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Employee
Benefits
PAS 19 (REVISED); IAS 19; R.A. 7641

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• TO IDENTIFY EMPLOYEE BENEFITS

• TO KNOW THE RECOGNITION
AND MEASUREMENT OF
SHORT- TERM BENEFITS
• TO KNOW THE RECOGNITION
AND MEASUREMENT OF
POSTEMPLOYMENT BENEFITS
Objectives: • TO DISTINGUISH DEFINED
CONTRIBUTION PLAN AND
DEFINED BENEFIT PLAN
• TO UNDERSTAND THE
RELATIONSHIP BETWEEN FAIR
VALUE OF PLAN ASSETS AND
PROJECTED BENEFIT OBLIGATION

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What are employee benefits?

PAS 19 (REVISED); IAS 19; R.A. 7641

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Employee benefits
UNDER PAS 19, EMPLOYEE BENEFITS ARE
DEFINED AS:

“all forms of consideration given by an

entity in exchange for services rendered
by employees or for termination of
employment”

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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 annual reporting
period in which the employee renders the
service.

Short-term employee benefits include the

following:
• Salaries, wages and social security
contributions
• Short-term compensated or paid absences
• Profit sharing and bonuses payable within
twelve months
• Nonmonetary benefits, such as medical
care, housing, car and free or subsidized
goods

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The rules for short-term employee benefits are

essentially an application of basic accounting
principles and practice.

 Unpaid short-term employee benefits at the

end of the accounting period shall be
recognized as accrued expense.
Recognition  Any short-term benefits paid in advance
shall be recognized as a prepayment.
and There is no requirement to discount future
measurement benefits because such benefits are all, by
definition, payable no later than twelve
months after the end of the current reporting
period.

There is also no possibility of actuarial gain or

loss because short-term employee benefits
are measured on an undiscounted basis.

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SHORT-TERM COMPENSATED OR PAID

ABSENCES
Entitlement to paid absences falls into two categories

Accumulating Nonaccumulating
absences absences

 carried forward  not carried forward

 can be used in future  benefits lapse if not
periods used
 may or may not  do not entitle
entitle employees to employees to a cash
a cash payment for payment for unused
unused entitlement entitlement on
on leaving the entity leaving the entity

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Vesting Nonvesting
 Employees are entitled to cash  Employees are NOT entitled to
payment for unused entitlement cash payment for unused
on leaving the entity entitlement on leaving the entity

Vested benefits are employee

benefits tat are not conditional on
future employment.

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Before we
TRUE OR FALSE:
SHORT-TERM EMPLOYEE BENEFITS CAN move on..
BE PAID IN ADVANCE OR UNPAID AT
THE END OF THE ACCOUNTING PERIOD.

HOW DO YOU RECOGNIZE

EMPLOYEE BENEFITS THAT ARE PAID
IN ADVANCE?

HOW ABOUT UNPAID EMPLOYEE

BENEFITS?

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Postemployment benefits
Postemployment benefits are
employee benefits, other than
termination benefits and short-term
employee benefits, which are
payable after completion of
employment.

Postemployment benefits include:

a) Retirement benefits, such as
pensions and lumpsum
payments on retirement
b) Postemployment life insurance
c) Postemployment medical care

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Most postemployment benefit plans are

formal arrangements between an employer
entity and the employees.
The plans may also be
established by law whereby
These plans are usually established as part of entities are required to
the remuneration package for the contribute to national benefit
employees. plans as in the case of Social
Security System.
Some postemployment benefit plans are
informal as evidenced only by the entity’s
practice to pay postemployment benefits.

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Republic Act (R.A.) No.

7641 Unless the parties provide for
broader inclusions, the term
Qualifications: one-half (1/2) month salary
 age of sixty (60) years or more, but not shall mean
beyond sixty-five (65) years, which is  fifteen (15) days, plus
hereby declared the compulsory
retirement age  one-twelfth (1/12) of the
 served at least five (5) years in the said 13th month pay
establishment  cash equivalent of not
more than five (5) days of
Benefits: service incentive leaves
 Retirement pay equivalent to at least
one-half (1/2) month salary for every year
of service, a fraction of at least six (6)
months being considered as one whole Retail, service and agricultural
year. establishments or operations
employing not more than (10)
employees or workers are exempted
from the coverage of this provision.

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POSTEMPLOYMENT BENEFIT
PLANS ARE CLASSIFIED AS
EITHER:

Defined
contribution Defined benefit
plan plan

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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.

The contribution is definite, but the

benefit is indefinite.

Consequently, when an employee retires,

the accumulated fund in the hands of the
trustee determines his retirement benefit.

The employee bears the investment risk.

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 The contribution shall be recognized as

an expense in the period it is payable.
 Any unpaid contribution at the end of the
period shall be recognized as accrued
expense

Recognition  Any excess contribution shall be

recognized as prepaid expense BUT only
to the extent that the prepayment will
and lead to a reduction in future payments or
a cash refund.
measurement
Accounting for a defined contribution plan is
straightforward because the obligation of
the entity is determined by the amount
contributed for each period.

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Illustration no. 1
On January 31, 2021, Pottery Barn
paid P100,000 contributions to a
defined contribution plan in
exchange for services performed by
the employees in December 2020.
QUESTION 1: WHAT IS THE JOURNAL ENTRY TO RECORD THE
ACCRUAL OF BENEFIT ON DECEMBER 31, 2020?
Employee benefit expense P100,000
Accrued benefit payable P100,000
QUESTION 2: WHAT IS THE JOURNAL ENTRY TO RECORD THE
PAYMENT OF THE CONTRIBUTION ON JANUARY 31, 2021?
Accrued benefit payable P100,000
Cash P100,000

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An entity may pay insurance premiums to fund

a post employment benefit plan.

When an insurance policy is in the name of a

specified plan participant or a group of
participants and the entity does not have any
legal or constructive obligation to cover any
Insured loss on the policy, the entity has no obligation
benefits to pay benefits and the insurer has sole
responsibility for paying the benefits.

Therefore, the entity shall treat such insurance

payments as contribution to a defined
contribution plan.

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Defined benefit plan

A defined benefit plan Is simply a
postemployment benefit plan other than a
defined contribution plan.

Under a defined benefit plan, an entity’s

obligation is to provide the agreed benefits
to employees.

The benefit is definite, but the

contribution is indefinite.

The entity assumes the investment risk.

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Recognition and
measurement
• Accounting for a defined benefit plan is
complex because actuarial assumptions
are required t measure the obligation
and the expense and there is a possibility
of actuarial gains or losses.
• The obligation is measured on a
discounted basis.
• Defined benefit plans may be unfunded,
fully funded or partly funded by the
contributions of the entity.
• The expense recognized is not necessarily
the amount of contribution for the period.

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Components of a defined
benefit cost
PAS 19, provides that an entity shall recognize
the following components of defined benefit
cost: Service cost and net interest
 Service cost, which comprises: are included in profit or loss as
a component of employee
 Current service cost benefit expense.
 Past service cost
 Any gain or loss on plan settlement
All of the remeasurements are
fully recognized through other
 Net interest
comprehensive income and
are reclassified subsequently to
 Remeasurements, which comprise: retained earnings.
 Remeasurement of plan assets
 Remeasurement of defined benefit obligation
 Remeasurement of the effect of asset ceiling

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The defined benefit cost if the amount to be

funded by contribution from the employer.

If the contribution is more than the defined

benefit cost, the difference is prepaid benefit
cost during the year.

If the contribution is less than the defined

benefit cost, the difference is accrued
benefit cost during the year.

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Components • Current service cost

• Past service cost
of employee • Net interest
benefit • Gain on plan settlement as a
deduction
expense • Loss on plan settlement as an addition

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Current service cost

Current service cost is the increase in present
value of the defined benefit obligation
resulting from employee service in the
current period.

Otherwise stated, current service cost is the

cost to an entity under a defined benefit
plan for service rendered by employees in
the current year.

This component of benefit expense

increases expense and the defined
benefit obligation.

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Net interest
Net interest on defined benefit liability or asset is the
change in the defined benefit obligation, plan
assets and asset ceiling as a result of the passage of
time.
In other words, the net interest
The net interest can be viewed as comprising three
elements, namely: expense or net interest income
is the difference between the
 Interest expense on deferred benefit obligation interest expense on the DBO,
(DBO)
interest expense on the effect
 DBO at beg. of period x Discount rate of asset ceiling and interest
income on the plan assets.
 Interest income on plan assets
 FV of plan assets at beg. of period x Discount rate

 Interest expense on effect of asset ceiling

 Effect of asset ceiling at beg. of period x
Discount rate

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Past service cost

Past service cost is the cost to an entity under
a defined benefit plan for services rendered
by employees in prior periods resulting form
the introduction of a defined benefit plan or Recognition of past service
amendment of an existing plan or cost
curtailment of an existing plan.
PAS 19 provides that an entity
Plan amendment includes introduction of a shall recognise past service
defined benefit plan or changes to an cost as an expense when the
existing defined benefit plan. plan amendment or
curtailment occurs.
Plan curtailment is a significant reduction by
an entity in the number of employees
covered by the defined benefit plan.

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Actual return on plan assets

The components of actual return on plan assets

include the following:
a) interest, dividend and other income derived
Plan assets form the plan assets
b) Realized and unrealized gains and losses on
the plan assets
Plan assets comprise
assets held by a long- Remeasurement of plan assets

term benefit fund and The remeasurement of plan assets is the difference
qualifying insurance between actual return on plan assets and interest
policy. income on plan assets.
 If the actual return is higher then the interest
income, the difference is a remeasurement
gain.
 If the actual return is less than the interest
income, the difference is a remeasurement
loss.

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An entity provided the following data for the

current year related to a defined benefit pan:

FV of plan assets beginning 5,000,000

Actual return on plan assets
during the year 900,000
Contribution to the plan 1,000,000
Benefits paid 200,000
Illustration
Discount rate 6%

Actual return on plan assets 900,000

Interest income on plan assets
(6% x 5,000,000) (300,000)
Remeasurement gain on plan assets 600,000

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Computation of fair value of plan assets

FV of plan assets beginning 5,000,000

Actual return on plan assets
during the year 900,000
Illustration Contribution to the plan 1,000,000
Total 6,900,000
Benefits paid ( 200,000)
FV of plan assets – ending 6,700,000

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Remeasurement of projected benefit

obligation (PBO)
The remeasurement of defined benefit
obligation is the recognition of actuarial gain
and actuarial loss.
Projected benefit obligation
Determination of actuarial gain and loss: Actuarial loss
 If the actual benefit obligation is higher Projected benefit obligation
then the estimated amount, there is an Actuarial gain
actuarial loss.

 If the actual benefit obligation is lower

than the estimated amount, there is an
actuarial gain

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Basic accounting considerations

The fair value of plan assets is increased The PBO is increased by:
by: a) Current service cost
a) Contribution to the plan b) Past service cost
b) Actual return on plan assets c) Interest expense on PBO
d) Actuarial loss
The fair value of plan assets is decreased
by: The PBO is decreased by:
a) Benefits paid to retirees a) Benefits paid to retirees
b) Realized loss on plan assets – this b) Actuarial gain
amount is normally netted against c) Present value of the PBO settled in
actual return advance
c) Settlement price of benefits settled in
advance

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To simplify the example, the only component of

the defined 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.

What is the entry to record the expense and the

contribution?
Illustration Employee benefit expense 500,000
Cash 450,000
Prepaid/accrued benefit cost 50,000

Observe that the “prepaid/accrued benefit

cost” account is the balancing figure.

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At the beginning of current year, the memorandum records in relation to a

defined benefit plan showed the following:

FV of plan assets 5,000,000

Projected benefit obligation 7,000,000

During the current year, the following transactions are gathered:

Current service cost 1,200,000
Past service cost 300,000
Actual return on plan assets 800,000
Contribution to the plan 1,000,000
Benefits paid 900,000
Actuarial loss due to increase in PBO 900,000
Illustration Discount rate 10%

Compute for the following:

a) Prepaid/accrued benefit cost
b) Interest income on FVPA
c) Interest expense on PBO
d) Employee benefit expense
e) Remeasurement gain on plan assets
f) Net remeasurement gain/loss
g) Total defined benefit cost
h) Accrued benefit cost during the year

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Other long-term employee

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.

In other words, other ling-term employee

benefits are employee benefits which are not
expected to be settled wholly within twelve
months after the end of the reporting period.

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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.

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Questions?

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