lOMoARcPSD|18500434

FAR 25_EMPLOYEE BENEFITS

FAR25 EMPLOYEE BENEFITS

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RELATED STANDARDS: PAS 19 – EMPLOYEE BENEFITS; PAS 26 –
ACCOUNTING & REPORTING BY RETIREMENT BENEFIT PLANS
TOPIC OUTLINE

Definition

Short-term Employee Benefits

EMPLOYEE BENEFITS Defined Contribution Plan

(PAS 19)
Post-employment Benefits
Defined Benefit Plan
Other long-term Benefits

Termination Benefits

LECTURE NOTES
DEFINITION
Employee benefits are all forms of consideration given by an entity in exchange for services-
rendered by employees or for the termination of employment.
NOTE: In accordance with PAS 19, employees INCLUDE directors and other management personnel.
Under PAS 19R, employee benefits include (SPOT):
❖ Short-term employee benefits
❖ Postemployment benefits
❖ Other long-term employee benefits (other than postemployment benefits)
❖ Termination benefits
SHORT-TERM EMPLOYEE BENEFITS
Short-term employee benefits are employee benefits other than termination benefits which are expected to
be settled wholly within twelve months after the end of annual reporting period in which the
employees render the related service
Examples of short-term employee benefits:
✓ Salaries, wages and social security contributions
✓ Short-term compensated or paid absences such as paid annual leave and paid sick leave
✓ Profit sharing and bonuses payable within twelve months
✓ Nonmonetary benefits, such as medical care, housing, car and free or subsidized goods.
ACCOUNTING FOR SHORT-TERM EMPLOYEE BENEFITS
Accounting for short-term employee benefits is fairly straight forward because there are no actuarial
assumptions to be made.
The rules for short-term benefits are essentially an application of basic accounting principles and practice.
(1) Unpaid short-term employee benefits at the end of the reporting period shall be recognized as
accrued expense.
(2) Any short-term benefits paid in advance shall be recognized as a prepayment.
(3) The cost of short-term benefits shall be recognized as expense in the period when incurred,
except when such cost may be included within the cost of an asset, such as property, plant
and equipment.

SHORT-TERM COMPENSATED ABSENCES

An entity may pay employees for absences for various reasons such as vacation, sickness and short-term
disability, maternity or paternity and military service.
Short-term compensated absences are classified as:
❖ Accumulating - are those that are carried forward and can be used in future periods if the current
period's entitlement is not used in full.
• Vesting - Employees are entitled to a cash payment for unused entitlement on leaving the
entity.

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• Nonvesting - Employees are not entitled to a cash payment for unused entitlement on leaving
the entity.
❖ Non-accumulating - are those that are not carried forward. Such benefits lapse if the current period's
entitlement is not used. Automatically, employees are not entitled to a cash payment for unused
entitlement on leaving the entity (NON-VESTING).
PROFIT SHARING AND BONUS PLANS
Under some profit-sharing plans, employees shall receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service that
increases the amount to be paid if they remain in service until the end of the specified period. The
measurement of such constructive obligation reflects the possibility that some employees may leave
without receiving profit-sharing payments. PAS 19R provides that an entity shall recognize the expected
cost of profit sharing and bonus payment when all of the following conditions are present:
(a) The entity has a present legal or constructive obligation to make such payment as a result of past
event.
(b) A reliable estimate of the obligation can be made. A present obligation exists when the entity has no
realistic alternative but to make the payment.
FORMULAS USED IN COMPUTING BONUS:
(1) Bonus is expressed as a certain percent of income before bonus and before tax.
BONUS = Profit x B%
(2) Bonus is expressed as a certain percent of income after bonus but before tax.
BONUS = P – [(P ÷ (1 + B%)]
(3) Bonus is expressed as a certain percent of income after tax but before bonus.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T%)]
(4) Bonus is expressed as a certain percent of income after bonus and after tax.
BONUS = P x [(1 – T%) ÷ ((1 / B%) - T% + 1))]
WHERE:
P = Profit before bonus and before tax
B% = Bonus rate
T% = Tax rate
POST-EMPLOYMENT BENEFITS
Postemployment benefits are employee benefits, other than termination benefits and short-term employee
benefits, which are payable after completion of employment.
Examples of post-employment benefits are:
✓ Retirement benefits, such as pensions and lump sum payments on retirement
✓ Postemployment life insurance
✓ Postemployment medical care
NOTE: Post-employment plans can be formal or informal. A plan is FORMAL if it was established as part of
the remuneration package for the employees. A plan is INFORMAL if it is evidenced only by the entity's
practice to pay postemployment benefits.
CATEGORIES OF POST-EMPLOYMENT PLANS
MAJOR CATEGORIES
DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN
❖ The employer commits to make fixed ❖ The employer commits to pay a definite
contributions to a fund. The amount of amount of retirement benefits. Such amount is
benefits that an employee will receive is independent of any fund balance.
dependent on the fund balance.
❖ The risk that the fund may be insufficient to
❖ The risk that the fund may be insufficient to pay for the promised benefits rests with the
meet the expected benefits rests with the employer.
employee.
OTHER CATEGORIES
CONTRIBUTORY PLAN NON-CONTRIBUTORY PLAN
❖ Both the employer and employee contribute to ❖ Only the employer contributes to the
the retirement fund (e.g. SSS). retirement fund of the employee.
FUNDED PLAN UNFUNDED PLAN
❖ The fund is being isolated from the control of ❖ The fund is being managed by the employer.
the employer and such is transferred to a In addition, the employer pays directly the
trustee who undertakes to manage the fund retiring employees.
and pay directly the retiring employees.
MULTI-EMPLOYER PLANS INSURED BENEFITS

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❖ Under a multi-employer plan, various ❖ An employer may pay insurance premiums to

unrelated employers contribute to a common fund a post-employment plan. It is classified
fund that is managed by a trustee to provide either as defined contribution or defined
post-employment benefits to the employees of benefit plan. It is classified as defined benefit
the participating employers. It is classified as plan if the employer retains the obligation to
either defined contribution or defined benefit either pay directly the benefits to the
plan. employee or make good any deficiency if the
insurer fails to pay in full the benefits.

ACCOUNTING FOR DEFINED CONTRIBUTION PLANS

Accounting for a defined contribution plan is straightforward because the obligation of the entity is
determined by the amount contributed for each period.
REQUIRED CONTRIBUTION = EXPENSE
✓ Any unpaid contribution at the end of the period shall be recognized as accrued expense.
✓ Any excess contribution shall be recognized as prepaid expense but only to the extent that the
repayment will lead to a reduction in future payments or a cash refund.
✓ The amount of contribution is measured at an UNDISCOUNTED amount unless it is due beyond 12
months.
ACCOUNTING FOR DEFINED BENEFIT PLANS
Accounting for a defined contribution plan more complex since there is discounting and actuarial
assumptions.
REQUIRED CONTRIBUTION ≠ EXPENSE
The following steps shall be followed in accounting for defined benefit plan
STEP 1: Determine the Defined Benefit Obligation (DBO)
STEP 2: Determine the Fair Value of Plan Assets
STEP 3: Determine the Deficit or Surplus
STEP 4: Determine the Net Defined Liability or Asset
STEP 5: Determine the Defined Benefit Cost
STEP 1: Determine the Defined Benefit Obligation (DBO)
DBO is the present value of expected future payments required to settle the obligation resulting from
employee service in the current and past periods.
This is determined using an actuarial valuation called PROJECTED UNIT CREDIT MEHOD. This method
sees each period of service as giving rise to an additional unit of benefit entitlement and measures each
unit separately to build up the final obligation.
How to compute the ending balance of DBO? See the following T-account to answer the question.
Defined Benefit Obligation (PV)
Actuarial Gain xx Beginning Balance xx
Benefits Paid xx Current Service Cost xx
C.A. of DBO settled in advance xx Past Service Cost xx
Interest Expense xx
Actuarial Loss xx
Ending Balance xx
NOTES:
❖ Current service cost is the increase in the present value of the defined benefit obligation resulting
from employee service in the current period. An employee’s retirement benefit expense increases as
he or she renders service.
❖ Past service cost is the change in the present value of defined benefit obligation for employee service
in prior periods resulting from a plan amendment or curtailment.
Plan amendment includes introduction of defined benefit plan or changes to an existing defined
benefit plan.

Plan curtailment is a significant reduction in the number of employees covered by the defined benefit
plan.
All past service costs, whether vested or unvested, shall be recognized as expense immediately.
❖ Interest expense is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the "discount rate". The discount rate is based on HIGH QUALITY CORPORATE
BONDS or ON GOVERNMENT BONDS in the absence thereof.
❖ Actuarial gains and losses are changes in the present value of the defined benefit obligation resulting
from experience adjustments and the effects of changes in actuarial assumptions.
Actuarial assumptions are an entity's best estimate of the variables that would determine the ultimate
cost of providing postemployment benefits. Actuarial assumptions shall be unbiased and mutually
compatible.

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Actuarial assumptions comprise of demographic assumptions and financial assumptions.

Demographic assumptions deal with mortality, rate of employee turnover, disability, early retirement,
proportion of plan members eligible for benefits, and claim rates under medical plans.
Financial assumptions deal with discount rate, future salary and benefit levels, future medical costs
and taxes payable by the plan.
If the actual benefit obligation is higher than the estimated amount, there is an actuarial loss. This
means that the projected benefit obligation has increased and the increase is recognized as an
actuarial loss.
If the actual benefit obligation is lower than the estimated amount, there is an actuarial gain. This
means that the projected benefit obligation has decreased and the decrease is recognized as an
actuarial gain.
❖ Benefits paid results from the settlement of the plan. A settlement is a transaction that eliminates all
further legal or constructive obligations for part or all of the benefits provided under a defined benefit
plan. This is referred to as "routine settlement".
An entity shall recognize gain or loss on the settlement of a defined benefit plan when the settlement
occurs. This happens if the employee opted an early retirement.
STEP 2: Determine the Fair Value of Plan Assets
FVPA represents the balance of any fund set aside for the payment of the retirement benefits.
Plan Assets comprise:
(1) Assets held by a long-term employee benefits fund
The assets are held by an entity, the fund itself, that is legally separate from the reporting entity.
(2) Qualifying insurance policies
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of
the reporting entity
NOTE: Both are not available to the employer’s creditors even in bankruptcy and cannot be returned to the
employer unless the amount returned represents surplus assets.
How to compute the ending balance of FVPA? See the following T-account to answer the question.
Fair Value of Plan Assets
Beginning Balance xx Benefits paid xx
Actual Return xx Settlement price of PBO settled in advance xx
Contributions made xx
Ending Balance xx
NOTES:
❖ Actual return comprises interest income and remeasurement gain. Interest income is computed by
multiplying the fair value of plan assets at the beginning of the reporting period by the same
discount rate used for interest expense.
STEP 3: Determine the Deficit or Surplus
If FVPA < DBO = Deficit
If FVPA > DBO = Surplus
STEP 4: Determine the Net Defined Liability or Asset
Net Defined Benefit Liability (Accrued Pension) = Deficit
Net Defined Benefit Asset (Prepaid Pension) = The lower of Surplus and Asset Ceiling
NOTE: Asset ceiling is the present value of any economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan.
DBO and FVPA are items kept only in the memorandum records of the sub-entity. The "prepaid/accrued
benefit cost" is the item that appears in the statement of financial position of the employer entity.

STEP 5: Determine the Defined Benefit Cost

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Disclosures - defined contribution plan

a. The amount recognized as expense for the defined contribution plan.
b. The contribution to defined contribution plan for key management personnel as required by PAS 24 on
related party disclosures.
Disclosures - defined benefit plan
a. Characteristics of the defined benefit plan and risks associated with the plan, for example, the nature
of benefits provided and any minimum funding.
b. Reconciliations for the fair value of plan assets, the present value of the defined benefit obligation and
the effect of asset ceiling.
c. Separate showing of current service cost, past service cost, interest expense or income and
remeasurements in the reconciliations.
d. Disaggregation of the fair value of plan assets into classes that distinguish the nature and risks of
assets, subdividing the plan assets into those that have a quoted market price and those that do not
have a quoted market price.
e. A sensitivity analysis for each significant actuarial assumption showing the effect on the defined
benefit obligation for any change in the relevant actuarial assumption.
f. Description of any funding arrangement and funding policy.
g. Expected contribution to the plan for the next annual reporting period.
h. Maturity profile of the defined benefit obligation.
OTHER LONG-TERM BENEFITS
The term "other long-term employee benefits" is a residual definition. Other long-term employee benefits
are all employee benefits other than short-term employee benefits, postemployment benefits and
termination benefits.
Other long-term employee benefits usually include the following:
a. Long-term paid absences such as long service or sabbatical leave
b. Jubilee or other long service benefit
c. Long-term disability benefit
d. Profit sharing and bonus
e. Deferred compensation
The recognition and measurement of liability for other long-term employee benefits are the same as the
recognition and measurement of defined benefit obligation. In other words, the liability recognized for
other long-term employee benefits at the end of reporting period shall be the net total of the following
amount:
a. Present value of the benefit liability
b. Fair value of the plan assets
For other long-term employee benefits, all of the following components of defined benefit cost are
recognized in profit or loss and included in employee benefit expense:
TERMINATION BENEFITS
Termination benefits are employee benefits provided in exchange for the termination of an employee's
employment as a result of either:
a. An entity's decision to terminate an employee's employment before the normal retirement date.
b. An employee's decision to accept an offer of benefits in exchange for the termination of employment.
The event that gives rise to an obligation is the termination of employment rather than employee service.
An entity shall recognize an expense and a liability for termination benefits at the earlier of the following
dates:
a. When the entity can. no longer withdraw the offer of the termination benefits, for example, when the
plan of termination is already communicated to affected employees.
b. When the entity recognizes the cost of restructuring that involves the payment of termination
benefits.

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If the termination benefits are expected to be settled wholly within twelve months after the end of
reporting period in which the termination benefit is recognized, the requirements for short-term employee
benefits shall be applied.
If the termination benefits are expected not to be settled wholly within twelve months after the end of
reporting period, the requirements for other long-term employee benefits shall be applied.

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DISCUSSION EXERCISES
STRAIGHT PROBLEMS
POST-EMPLOYMENT BENEFITS
1. EMILIO CORP. has a defined contribution plan that covers its existing employees. The term of the plan
required EMILIO to contribute 8% of the annual employees’ salaries to the retirement plan each year.
The following information shows the total annual salaries and the contribution made each year:
Annual Salaries Contribution Made
2019 P3,000,000 P200,000
2020 3,600,000 280,000
REQUIREMENT: Prepare the entry to record entries pertaining to the defined contribution plan.

2. On January 1, 2019, SILANG COMPANY had the following balances related to a defined benefit plan:
Fair value of plan assets 4,500,000
Projected benefit obligation 5,500,000
The actuary provided the following data for the current year:
Current service cost 400,000
Settlement discount rate 10%
Expected return on plan assets 8%
Actual return on plan assets 600,000
Contribution to the plan 750,000
Benefits paid to retirees 200,000
Decrease in the present value of
benefit obligation due to change in actuarial assumptions 300,000
Present value of defined benefit obligation settled in advance 450,000
Settlement price of defined benefit obligation settled in advance 400,000
On January 1, 2019, SILANG amended its retirement plan. The amendment resulted to an increase in
the balance of the present value of defined benefit obligation from 5,500,000 to 5,750,000.
REQUIREMENTS:
(1) What is the projected benefit obligation on December 31, 2019?

(2) What is the fair value of plan assets on December 31, 2019?
(3) What is balance of the prepaid or accrued pension as of December 31, 2019?
(4) What amount employee benefit cost should be reported in the profit or loss?
(5) What is the net amount of remeasurements for the year 2019?
(6) How much is the amount of underfunding or overfunding during 2019?
3. Information on GABRIELA CORP.’s defined benefit plan is shown below.
Fair value of plan assets, Jan. 1, 2018 6,000,000
Present value of defined obligation, Jan. 1, 2018 5,200,000
Current service cost 580,000
Past service cost 220,000
Benefits paid 350,000
Actual return on plan assets 850,000
Contribution to the plan 830,000
Actuarial loss 340,000
Present value of defined benefit obligation settled 500,000
Settlement price of defined benefit obligation 400,000
Expected rate of return 12%
Discount rate to discount DBO 10%
The present values of economic benefits available in the form of refunds from the plan are P700,000
and P800,000 on January 1 and December 31, respectively.
REQUIREMENTS:
(1) What is the projected benefit obligation on December 31, 2019?
(2) What is the fair value of plan assets on December 31, 2019?
(3) What is balance of the prepaid or accrued pension as of December 31, 2019?
(4) What amount employee benefit cost should be reported in the profit or loss?
(5) What is the net amount of remeasurements for the year 2019?
(6) How much is the amount of underfunding or overfunding during 2019?

MULTIPLE CHOICE (THEORIES)

1. Which is not a characteristic of short-term employee benefits?
A. There is no possibility of any actuarial gain or loss.
B. No actuarial assumptions are required to measure the benefit obligation.
C. Short-term employee benefit obligations are measured on a discounted basis.
D. Short-term employee benefits by definition are payable no later than twelve months after the
end of the reporting period.
2. In terms of classification of short-term compensated absences, which of the following is incorrect?

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A. Under vesting short-term compensated absences, employees are entitled to a cash payment for
unused entitlement on leaving the entity.
B. Under non-vesting short-term compensated absences, employees are not entitled to a cash
payment for unused entitlement on leaving the entity.
C. Accumulating short-term compensated absences are those that are carried forward and can be
used in future periods if the current period's entitlement is not used in full.
D. Non-accumulating short-term compensated absences are those that are carried forward and can
be used in future periods if the current period's entitlement is not used in full.
3. Which of the following is not a characteristic of a defined contribution plan?
A. The employer contribution each period is based on a formula.
B. The accounting for a defined contribution plan is straightforward and uncomplicated.
C. The benefits to be received are usually determined by an employee's highest salary.
D. The benefit of gain or the risk of loss from the assets contributed to the plan are borne by the
employee.
4. S1: In rare circumstances, when a retirement benefit plan has attributes of both defined
contribution and defined benefit plan, it is deemed a defined contribution plan.
S2: Accounting for a defined contribution plan is straightforward because the obligation of the entity
is determined by the amount contributed for each period.
S3: Under a defined benefit plan, the risk that the fund may be insufficient to pay for the promised
benefits rests with the employer.
A. False, true, true D. True, true, false
B. True, false, false E. True, false true
C. False, false, true
5. In computing the current service cost component of pension expense
A. The accumulated benefit obligation provides a more realistic measure of the pension obligation
on a' going concern basis.
B. An entity should employ an actuarial funding method to report pension expense that best
reflects the cost of benefits to employees.
C. The defined benefit obligation using future compensation levels provides a realistic measure of
present pension obligation and expense.
D. All of these.
6. What is the treatment of actuarial gains and losses?
A. As remeasurements recognized immediately in profit or loss.
B. As remeasurements recognized immediately in retained earnings
C. As remeasurements recognized immediately in other comprehensive income and subsequently
recycled to profit or loss.
D. As remeasurements recognized immediately in other comprehensive income and permanently
excluded from profit or loss.
7. In computing the ending balance of defined benefit obligation, which of the following is deducted from
the beginning balance?
(1) Current service cost (3) Actuarial gain
(2) Actuarial loss (4) Benefits paid
A. 1 and 4 C. 1 and 3
B. 3 and 4 D. 2 and 3
8. In accounting for defined benefit plan, which of the following statements is incorrect?
A. The defined benefit obligation and plan assets accounts are NOT presented in the statement of
financial position.
B. NOT all defined benefit costs are presented in profit or loss.
C. If the balance of the defined benefit obligation is higher than the balance of plan assets, the
difference is presented in the statement of financial position.
D. If the balance of the defined benefit obligation is lower than the balance of plan assets, the
difference is presented in the statement of financial position.
9. A pension asset is reported when
A. Plan assets at fair value exceed the defined benefit obligation.
B. Plan assets at fair value exceed the accumulated benefit obligation.
C. The accumulated benefit obligation exceeds the fair value of plan assets.
D. The accumulated benefit obligation exceeds the fair value of plan assets but a past service cost
exists.
10. Which of the following statements is incorrect in relation to termination benefits?
A. A benefit that is in any way dependent on providing service in the future is a termination
benefit.
B. The event that gives rise to an obligation for termination benefit is the termination of
employment.

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C. A benefit resulting from mandatory retirement is a postemployment benefit rather than a

termination benefit.
D. A benefit resulting from termination of employment at the request of an employee without an
entity offer is not a termination benefit.

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