CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
PAS 19 Employee Benefits
Employee Benefits Can either be:
- All forms of consideration given by an 1. Vesting - employees are entitled to a
entity in exchange for services rendered by cash payment for unused entitlement on
employees or for the termination of leaving the entity
employment. 2. Non-vesting - employees are not
Four Employee Benefits: entitled to cash payment for unused
1. Short term employee benefits entitlement on leaving the entity.
2. Postemployment benefits
3. Other long-term employee benefits Non-accumulating compensated absences
4. Termination benefits - not carried forward.
- No liability or expense is recognized until
Short-term Employee Benefits the absences occur, due to employee service
- are benefits which are expected to be not increasing the amount of benefit.
settled wholly within twelve months
after the end of annual reporting period. Post-Employment Benefits
- not measured on a discount basis - Benefits other than termination benefits
Benefits include: that are payable after the completion of
a. Salaries, wages, SSS, Pag-ibig, employment
Philhealth contributions Can be classified as:
b. Paid vacation leaves and sick leaves 1. Defined contribution plans
c. Profit sharing and bonuses payable 2. Defined benefit plans
d. Nonmonetary benefits (e.g., free
goods and services Defined Contribution Plan
Recognition and Measurement - Risk the retirement benefit may be
The entity shall recognized the insufficient rest with the employee.
undiscounted amount of short-term - Employee commits to contribute to a
employee benefits expected to be paid in fund; used to pay for the retirement benefits
exchange of service: of the employees.
1. As Liability (accrued expense) - Contribution is definite ; Benefits is
2. As an Asset (prepaid expense) indefinite
3. As an Expense, unless the
employee benefit forms part of the Defined Benefit Plan
cost of an asset (e.g., cost of - Employer commits to pay retiring
inventories or PPE) employees a definite amount
- Risk of the retirement benefit may be
Short-Term Compensated Absences insufficient rests with the employer.
Accumulating compensated absences - Benefit is indefinite ; Contribution is
- Carried forward and can be used in future indefinite
periods of the current period’s entitlement
is not used in full.
, CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Other Relevant Terms Definition of Terms
1. Current Service Cost - increase in the
Contributory Non
Contributory present value (result from: employee
Both employee and Only the service)
employer contribute employer 2. Past Service Cost - the chance in the
for retirement contribute for the
benefits retirement benefit present (result: plan amendment or
curtailment)
Funded Unfunded
3. Gain or loss on settlement - different
-Transferred to - Not transferred between the present value and the
a trustee to a trustee
- Trustee - Employer retains settlement price
assumes the the obligation of 4. Increase cost on the Defined Benefit
obligation
Obligation - the increase during a period
in the present value
Accounting for Defined Contribution Plan
5. Actuarial gains and losses - changes
- Straightforward; the reporting entity’s
in the present value from experience
obligation for each period is determined by
adjustment and the effects of changes in
the amounts to be contributed for that
actuarial assumptions..
period.
- No Actuarial assumptions are required
Actuarial Assumptions
to measure the obligation
- an entity’s best estimates of the variables >
determining the ultimate cost of providing
Accounting for Defined Benefit Plan
post-employment benefits.
- Complex
1. Demographic assumptions - future
- actuarial assumptions are required
characteristics of employees:
- Obligations > measured > discounted
a. Mortality, both during and after
basis
employment
b. Rates of employee turnover, disability
Accounting Procedures for Defined Plans
and early retirement
Step 1: Determine the deficit or surplus
c. the proportion of plan members with
(Deficit) Surplus = FVPA - PV of DBO
dependents who will be eligible for benefits
FVPA - Fair Value of Plan Asset
d. Claims rate under medical plans
PV of DBO - Present Value of Defined
2. Financial assumptions - deals with:
Benefit Obligation
a. Discount rate
Step 2: Determine the Net defined benefit
b. Future Salary and Benefit levels
liability (asset)
c. Future Medical Costs
> if there is deficit > Net defined benefit
d. The expected rate of return on plan assets
liability
> if there is surplus > Net defined benefit
Actuarial Assumptions - Discount Rate
asset > lower of the surplus and the asset
- the rate shall be determined by reference
ceiling.
to market yields at the end of the reporting
Asset Ceiling
period on high quality corporate
, CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Other long-term employee benefits 2. An employee’s decision to accept an
- due to be settle beyond 12 months entity’s offer of benefits in exchange for the
- accounted for using the procedure termination of employment.
applicable for a defined benefit plan. Measurement
- recognized in profit or loss (IS) - initially and subsequently recognised with
1. Long term compensated absences the nature of the employee benefit
2. Jubilee or other long-service benefits a. the termination benefits are payable
3. Long-term disability benefits within 12 months (can either be
4. Profit-sharing and bonuses payable accounted short-term employee benefits or
5. Deferred compensation payable other long-term benefits)
b. in substance, enhancement to
Termination Benefits post-employment benefits.
- provided in exchange for the termination
of an employee’s employment as result of:
1. An entity’s decision to terminate an
employee’s employment before the normal
retirement date.
ILLUSTRATIVE PROBLEM
Problem 26-3 (IAA)
Rachel Company revealed the following information for the current year:
Fair Value of plan assets - January 1 5,000,000
Projected benefit obligation - January 1 7,500,000
Current Service Cost 1,450,000
Past Service Cost 300,000
Actual Return on Plan Assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000
Discount rate 10%
1. What amount should be reported as employee benefit expense?
a. 2,000,000 c. 2,500,000
b. 2,200,000 d. 1,750,000
Solution and Answers:
Current Service Cost 1,450,000
PAS 19 Employee Benefits
Employee Benefits Can either be:
- All forms of consideration given by an 1. Vesting - employees are entitled to a
entity in exchange for services rendered by cash payment for unused entitlement on
employees or for the termination of leaving the entity
employment. 2. Non-vesting - employees are not
Four Employee Benefits: entitled to cash payment for unused
1. Short term employee benefits entitlement on leaving the entity.
2. Postemployment benefits
3. Other long-term employee benefits Non-accumulating compensated absences
4. Termination benefits - not carried forward.
- No liability or expense is recognized until
Short-term Employee Benefits the absences occur, due to employee service
- are benefits which are expected to be not increasing the amount of benefit.
settled wholly within twelve months
after the end of annual reporting period. Post-Employment Benefits
- not measured on a discount basis - Benefits other than termination benefits
Benefits include: that are payable after the completion of
a. Salaries, wages, SSS, Pag-ibig, employment
Philhealth contributions Can be classified as:
b. Paid vacation leaves and sick leaves 1. Defined contribution plans
c. Profit sharing and bonuses payable 2. Defined benefit plans
d. Nonmonetary benefits (e.g., free
goods and services Defined Contribution Plan
Recognition and Measurement - Risk the retirement benefit may be
The entity shall recognized the insufficient rest with the employee.
undiscounted amount of short-term - Employee commits to contribute to a
employee benefits expected to be paid in fund; used to pay for the retirement benefits
exchange of service: of the employees.
1. As Liability (accrued expense) - Contribution is definite ; Benefits is
2. As an Asset (prepaid expense) indefinite
3. As an Expense, unless the
employee benefit forms part of the Defined Benefit Plan
cost of an asset (e.g., cost of - Employer commits to pay retiring
inventories or PPE) employees a definite amount
- Risk of the retirement benefit may be
Short-Term Compensated Absences insufficient rests with the employer.
Accumulating compensated absences - Benefit is indefinite ; Contribution is
- Carried forward and can be used in future indefinite
periods of the current period’s entitlement
is not used in full.
, CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Other Relevant Terms Definition of Terms
1. Current Service Cost - increase in the
Contributory Non
Contributory present value (result from: employee
Both employee and Only the service)
employer contribute employer 2. Past Service Cost - the chance in the
for retirement contribute for the
benefits retirement benefit present (result: plan amendment or
curtailment)
Funded Unfunded
3. Gain or loss on settlement - different
-Transferred to - Not transferred between the present value and the
a trustee to a trustee
- Trustee - Employer retains settlement price
assumes the the obligation of 4. Increase cost on the Defined Benefit
obligation
Obligation - the increase during a period
in the present value
Accounting for Defined Contribution Plan
5. Actuarial gains and losses - changes
- Straightforward; the reporting entity’s
in the present value from experience
obligation for each period is determined by
adjustment and the effects of changes in
the amounts to be contributed for that
actuarial assumptions..
period.
- No Actuarial assumptions are required
Actuarial Assumptions
to measure the obligation
- an entity’s best estimates of the variables >
determining the ultimate cost of providing
Accounting for Defined Benefit Plan
post-employment benefits.
- Complex
1. Demographic assumptions - future
- actuarial assumptions are required
characteristics of employees:
- Obligations > measured > discounted
a. Mortality, both during and after
basis
employment
b. Rates of employee turnover, disability
Accounting Procedures for Defined Plans
and early retirement
Step 1: Determine the deficit or surplus
c. the proportion of plan members with
(Deficit) Surplus = FVPA - PV of DBO
dependents who will be eligible for benefits
FVPA - Fair Value of Plan Asset
d. Claims rate under medical plans
PV of DBO - Present Value of Defined
2. Financial assumptions - deals with:
Benefit Obligation
a. Discount rate
Step 2: Determine the Net defined benefit
b. Future Salary and Benefit levels
liability (asset)
c. Future Medical Costs
> if there is deficit > Net defined benefit
d. The expected rate of return on plan assets
liability
> if there is surplus > Net defined benefit
Actuarial Assumptions - Discount Rate
asset > lower of the surplus and the asset
- the rate shall be determined by reference
ceiling.
to market yields at the end of the reporting
Asset Ceiling
period on high quality corporate
, CONCEPTUAL FRAMEWORK AND ACCOUNTING STANDARDS
Other long-term employee benefits 2. An employee’s decision to accept an
- due to be settle beyond 12 months entity’s offer of benefits in exchange for the
- accounted for using the procedure termination of employment.
applicable for a defined benefit plan. Measurement
- recognized in profit or loss (IS) - initially and subsequently recognised with
1. Long term compensated absences the nature of the employee benefit
2. Jubilee or other long-service benefits a. the termination benefits are payable
3. Long-term disability benefits within 12 months (can either be
4. Profit-sharing and bonuses payable accounted short-term employee benefits or
5. Deferred compensation payable other long-term benefits)
b. in substance, enhancement to
Termination Benefits post-employment benefits.
- provided in exchange for the termination
of an employee’s employment as result of:
1. An entity’s decision to terminate an
employee’s employment before the normal
retirement date.
ILLUSTRATIVE PROBLEM
Problem 26-3 (IAA)
Rachel Company revealed the following information for the current year:
Fair Value of plan assets - January 1 5,000,000
Projected benefit obligation - January 1 7,500,000
Current Service Cost 1,450,000
Past Service Cost 300,000
Actual Return on Plan Assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees 800,000
Discount rate 10%
1. What amount should be reported as employee benefit expense?
a. 2,000,000 c. 2,500,000
b. 2,200,000 d. 1,750,000
Solution and Answers:
Current Service Cost 1,450,000
