Employee

Benefits

By: Ma. Salome M. Mercado

Definition of Employee Benefits
 Employee benefits are all forms of consideration
given by an entity in exchange for services
rendered by employees.

 PAS 19 prescribes the accounting and

disclosure by employers for employee
benefits.

 For the purpose of this standard, employees

include directors and other management
personnel.
Definition of Employee Benefits
 The standard enumerates the following
employee benefits.

a. Short-term employee benefits

b. Post employment employee benefits
c.
Long-term employee benefits, other than
postemployment benefits
d. Termination benefits
Definition of Employee Benefits
 The standard enumerates the following
employee benefits.

a. Short-term employee benefits

b. Post employment employee benefits
c. Long-term employee benefits, other than
postemployment benefits
d. Termination benefits
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Short-term employee benefits

 Short-term employee benefits are
employee benefits other than termination
benefits which are due to be settled
within twelve months after the end of
the period in which the employees
render the related service.
Short-term employee benefits
 Include the following:

a. Salaries, wages and social security

contributions
b. Short-term compensated absences
such as paid annual leave and sick leave
c. Profit sharing and bonuses payable within
twelve months
d. Nonmonetary benefits, such as medical,
housing, car and free or subsidized goods.
Short-term employee benefits
 Accounting for short-term employee
benefits is fairly straightforward
because there are no actuarial
assumptions to be made and there is
no requirement to discount future
benefits because they are all, by
definition, payable no later than twelve
months after the end of the reporting
period.
Short-term employee benefits
 Rules:

a. Unpaid short-term employee benefits at the end of

the accounting period shall be recognized as accrued
expense.

b. Any short-term benefits paid in advance shall be

recognized as a prepayment, to the extent, that it will
lead to a reduction in future payments or a cash
refund.
Short-term employee benefits
 Rules:

c. The cost of the short-term benefits shall be recognized

as expense in the period when the economic
benefit is given, except when such cost may be
included within the cost of an asset, for example,
property, plant and equipment in accordance with
another standard.
Short-term compensated absences
 An entity may compensate employees for
absences for various reasons such as
vacation, sickness and short-term
disability, maternity or paternity and
military service
Short-term compensated absences
 Entitlement to compensated absences
falls in two categories, namely
accumulating and non-accumulating
absences.
Short-term compensated absences
 Entitlement to compensated absences
falls in two categories, namely
accumulating and non-accumulating
absences.
Short-term compensated absences
 Accumulating 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.

a. Vesting- meaning, employees are entitled to a cash

payment for unused entitlement on
leaving the entity.

b. Nonvesting- meaning, employees are not entitled to

a cash payment for unused entitlement
on leaving the entity.

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Short-term compensated absences
 Non-accumulating compensated absences
are those that do not carry forward.
They lapse if the current period's
entitlement is not used and do not entitle
the employees to a cash payment for
unused entitlement on leaving the
entity.
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.

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Postemployment Benefits
 Postemployment benefits are employee
benefits, other than termination
benefits, which are payable after
completion of employment.
Postemployment Benefits
 Include:

a. Retirement benefits
b. Postemployment life insurance
c. Postemployment medical care
Postemployment Benefits
 Postemployment benefits are usually
embodied in an arrangement known as
"postemployment benefit plan".

 Can be in formal or informal

arrangements.
Postemployment Benefits
 Under the Social Security System,
postemployment benefits are provided to
qualified private sector employees, and
under R.A. 7641, employees are
entitled to a certain amount of benefit
for every year of service.
Postemployment Benefits
 Classified as either
defined contribution
plans or defined benefit plans.

 Such plans may be contributory or

noncontributory, and funded or unfunded.
Postemployment Benefits
 Classified as either
defined contribution
plans or defined benefit plans.

 Such plans may be contributory or

noncontributory, and funded or unfunded.
Contributory and noncontributory

 Under a contributory plan, the employer

and employee make contributions to
the retirement benefit plan

 Under a noncontributory plan, only the

employer makes contributions to the
retirement benefit plan.

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Funded and unfunded
 Funding is the transfer of assets to an entity,
called the retirement fund.

 Under a funded plan, the entity sets aside funds

for future retirement benefits by making
payments to a funding agency .

 Under an unfunded plan, the entity retains the

obligation for the payment of retirement
benefits without the establishment of a
separate fund.
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Defined contribution plan
 A defined contribution plan is a
postemployment benefit plan under
which an entity pays fixed contributions
into a separate entity known as the fund,
and will have no legal or constructive
obligation to pay further contributions.

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Defined contribution plan
 The contribution is definite but the benefit is
indefinite.

 Once the defined contribution is paid, the

employer has no more obligation under the
plan.

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Defined Benefit Plan

 The standard simply defines a defined benefit

plan as a postemployment plan other than a
defined contribution plan.

 Under a defined benefit plan, an entity's

obligation is to provide the agreed benefits to
employees.

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Multiemployer Plan
 This is a defined contribution plan or
defined benefit plan that pools the assets
contributed by various entities that
are not under common control and uses
those assets to provide benefits to
employees of more than one entity.
Postemployment Benefit Plan
Under the Law
 Social Security System- a defined
contribution plan because the entity’s
obligation is limited.

 RA 7641- a defined benefit plan because

the entity’s obligation is to provide
specific level of benefit.
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Accounting for defined
contribution plan
 Accounting for a defined contribution plan
is straightforward because the
obligation of the entity is determined by
the amount contributed for each period.
There are no actuarial assumptions to
measure the contribution and there is
no possibility of any actuarial gain or
loss.
Accounting for defined
contribution plan
a. The contribution shall be recognized as
expense in the period it id payable.

b. Any unpaid contribution at the end of the

period shall be recognized as an accrued
expense.

c. Any excess contribution shall be recognized as

a prepaid expense but only to the extent that
the prepayment will lead to a reduction in
future payments or cash refund.
Illustration-Accounting
Illustration- for
defined contribution plan
Accounting for defined contribution plan

An employee is a member of the faculty of

accounting at a certain university. During
the current year the employee earned
P600,000. In addition the employee is
covered by the university’s defined
contribution plan which requires the
university to contribute the equivalent of
5% of the employee’s salary or P30,000
for the current year to the trustee.
Accounting for defined contribution plan

An employee is a member of the faculty of accounting at a

certain university. During the current year the employee
earned P600,000. In addition the employee is covered by the
university’s defined contribution plan which requires the
university to contribute the equivalent of 5% of the employee’s
salary or P30,000 for the current year to the trustee.

Assuming yearly contribution, the university shall

recognize the contribution as expense as follows:

Benefit expense 30,000

Cash 30,000
Accounting for defined benefit
plan
 Accounting for a defined benefit plan is complex
because actuarial assumptions are required to
measure the obligation and the expense and
there is possibility of actuarial gains and losses.

 Moreover, the obligations are measured on a

discounted basis because they may be settled
many years after the employees render the
related service.

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Components of benefit expense
 PAS 19 enumerates the following components of benefit
expense that will be recognized for a period under a
defined benefit plan:

a. Current service cost

b. Interest cost
c. Expected return on plan assets
d. Actuarial gains or losses
e. Past service cost
f. Effect of any curtailment or settlement
Actuarial valuation method
 The projected unit method, sometimes
known as the accrued benefit method ,
shall be used in determining the PV of the
defined benefit obligation and the related
current service cost, and where applicable,
past service cost.
Illustration-
Projected unit
credit method
Projected unit credit method

An employer pays lump-sum to employees when

they retire. The lump-sum is equal to 5% of
their salary in the final year of service, for
every year of service. The following data
pertain to certain employee:

a. The employee is expected to work for 5 years.

b. The salary is expected to rise by 8% per
annum.
c. The salary in 2012 is P200,000 per annum.
d. The discount rate is 10% per annum.
Projected unit credit method

An employer pays lump-sum to employees when they retire. The lump-sum is

equal to 5% of their salary in the final year of service, for every year of
service. The following data pertain to certain employee:

a. The employee is expected to work for 5 years.

b. The salary is expected to rise by 8% per annum.
c. The salary in 2012 is P200,000 per annum.
d. The discount rate is 10% per annum.

The first issue to be settled is the final salary of the employee in 2016.
In this case, the “future value of 1” factor is necessary. The future
value of 1 at 8% for 4 years subsequent to 2012 is 1.3065. Thus, the
final salary is P200,000 multiplied by 1.3065 or P272,100.

The benefit each year is 5% of P272,100 or P13,605 or a total of

P68,025 for 5 years.
Projected unit credit method

An employer pays lump-sum to employees when they retire. The lump-sum is

equal to 5% of their salary in the final year of service, for every year of
service. The following data pertain to certain employee:

a. The employee is expected to work for 5 years.

b. The salary is expected to rise by 8% per annum.
c. The salary in 2012 is P200,000 per annum.
d. The discount rate is 10% per annum.

2012 2013 2014 2015 2016

Prior 0 13,605 27,210 40,815 54,420
years
Current 13,605 13,605 13,605 13,605 13,605
years
13,605 27,210 40,815 54,420 68,025
Projected unit credit method

An employer pays lump-sum to employees when they retire. The lump-sum is equal to 5% of their
salary in the final year of service, for every year of service. The following data pertain to
certain employee:

a. The employee is expected to work for 5 years.

b. The salary is expected to rise by 8% per annum.
c. The salary in 2012 is P200,000 per annum.
d. The discount rate is 10% per annum.

Benefit PV factor Present

value
2012 13,605 .683 9,292
2013 13,605 .751 10,217
2014 13,605 .826 11,238
2015 13,605 .909 12,367
2016 13,605 1 13,605
68,025 56,719
Projected unit credit method
Benefit PV factor Present value
2012 13,605 .683 9,292
2013 13,605 .751 10,217
2014 13,605 .826 11,238
2015 13,605 .909 12,367
2016 13,605 1 13,605
68,025 56,719

Date Current Service Interest Cost Present Value

Cost
12/31/2012 9,292 - 9,292
12/31/2013 10,217 930 20,439
12/31/2014 11,238 2044 33,721
12/31/2015 12,367 3372 49,460
12/31/2016 13,605 4960 68,025
Projected unit credit method
Date Current Service Cost Interest Cost Present Value
12/31/2012 9,292 - 9292
12/31/2013 10,217 930 20439

12/31/2014 11,238 2044 33721

12/31/2015 12,367 3372 49460

12/31/2016 13,605 4960 68025

Date Current Service Interest Cost Present Value

Cost
2012 9,292 - 9292
2013 10,217 930 11,147
2014 11,238 2044 13,282
2015 12,367 3372 15,739
2016 13,605 4960 18,565
56,719 11,306 68,025
Current Service Cost
 Current service cost (C) is the increase in
the present value of the defined
benefit obligation resulting from
employee service in the current
period.
Interest expense
 Interest cost (I) is the increase during a
period in the present value of the
defined benefit obligation which arises
because the benefits are one period
closer to the settlement.
To remember:
CIE (Ciedelle)

Current Service Cost (C)

+
Interest expense (I)

Expense (E)
Problem
A director of Easy Company shall receive a
retirement benefit 10% of the final salary
per annum for a contractual period of 3
years. A director does not contribute to the
scheme. The anticipated salary over 3
years is P1000,000, P1,200,000, and
P1,440,000 from 2011 to 2013. The
discount rate is 5%. Using the projected
unit method, what is the pension liability
on Dec. 31, 2012?
Ans: 274,284
 Sol.
The annual benefit is 10% of P1,440,000 or P144,000 or a
total of P432,000 for 3 years.
Benefit PV factor PV
2011 144,000 .9070 130,608
2012 144,000 .9524 137,146
2013 144,000 1 144,000
432,000 411,754

Current SC Int. Cost PV

2011 130,608 - 130,608
2012 137,146 6,530 274,284
2013 144,000 13,716 432,000
Plan assets
 Plan assets include assets held by a long-
term benefit fund and qualifying insurance
policies.
Plan assets
 The conditions for assets held by a long-term
benefit fund are:

a. The assets are held by an entity, the fund itself, that

is legally separate from the reporting entity.
b. The assets are available only to pay only employee
benefits.
c. The assets are not available to the reporting entity’s
own creditors even in the event of bankruptcy.
Plan assets
 The conditions for assets held by a long-term
benefit fund are:

d. The assets cannot be returned to the reporting entity

or can be returned only to the reporting entity if the
remaining assets of the fund are sufficient to meet
all employee benefit obligations or the assets are
returned to the reporting entity to reimburse it to
employee benefits already paid.
Plan assets
 A qualifying insurance policy is an
insurance policy issued by an insurer
that is not a related party of the reporting
entity and the proceeds of the policy can
be used only to pay employee benefits
and are not available to the reporting
entity's own creditors even in bankruptcy.
Plan assets
 The proceeds of the policy cannot be paid to the
reporting entity, except:

a. When the proceeds represent surplus assets not

needed for the policy to pay employee benefits.

b. When the proceeds are returned to the reporting

entity to reimburse it for employee benefits already
paid.
Return on Plan Assets
 The return on plan assets is interest,
dividend and other revenue derived from
the plan assets, together with realized and
unrealized gains or losses on the plan
assets, less any plan administration costs
to the extent not included in actuarial
assumptions used to measure defined
benefit obligation, and less any tax
payable by the plan itself.
Return on Plan Assets
 The return on plan asset may be classified
as expected or actual return.

 The standard identifies the expected

return as the component in the
computation of the benefit expense.
Return on Plan Assets
 The expected return is deducted in the
computation of the total benefit expense
because it reduces the cash outflow of the entity
under the defined benefit plan.

 However, it is the actual return that increases

the fair value of plan assets. The difference
between the actual return and expected return
on plan assets is an actuarial gain or loss.
Return on Plan Assets
 The expected return on plan assets is
based on market expectations at the
beginning of the period, for returns over
the entire life of the related obligation.

 In determining the expected and actual

return, an entity deducts expected
administration costs.
Return on Plan Assets
Formula for determining the actual return:
Fair value of plan assets- beginning xxx
Add: Contribution to the fund xxx
Actual return (squeeze) xxx
Total xxx
Less: Benefits paid (xxx)
Fair value of plan assets- ending xxx
Accumulated benefit obligation (ABO)
 Accumulated benefit obligation is the
actuarial present value of all benefits
attributed by the pension benefit formula to
employee service rendered before a
specified date.

 The amount is based on current

compensation level of employees and
therefore includes no assumptions about
future salary increases.
Illustration-
Accumulated
benefit obligation
(ABO)
Accumulated benefit obligation (ABO)

Employer Company has established a defined benefit plan. The characteristics

of the plan on January 1, 2012 among others are:

1. The defined accrual benefit formula is 5% of the highest salary times

the number of years of service. The annual benefit is paid at the end
of each year after retirement.

2. The age of retirement is 65.

3. The discount rate is 10%.

4. The life expectancy of employee is 8 years beyond retirement. This

means that an employee shall receive annual benefit for 8 years after
retirement or until death. Note that the benefit is not received lump
sum but rather in the form of an annual pension from retirement.

On January 1, 2012 an employee is 40 years of age and has worked for the
entity for 5 years. The current salary is P500,000 annually. Since the
retirement age is 65, it means that the employee has a remaining service
period of 25 years.
Accumulated benefit obligation (ABO)

Employer Company has established a defined benefit plan. The characteristics of the plan on January 1, 2012 among
others are:

1. The defined accrual benefit formula is 5% of the highest salary times the number of years of service. The
annual benefit is paid at the end of each year after retirement.
2. The age of retirement is 65.
3. The discount rate is 10%.
4. The life expectancy of employee is 8 years beyond retirement. This means that an employee shall receive
annual benefit for 8 years after retirement or until death. Note that the benefit is not received lump sum but
rather in the form of an annual pension from retirement.

On January 1, 2012 an employee is 40 years of age and has worked for the entity for 5 years. The current salary is
P500,000 annually. Since the retirement age is 65, it means that the employee has a remaining service
period of 25 years.

Following the defined benefit formula which is 5% of highest salary times the
number of years in service, the annual benefit is computed as follows:

1. For one year of service (5% x P500,000 x 1)

25,000
2. For 5 years of service (5% x P500,000 x 5) 125,000
3. For 30 years of service (5% x P500,000 x 30) 750,000
Accumulated benefit obligation (ABO)

Employer Company has established a defined benefit plan. The characteristics

of the plan on January 1, 2012 among others are:

1. The defined accrual benefit formula is 5% of the highest salary times the number of years of service. The
annual benefit is paid at the end of each year after retirement.
2. The age of retirement is 65.
3. The discount rate is 10%.
4. The life expectancy of employee is 8 years beyond retirement. This means that an employee shall receive
annual benefit for 8 years after retirement or until death. Note that the benefit is not received lump sum but
rather in the form of an annual pension from retirement.

On January 1, 2012 an employee is 40 years of age and has worked for the entity for 5 years. The current salary is
P500,000 annually. Since the retirement age is 65, it means that the employee has a remaining service
period of 25 years.

1. For one year of service (5% x P500,000 x 1) 25,000

2. For 5 years of service (5% x P500,000 x 5) 125,000
3. For 30 years of service (5% x P500,000 x 30) 750,000

Thus, if the employee retires at the age of 65 with 30

years of service period, the employee is entitled to
annual benefit of P750,000 for 8 years from retirement.
Accumulated benefit obligation (ABO)

Employer Company has established a defined benefit plan. The characteristics

of the plan on January 1, 2012 among others are:

1. The defined accrual benefit formula is 5% of the highest salary times the number of years of service. The
annual benefit is paid at the end of each year after retirement.
2. The age of retirement is 65.
3. The discount rate is 10%.
4. The life expectancy of employee is 8 years beyond retirement. This means that an employee shall receive
annual benefit for 8 years after retirement or until death. Note that the benefit is not received lump sum but
rather in the form of an annual pension from retirement.

On January 1, 2012 an employee is 40 years of age and has worked for the entity for 5 years. The current salary is
P500,000 annually. Since the retirement age is 65, it means that the employee has a remaining service
period of 25 years.

1. For one year of service (5% x P500,000 x 1) 25,000

2. For 5 years of service (5% x P500,000 x 5) 125,000
3. For 30 years of service (5% x P500,000 x 30) 750,000

However, if the employee has worked only for 5 years

and has earned only the annual benefit of P125,000.
Accumulated benefit obligation (ABO)

Employer Company has established a defined benefit plan. The characteristics

of the plan on January 1, 2012 among others are:

1. The defined accrual benefit formula is 5% of the highest salary times the number of years of service. The
annual benefit is paid at the end of each year after retirement.
2. The age of retirement is 65.
3. The discount rate is 10%.
4. The life expectancy of employee is 8 years beyond retirement. This means that an employee shall receive
annual benefit for 8 years after retirement or until death. Note that the benefit is not received lump sum but
rather in the form of an annual pension from retirement.

On January 1, 2012 an employee is 40 years of age and has worked for the entity for 5 years. The current salary is
P500,000 annually. Since the retirement age is 65, it means that the employee has a remaining service
period of 25 years.

1. For one year of service (5% x P500,000 x 1) 25,000

2. For 5 years of service (5% x P500,000 x 5) 125,000
3. For 30 years of service (5% x P500,000 x 30) 750,000

The benefit obligation is equal to the present value of the

benefits of P125,000 already earned by the employee in
5 years.
Accumulated benefit obligation (ABO)

The benefit obligation is equal to the present value of the benefits of

P125,000 already earned by the employee in 5 years. Observe the
following computation:

Annual benefit (5 years of service) 125,000

Multiply by PV of ordinary annuity
of 1 at 10 % for 8 years 5.335
Present value- January 1, 2037 666,875
Multiply by PV of 1 at 10 % for 25 years .0923
Present value of benefit obligation- Jan. 1, 2012 61,553
Projected benefit obligation
 Projected benefit obligation is the actuarial
present value of all benefits attributed by the
pension benefit formula to employee service
rendered before a specified date based on future
compensation level.

 In other words, the amount of the benefit

obligation includes future salary increases that the
entity projects it will pay to employees during the
remainder of their employment.
Illustration-
Projected benefit
obligation
Projected benefit obligation

Using the preceding illustration for accumulated benefit obligation,

assume that the current salary of the employee of P500,000 will
increase by 5% every year until retirement.

The salary for 2036 is simply computed by multiplying P500,000 by

the future value of 1 at 5% for 25 years or 3.3864 or an amount of
P1,693,200.

Following the defined benefit formula, the annual benefit is

determined as follows:

1. For one year of service (5% x P1,693,200 x 1) 84,660

2. For 5 years of service (5% x P1,693,200 x 5) 423,200
3. For 30 years of service (5% x P1,693,200 x 30) 2539,800
Projected benefit obligation

Following the defined benefit formula, the annual benefit is

determined as follows:

1. For one year of service (5% x P1,693,200 x 1) 84,660

2. For 5 years of service (5% x P1,693,200 x 5) 423,200
3. For 30 years of service (5% x P1,693,200 x 30) 2539,800

Annual benefit (5 years of service) 423,300

Multiply by PV of ordinary annuity
factor (10%, 8 years) 5.335
Present value- January 1, 2037 2,258,305
Multiply by PV of 1 factor ( 10%, 25 years) .0923
Present value of benefit obligation- Jan. 1, 2012 208,442
Projected benefit obligation

Annual benefit (5 years of service) 423,300

Multiply by PV of ordinary annuity
of 1 factor (10%, 8 years) 5.335
Present value- January 1, 2037 2,258,305
Multiply by PV of 1 factor (10%, 25 years) .0923
Present value of benefit obligation- Jan. 1, 2012 208,442

Projected benefit obligation- Jan 1, 2012 208,442

Accumulated benefit obligation- Jan 1, 2012 61,553
Additional obligation due to future salary
increases 146,889
Problem
Woodstock has established a defined benefit pension plan.
Annual payments under the pension plan are equal to the
employee’s highest lifetime salary multiplied by 2% multiplied
by the number of years within the entity.. On Dec. 31, 2011,
the employee had work for 10 years. The salary for 2011 was
P500,000. The employee is expected to retire in 25 years and
the salary increases are expected to average 3% per year
during the period. The employee is expected to live for 15
years after retiring and will receive the first annual payment one
year after retirement. The discount rate is 8%. The PV and
future value factors are as follows:

FV of 1 at 3% for 25 years 2.094

PV of an ordinary annuity of 1 at 8% for 15 periods 8.559
PV of 1 at 8% for 25 periods .146

What is the projected benefit obligation on Dec. 31, 2011?

ans:

261,669
Sol.

Future salary –PBO 500,000 x 2. 094 1,047,000

Annual pension payment- PBO

(1,047,000 x 2% x 10 years) 209,400
PV of annuity of 1 at 8% for 15 periods 8.559
PV- Dec. 31, 2036 1,792,255
PV of 1 at 8% for 25 periods .0146
PBO- Dec. 31, 2011 261,669
Defined benefit obligation
 PAS 19 provides that the present value of a defined
benefit obligation is the present value, without deducting
any plan assets, of expected future payments required to
settle the obligation resulting from employee service in
the current and prior periods.

 The standard further provides that an entity shall use the

projected unit credit method to determine the present
value of its defined benefit obligation and the related
current service cost and where applicable, past service
cost.
Defined benefit obligation
 Under the projected unit credit method, the computation
of the present value of the defined benefit obligation
includes future salary increase. This means that PAS
19 is adopting the concept of projected benefit
obligation.

 Moreover, one of the actuarial assumptions provided

under PAS 19 is that "postemployment benefit
obligations shall be measured on a basis that reflects
estimated future salary increases".

 In conclusion, the defined benefit obligation shall be the

projected benefit obligation.
Basic accounting considerations
 The benefit plan shall be viewed as a subentity
separate and distinct from the primary entity,
which is the employer entity.

 The subentity maintains information that does

not appear in the financial statements of the
primary entity. Such information is kept only by
means of memorandum records and therefore
not reflected in the general ledger accounts of
the primary entity.
Basic accounting considerations
 The information contained in the memorandum records
of the subentity contains the following, among others:
a. Fair value of plan assets (FVPA)
b. Projected benefit obligation (PBO)

 The fair value of the plan assets is the source of fund

set aside in meeting future benefit payments.

 The projected benefit obligation or the defined benefit

obligation is the present value of expected future
payments required to settle the obligation arising from
employee service in the current and prior periods.
Basic accounting considerations
 The relationship between the FVPA and
the PBO can be expressed as follows:

Fair value of plan assets xx

Less: PBO xx
Prepaid/accrued benefit costs
(P/ABC) xx
Basic accounting considerations
 The FVPA is analogous to an off-statement of financial
position asset with a debit balance and the PBO is
analogous to an off-statement of financial position
liability with a credit balance. Again, these two items are
kept only in the memorandum records of subentity.

 The 'prepaid/accrued benefit cost' is the item that

appears on the financial statement of the employer
entity.
Basic accounting considerations
 If the FVPA is more than the PBO, the plan is
overfunded and therefore there is a prepaid
benefit cost, a noncurrent asset.

 If the FVPA is less than the PBO, the plan is

underfunded and therefore there is a accrued
benefit cost, a noncurrent liability
Illustration-
Underfunding
Underfunding

To simplify the example the only component of the benefit

expense is the current service cost of P500,000. The entity
made a contribution of P450,000 to the defined benefit plan
for the current year.

The entry to record the expense and the contribution is:

Benefit expense 500,000

Cash 450,000
Prepaid/accrued benefit cost 50,000
Illustration-
Overfunding
Overfunding

Again the only component of the benefit expense is the

current service cost of P500,000. The entity made a
contribution of P600,000 to the defined benefit plan for the
current year.

The entry to record the expense and the contribution is:

Benefit expense 500,000

Prepaid/accrued benefit cost 100,000
Cash 600,000
Benefit expense 500,000
Cash 450,000
Prepaid/accrued benefit cost 50,000

Benefit expense 500,000

Prepaid/accrued benefit cost 100,000
Cash 600,000

Observe that the “prepaid/accrued benefit cost” account

is the balancing figure. As the years go by, this account
will build up and it may have a debit or credit balance at
the end of the reporting period.
Illustration
This example will now consider the three components, so far discussed namely current service
cost, interest cost and return on plan assets, and the relationship of the fair value of plan
assets and projected benefit obligation.

On January 1, 2012, the memorandum records of the plan showed the following:

Fair value of plan assets 3,000,000

PBO (3,700,000)
Prepaid/accrued benefit cost ( 700,000)

During the current year, the following transactions are gathered.

Current service cost 750,000

Interest cost 10%
Expected return on plan assets 12%
Actual return on plan assets 300,000
Contribution to the plan 600,000
Benefits paid 100,000
Fair value of plan assets 3,000,000 Expected return on plan assets 12%
PBO (3,700,000) Actual return on plan asset 300,000
Prepaid/accrued benefit cost (700,000) Contribution to the plan 600,000
Benefits paid 100,000
Current service cost 750,000
Interest cost 10%

The total employee benefits is computed as follows:

Current service cost 750,000

Interest cost (10% x 3,700,000) 370,000
Expected return (12% x 3,000,000) (360,000)
Total 760,000
Current service cost 750,000
Interest cost (10% x 3,700,000) 370,000
Expected return (12% x 3,000,000) (360,000)
Total 760,000

The entry to record the total benefit expense and the

contribution is as follows:

Benefit expense 760,000

Cash 600,000
Prepaid benefit expense 160,000
At this point, the prepaid or accrued benefit cost account has a credit
balance of P860,000 (P700,00 beginning balance plus credit adjustment
of P160,000). This will be confirmed in the memorandum records.

Fair value of plan assets- Jan. 1, 2012 3,000,000

Add: Actual return 300,000
Contribution 600,000
Total 3,900,000
Less: Benefits paid 100,000
FV of plan assets- Dec. 31, 2012 3,800,000
Actual return on plan assets 300,000
Expected return on plan assets 360,000
Actuarial loss (60,000)

The actuarial loss is deferred and amortized in accordance with

the “corridor” approach.

PBO- Jan. 1, 2012 3,700,000

Add: Current service cost 750,000
Int. cost 370,000
Total 4,820,000
Less: Benefits paid 100,000
PBO: 4,720,000
Reconciliation

FV of plan assets- Dec. 31, 2012 3,800,000

Actuarial loss- deferred 60,000
Total debits 3,860,000
PBO- Dec. 31, 2012 (4,720,000)
Prepaid/accrued benefit cost ( 860,000)
Past service cost
 Past service cost is the actuarially computed PV of the
retirement benefits payable in the future with respect to
services rendered prior to the adoption or
amendment of a retirement plan.

 In other words, past service cost is the cost to

an entity under defined benefit plan for services
rendered by employees in prior periods resulting
from the introduction of a retirement benefit plan
or amendment of an existing plan.
Accounting for past service cost
a. Past service cost shall be expensed
immediately when additional benefits
vests immediately.

b. If the benefits are not vested, the past

service cost is amortized on a straight
line basis over the period until the
benefits become vested.
Illustration-
Accounting for Past Service
Cost
Accounting for Past Service Cost

An entity operates a defined benefit plan that provides a benefit of 5% of final

salary for each year of service. The benefits become vested after 5 years of
service.

On Jan. 1, 2012, the entity improves the benefit to 6% of final salary for each
year of service starting Jan. 1, 2008.

At the date of the amendment, the PV of the additional benefits from Jan. 1,
2008 to Jan. 1, 2012 is as follow:

Employees with more than 5 years of

service on Jan. 1, 2012 300,000
Employees with less than 5 years of service
on Jan. 1, 2012 150,000
(assume average period until vesting is 3 years)
Accounting for Past Service Cost
An entity operates a defined benefit plan that provides a benefit of 5% of final salary for each year of service. The
benefits become vested after 5 years of service.

On Jan. 1, 2012, the entity improves the benefit to 6% of final salary for each year of service starting Jan. 1, 2008.

At the date of the amendment, the PV of the additional benefits from Jan. 1, 2008 to Jan. 1, 2012 is as follow:

Employees with more than 5 years of

service on Jan. 1, 2012 300,000
Employees with less than 5 years of service
on Jan. 1, 2012 150,000
(assume average period until vesting is 3 years)

The past service cost of P300,000 is added to the PBO but

recognized as expense immediately as component of total benefit
expense.

The past service cost of P150,000 is added to the PBO and

amortized over 3 years or an annual expense of P50,000.
Accounting for Past Service Cost
An entity operates a defined benefit plan that provides a benefit of 5% of final salary for each year of service. The
benefits become vested after 5 years of service.

On Jan. 1, 2012, the entity improves the benefit to 6% of final salary for each year of service starting Jan. 1, 2008.

At the date of the amendment, the PV of the additional benefits from Jan. 1, 2008 to Jan. 1, 2012 is as follow:

Employees with more than 5 years of

service on Jan. 1, 2012 300,000
Employees with less than 5 years of service
on Jan. 1, 2012 150,000
(assume average period until vesting is 3 years)

The amortization of the past service cost shall be included as a

component of the total benefit expense.

The unamortized past service cost of P100,000 will be shown in

the memorandum records as debit because the total past service
cost is already included in the PBO.
Actuarial gains or losses
 Actuarial gains or losses arise from
experience adjustment and the effects in
the changes in actuarial assumptions.

 Experience adjustments are adjustments

from the differences between the previous
actuarial assumptions and what has
actually occurred.
Actuarial gains or losses
 Actuarial gains and losses may result ro increases or
decreases in either the present value of the defined
benefit obligation or the fair value of the plan assets.

 The following maybe of help:

AR > ER = actuarial gain

AR < ER = actuarial loss
actual benefit obligation > expected obligation = actuarial loss
actual benefit obligation < expected obligation = actuarial gain
Illustrations
Actuarial gains and losses

The defined benefit plan of an entity showed the following details for
2012:

Fair value of plan assets- Jan. 1, 2012 5,000,000

Fair value of plan assets- Dec. 31, 2012 6,500,000
Actual return on plan assets 800,000
Expected rate of return 10%

Actual return 800,000

Expected return (10% x 5,000,000) 500,000
Actuarial gain 300,000

Note the ER is based on the ERR on the FV of plan assets

at the beginning of the year.
Actuarial gains and losses

Fair value of plan assets- Jan. 1, 2012 7,000,000

Fair value of plan assets- Dec. 31, 2012 9,000,000
Actual return on plan assets 600,000
Expected rate of return 12%

Actual return 600,000

Expected return (12% x 7,000,000) 840,000
Actuarial gain (240,000)
Actuarial gains and losses

The defined benefit plan showed the following information on Jan. 1,

2012:
Actual Expected Gain/loss
Fair value of plan assets 7,300,000 7,500,000 (200,000)
Projected benefit obligation 6,000,000 6,900,000 900,000
Net actuarial gain 700,000

The defined benefit plan showed the following information on Jan. 1,

2012:
Actual Expected Gain/loss
Fair value of plan assets 8,000,000 7,500,000 500,000
Projected benefit obligation 9,000,000 8,200,000 (800,000)
Net actuarial loss (300,000)
Treatment of actuarial gain or loss
a. Corridor approach- this is the deferral
approach required by the standard

b. Full-recognition approach- this is an

option available when
fluctuations are so great that
deferral is not deemed to be
wise.
Corridor approach
 In measuring the defined benefit liability, the entity shall
recognize the portion of its actuarial gains or losses as
income or expense if the net cumulative unrecognized
actuarial gains or losses at the beginning of the period
exceed 10% of the greater between the projected benefit
obligation and fair value of plan assets.

 The 10% amount is known as the corridor and

represents a materiality threshold in determining whether
the actuarial gains or losses are included in the
computation of the total benefit expense.
Amortization of actuarial gain or
loss
 The excess of the cumulative actuarial gains or losses
over the corridor amount shall be amortized over the
remaining service period of the employees
participating in the plan.

a. The amortization of the actuarial gain is deducted in the

computation of the total benefit expense.
b. The amortization of the actuarial loss is added in the
computation of the total benefit expense.
c. Any unamortized actuarial gain is shown as a credit in
the memorandum records.
d. Any unamortized actuarial loss is shown as a debit in
the memorandum records.
Illustrations-
Corridor approach
Corridor approach-actuarial loss

On Jan.1, 2012, the memorandum records of a defined

benefit plan showed the following details:

FV of plan assets 1,500,000

PBO 1,800,000
Unrecognized actuarial loss 400,000

The average remaining service period of the covered

employee is 10 years.
Corridor approach-actuarial loss

On Jan.1, 2012, the memorandum records of a defined benefit plan showed the following details:

FV of plan assets 1,500,000

PBO 1,800,000
Unrecognized actuarial loss 400,000

The average remaining service period of the covered employee is 10 years.

The corridor is:

FV of plan
The assets
corridor is: > PBO, therefore the corridor is 10%
of P1,800,000, or P180,000.

Unrecognized actuarial loss- Jan. 1, 2012 400,000

Corridor 180,000
Excess to be amortized 220,000

Amortization of actuarial loss 220,000/10 22,000

Corridor approach-actuarial loss

FV of plan assets > PBO, therefore the corridor is 10% of P1,800,000, or P180,000.

Unrecognized actuarial loss- Jan. 1, 2012 400,000

Corridor 180,000
Excess to be amortized 220,000

Amortization of actuarial loss 220,000/10 22,000

This amortization of actuarial loss of P22,000 is added

in the computation of total benefit expense.

The unrecognized or unamortized actuarial loss of

P378,000 (P400,000 – P22,000) is shown as a debit in the
memorandum records.
It is important to know that the only unrecognized gains and losses from prior
years or at the beginning of the current year are subject to amortization.
Actuarial gains and losses in the current year are amortized in the next year.
Corridor approach-actuarial gain

On Jan.1, 2012, the memorandum records of a defined

benefit plan showed the following details:

FV of plan assets 4,200,000

PBO 4,000,000
Unrecognized actuarial loss 500,000

The average remaining service period of the covered

employee is 10 years.
Corridor approach-actuarial gain

On Jan.1, 2012, the memorandum records of a defined benefit plan showed the following details:

FV of plan assets 4,200,000

PBO 4,000,000
Unrecognized actuarial loss 500,000

The average remaining service period of the covered employee is 10 years.

The corridor is:

Unrecognized actuarial gain- Jan.1, 2012 500,000

Corridor (10% x 4,200,000) 420,000
Excess gain to be amortized 80,000

Amortization of actuarial gain 80,000/10 8,000

Corridor approach-actuarial gain

Unrecognized actuarial gain- Jan.1, 2012 500,000

Corridor (10% x 4,200,000) 420,000
Excess gain to be amortized 80,000

Amortization of actuarial gain 80,000/10 8,000

This amortization of actuarial gain of 8,000 is deducted

in the computation of total benefit expense.

The unrecognized or unamortized actuarial gain of

P492,000 (P500,000 – P8,000) is shown as a credit in the
memorandum records.

back
Full recognition approach
 Par. 93 of PAS 19 provides that “an entity may
adopt any systematic method that results in
faster recognition of accrual gains or losses
provided the same basis is applied consistently
from period to period.”

 Par. 93A further provides that “if an entity adopts

a policy of recognizing gains and losses in the
period in which they occur, it may recognize
them in the other comprehensive income,
provided it does so for all of its defined benefit
plans and all of its actuarial gains and losses.”
Full recognition approach
 Accordingly, the entity has the option of
recognizing actuarial gains and losses in
full in the period in which they occur.

 In other words, gains and losses occurring

in the current year are recognized
immediately in the current year.
Full recognition approach
 Under the full recognition approach, the actuarial
gains and losses are fully recognized either as
component of “other comprehensive income” or
as a component of “profit or loss” as part of total
employee benefit expense.

 The advantage of this approach is that the

reported prepaid or accrued benefit cost in the
statement of financial position no longer includes
the conglomeration of deferred actuarial gains or
losses.
Illustration-
Full recognition
approach
Full recognition approach

On Jan. 1, 2012, the memorandum records of defined

benefit plan showed the following:

FV of plan assets 5,000,000

OBO 4,500,000
Unrecognized actuarial gain 800,000

On Dec. 31, 2012, the fair value of the plan assets

amounted to P5,500,00 and the projected benefit
obligation totalled P4,800,000.

The actuarial gain during the period is P1,000,000 and

the average remaining service period of the employee is
20 years.
Full recognition approach
On Jan. 1, 2012, the memorandum records of defined benefit plan showed the following:

FV of plan assets 5,000,000

OBO 4,500,000
Unrecognized actuarial gain 800,000

On Dec. 31, 2012, the fair value of the plan assets amounted to P5,500,00 and the projected benefit obligation
totalled P4,800,000.

The actuarial gain during the period is P1,000,000 and the average remaining service period of the employee is
20 years.

The actuarial gain is P1,000,000 and it is fully recognized

in 2012 as follows:

Prepaid/accrued benefit cost 1,000,000

Actuarial gain 1,000,000

The actuarial gain may be shown as component of “other comprehensive income” or as

component of profit or loss as a deduction in the computation of employee benefit expense.

Because the entity fully recognizes any actuarial gain or loss during the year, there is no
unrecognized gain or loss at the beginning of the year.
Comprehensive
illustration
Comprehensive illustration

On Jan. 1, 2012, the memorandum records of a defined benefit plan showed the
following:
FV of plan assets 5,500,000
Unrecognized past service cost 200,000
Total debits 5,700,000
PBO 6,000,000
Unrecognized actuarial gain 700,000
Total credits 6,700,000
Prepaid/accrued benefit cost (1,000,000)
The information concerning the defined benefit plan for the current year is as
follows:
Current service cost 550,000
Contribution to the plan 850,000
Benefits plan 400,000
Amortization of past service cost 50,000
Actual return on plan assets 750,000
Settlement discount rate 10%
Expected return on plan assets 12%
Average remaining service period of covered employees 10 years
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

The unamortized or unrecognized actuarial gain of P700,000 on Jan. 1,

2012 shall be tested whether a portion shall be amortized in 2012.

Unamortized actuarial gain 700,000

Corridor (10% x 6,000,000) 600,000
Excess gain to be amortized 100,000
Amortization of actuarial gain 100,000 / 10 10,000
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

The total employee benefit expense is as follows:

Current service cost 550,000

Interest cost (10% x 6,000,000) 600,000
Expected return (12% x 5,500,000) (660,000)
Amortization f past service cost 50,000
Amortization of actuarial gain ( 10,000)
Total benefit expense 530,000
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

The entry to record the 2012 employee benefit expense and

contribution is as follows:
Benefit expense 530,000
Prepaid/accrued benefit cost 320,000
Cash 850,000

Prepaid/accrued benefit cost- Jan. 1, 2012 (1,000,000)

Debit adjustment 320,000
Balance- Dec. 31, 2012 ( 680,000)
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

The balance of the prepaid/accrued benefit cost account is

confirmed or reconciled with the following memorandum
records

FV of plan assets- Jan. 1, 2012 5,500,000

Add: Contribution 850,000
Actual return 750,000
Total 7,100,000
Less: Benefits paid 400,000
FV of plan assets- Dec. 31, 2012 6,700,000
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

Projected benefit obligation- Jan. 1, 2012 6,000,000

Add: Current service cost 550,000
Interest cost 600,000
Total 7,150,000
Less: Benefits paid 400,000
PBO- Dec. 31, 2012 6,750,000

Actual return on plan assets 750,000

Expected return (660,000)
Actuarial gain during the year- deferred 90,000
Comprehensive illustration

Current service cost 550,000

FV of plan assets 5,500,000 Contribution to the plan 850,000
Unrecognized past service cost 200,000 Benefits plan 400,000
Total debits 5,700,000 Amortization of past service cost 50,000
PBO 6,000,000 Actual return on plan assets 750,000
Unrecognized actuarial gain 700,000 Settlement discount rate 10%
Total credits 6,700,000 Expected return on plan assets 12%
Prepaid/accrued benefit cost (1,000,000) Average remaining service period of covered employees 10 years

Unamortized actuarial gain 700,000

Amortization of actuarial gain ( 10,000)
Actuarial gain on plan assets
during the year 90,000
Unamortized actuarial gain- Dec. 31, 2012 780,000
Comprehensive illustration

Reconciliation

FV of plan assets- Dec. 31, 2012 6,700,000

Unamortized past service cost (200,000 – 50,000) 150,000
Total debits 6,850,000
Projected benefit obligation- Dec. 31, 2012 6,750,000
Unamortized actuarial gain 780,000
Total credits 7,530,000
Prepaid/accrued benefit cost ( 680,000)
FVPA more than PBO
 Again, if the fair value of plan assets is more
than the projected benefit obligation, the plan is
overfunded and therefore, there is a prepaid
benefit cost which is classified as an asset.

 PAS 19 calls this asset as surplus which is the

excess of the fair value of plan assets over the
present value of the defined benefit obligation.
FVPA more than PBO
 This surplus arises where a defined benefit plan has been
overfunded or in certain cases where actuarial gains are
recognized.

 An entity shall recognize an asset in such cases because:

a. The entity controls a resource, which is the ability to use the

surplus to generate future benefits.
b. The control is the result of past events, meaning the
contribution paid by the entity and service rendered by the
employees.
c. Future economic benefits are available to the entity in the
form of a reduction in future contributions or a cash refund,
either directly or indirectly to another plan in deficit.
FVPA more than PBO
 PAS 19 provides that such surplus or resulting asset
must not exceed the total of any cumulative
unrecognized net actuarial loss, and past service cost
and the present value of any economic benefits
available in the form of refunds from the plan or
reduction in future contributions.
Illustration
FVPA more than PBO

On Dec. 31, 2012, a defined benefit revealed the following:

FV of plan assets 5,950,000

Unrecognized actuarial loss 800,000
Unrecognized past service cost 350,000
PBO (5,500,000)
Prepaid/accrued benefit cost- debit 1,600,000

The PV of available future refunds and reduction in

future contribution is P150,000.
FVPA more than PBO

On Dec. 31, 2012, a defined benefit revealed the following:

FV of plan assets 5,950,000

Unrecognized actuarial loss 800,000
Unrecognized past service cost 350,000
PBO (5,500,000)
Prepaid/accrued benefit cost- debit 1,600,000

The PV of available future refunds and reduction in future contribution is

P150,000.

Since the prepaid/accrued benefit cost account has a

debit balance, there is a surplus or asset of P1,600,000.
However, the surplus must not exceed the total of the
following:
Unrecognized actuarial loss 800,000
Unrecognized past service cost 300,000
PV of future refunds and reductions
In future contributions 150,000
Total limit 1,300,000
FVPA more than PBO

Accordingly, the entity shall report only an asset of

P1,300,000. The difference of P300,000 is normally
included in profit or loss. However PAS 19,
par. 93C, provides that if an entity follows the full
recognition of actuarial gain and loss through other
comprehensive income, any surplus adjustment is
also recognized in the other comprehensive income.

The adjustment for the difference is as follows:

Surplus reduction 300,000

Prepaid/accrued benefit cost 300,000
Actuarial assumptions
 Actuarial assumptions must be unbiased and mutually
compatible.
 Actuarial assumptions comprise of demographic
assumptions and financial assumptions.
 The discount rate shall be determined by reference to
market yields at the end of reporting period on high
quality bonds. If there are no such bonds, the market
yields on government bonds shall be used as the
discount rate.
 Postemployment benefit obligations shall be measured
on a basis that reflects estimated future salary
increases.
Curtailment and settlement
 An entity shall recognize gains and losses on
curtailment or settlement of a defined benefit plan
when curtailment or settlement occurs. The gain or
loss on curtailment or settlement shall comprise the
following:

a. Any resulting change in the present value of the

defined benefit obligation.
b. Any resulting change in the in the fair value of plan
assets.
c. Any related actuarial gains and losses and past service
cost that had nor previously been recognized.
Curtailment and settlement
 Any curtailment occurs when the entity:

a. Is demonstrably committed to make material

reduction in the number of the employees
covered in the plan.
b. Amends the terms of the defined benefit plan
such that a material element of future service
by current employees will no longer qualify for
benefits, or will qualify only for reduced
benefits.
Curtailment and settlement
 A settlement occurs when an entity enters into
a transaction that eliminates all the further
legal or constructive obligation for part or all of
the benefits provided under a defined benefit
plan.

 A settlement occurs with a curtailment if a plan

is terminated such that the obligation is settled
and the plan ceases to exist.
Curtailment and settlement
 However, the plan is not a curtailment or
settlement if the plan is replaced by a
new plan that offers benefits that in
substance identical.

 Termination is the discontinuance of the

plan so that employees do not anymore
additional benefits for future services.
Illustration
Curtailment and settlement

On Dec. 31, 2012, entity has closed down its subsidiary

and the employees in the subsidiary will earn no further
pension benefits.

On this date, the memorandum records showed the

following:

FV of plan assets 6,000,000

Unrecognized past service cost 500,000
PBO 8,000,000
Unrecognized actuarial gain 1,000,000

It is reliably determined that the curtailment reduced the

PBO to P7,200,000.
Curtailment and settlement

On Dec. 31, 2012, entity has closed down its subsidiary and the employees in the subsidiary will earn no
further pension benefits.

On this date, the memorandum records showed the following:

FV of plan assets 6,000,000

Unrecognized past service cost 500,000
PBO 8,000,000
Unrecognized actuarial gain 1,000,000

It is reliably determined that the curtailment reduced the PBO to P7,200,000.

The gain on curtailment is determined as follows:

PBO- before curtailment 8,000,000
PBO- after curtailment 7,200,000
Gain on curtailment- reduction of PBO 800,000
Proportionate share in the unrecognized
past service cost (10% x 500,000) ( 50,000)
Proportionate share in the unrecognized
Actuarial gain (10% x 1,000,000) 100,000
Net gain on curtailment 850,000
Percentage of reduction of PBO (800,000 / 8,000,000) 10%
Curtailment and settlement
 Where a curtailment relates only to some
employees covered by the plan, the obligation
is partly settled, and any gain or loss on
curtailment shall include a proportionate share
of the previously past service cost and
actuarial gain or loss.

 The net gain on curtailment shall be included

as component of employee benefit expense.
Curtailment and settlement

On Dec. 31, 2012, entity has closed down its subsidiary and the employees in the subsidiary will earn no
further pension benefits.

On this date, the memorandum records showed the following:

FV of plan assets 6,000,000

Unrecognized past service cost 500,000
PBO 8,000,000
Unrecognized actuarial gain 1,000,000

It is reliably determined that the curtailment reduced the PBO to P7,200,000.

After curtailment, the memorandum records would

show the following balances
FV of plan assets 6,000,000
Unrecognized past service cost
(500,000 – 50,000) 450,000
PBO as reduced by curtailment (7,200,000)
Unrecognized actuarial gain
(1,000,000 – 100,000) ( 900,000)
Prepaid/accrued benefit cost (1,650,000)
Disclosures- defined contribution
plan
a. General description of the plan

b. The amount recognized as expense

during the period
Disclosures- defined benefit plan
a. Accounting policy for actuarial gains and
losses
b. General description or the type of plan
c. Reconciliation of the assets and liabilities
recognized in the balance sheet
d. Amounts included in the fair value of plan
assets
e. Reconciliation showing the movements during
the period in the net liability or net asset
recognized in the balance sheet.
Disclosures- defined benefit plan
f. Total expense in the income statement for
each of the following, and the line item in the
income statement in which they are included.
Current service cost
Interest cost
Expected return on plan assets
Actuarial gain or loss
Past service cost
Effect of any curtailment
g. Actual return on plan assets
h. Principal actual assumptions
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Other long-term employee benefits
 Long-term employee benefits, other than
postemployment benefits, include:

a. Long-term compensated absences such

as long service or sabbatical leave
b. Jubillee or other long-term benefit
c. Long-term disability benefits
Other long-term employee benefits
 Long-term employee benefits, other than
postemployment benefits, include:

d. Profits sharing and bonuses payable in more than

twelve months after the end of the period in which the
employees render the related service.
e. Deferred compensation payable in more than twelve
months after the end of the period in which it is earned.
Recognition and Measurement
 The amount recognized as a liability for other
long-term employee benefits shall be the net
total of the following amounts:

a. Present value of the defined benefit obligation

at the end of reporting period.
b. Minus the fair value at the end of the reporting
period of the plan assets, if any, out of which
the obligations are to be settled directly.
Recognition and Measurement
 For such long-term employee benefits, an entity shall
recognize the net total of the following amounts as
expense:

a. Current service cost

b. Interest cost
c. Expected return on plan assets
d. Actuarial gains and losses, which shall all be
recognized immediately
e. Past service cost, shall all be recognized immediately
f. Effect of any curtailment or settlement

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Termination benefits
 Termination benefits are employee benefits
payable as a result, of an entity's decision to
terminate an employee's employment before the
normal retirement date, or an employee's
decision to accept voluntary redundancy in
exchange for those benefits.

 The event which gives rise to an obligation is the

termination rather than the employee service.
Termination benefits
 Therefore, the entity shall recognize
termination benefits as expense and liability
where the entity is demonstrably committed to
either:

a. Terminate the employment of an employee or

group of employees before the normal
retirement date.
b. Provide termination benefits as a result of an
offer made in order to encourage voluntary
redundancy.
Measurement of termination
benefits
a. Where termination benefit falls due more
than twelve months after the end of the
reporting period, they are discounted
using the applicable discount rate.
b. In the case of an offer made to
encourage voluntary redundancy, the
measurement of termination benefits
shall be based on the number of
employees expected to accept the offer.
Transitional provisions
 On first adopting PAS 19, an entity shall determine its
transitional liability for a defined benefit plan at that
date as follows:

a. The present value of the obligation at the date of

adoption.
b. Minus the fair value of plan assets at the date of
adoption.
c. Minus any unamortized past service cost
Transitional provisions
 If the transitional liability is more than the liability that
would have been recognized at the same date under
the entity's previous accounting policy, the entity shall
make an irrevocable choice to recognize this increase
as transition loss as part of its defined benefit liability as
follows:

a. Recognize the transition loss as expense immediately

to be included in the total benefit expense for the
current period.
b. Amortize the transition loss on a straight line basis over
a maximum of 5 years.
Transitional provisions
 If the transitional liability is less than the
liability that would have been recognized
at the same date under the entity's
previous accounting policy, the entity shall
recognize the decrease as transition gain
immediately.
Illustration
Transitional provisions

On Jan. 1, 2012, an entity’s statement of financial

position includes an accrues benefit cost of P500,000.

On the same date, the entity adopts PAS 19 with the

following calculations:

FV of plan assets 5,000,000

Unamortized past service cost 320,000
PBO 6,500,000
Transitional provisions

On Jan. 1, 2012, an entity’s statement of financial position includes an accrues benefit cost of
P500,000.

On the same date, the entity adopts PAS 19 with the following calculations:

FV of plan assets 5,000,000

Unamortized past service cost 320,000
PBO The transitional effect is computed
6,500,000 as follows:
PBO
6,500,000
Less: FV of plan assets 5,000,000
Unamortized past service cost 320,000
5,320,000
Accrued benefit cost
1,180,000
Accrued benefit cost
500,000
Increase in defined benefit liability
or transition loss
680,000
PAS 26
 This standard deals with accounting and
reporting by retirement benefit plan

 It is the standard for the preparation of

general purpose financial statements or
financial reports of retirement plans which
may be a defined contribution plan or
defined benefit plan.
Report of defined contribution
plan
 The report of a defined contribution plan shall contain a
statement of net assets available for benefits and a
description of the funding policy.

 In preparing the 'statement of net assets available for

benefits', the plan investments shall be carried at fair
value. When plan investments are held for which an
estimate is not possible, the reason why fair value is not
used shall be disclosed.
Report of defined benefit plan
 The report of a defined benefit plan shall contain either:

a. Statement that shows that the net assets available for

benefits, the actuarial present value of promised
benefits, distinguishing between vested and nonvested
benefits, and the resulting excess or deficit.
b. A statement of net assets available for benefits,
including either a note disclosing the actuarial present
value of promised vested and nonvested benefits or
reference to this information in an accompanying
actuarial report.
Illustration
Generous Company- Defined Benefit Plan
Statement of Net Assets Available for Benefits
December 31, 2012
Assets

Cash 500,000
Receivables
Amounts dues from stockholder from sale of
securities 1,500,000
Accrued interest receivable 400,000
Dividend receivable 100,000 2,000,000

Investment at fair value

Treasury bills 2,500,000

Equity securities 1,000,000
Debt securities 500,000 4,000,000 6,500,000

Liabilities

Amounts due to stockholders on purchase of

securities 300,000
Banefits payable 700,000
Accrued expenses 100,000 1,100,000
NET ASSETS AVAILABLE FOR BENEFITS 5,400,000
Actuarial present value of benefits
Vested benefits 1,200,000
Nonvested benefits 200,000 1,400,000
EXCESS OF NET ASSETS OVER BENEFITS 4,000,000
END!!!