Employee Benefits Pt.

1
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Employee Benefits
Are all forms of consideration given by an entity in exchange for services
rendered by employees or for termination of employment.

Whether in cash or in kind (e.g sick leave, travel or allowance, etc.)

Employees include directors and other management personnel

Different Types of Benefit

 Short-term Employee Benefits

 Termination Benefits

 Postemployement Benefits

 Other Long-term Benefits

Short-Term Employee Benefits

Benefits which are expected to be settled wholly within 12 months (except for
termination benefits).

In exchange for the services rendered

Received during employment

Includes the following:

Salaries, wages, and social security contributions

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 Short-term compensated or paid absences

Profit sharing and bonuses

Non monetary benefits, such as medical care, housing, car and free or
subsidized goods.

Termination Benefit
Are employee benefits provided in exchange for the termination of an
employee's employment as a result of either:

Entity's choice to terminate an employee before normal retirement date

Employee's decision to accept an offer of benefit in exchange for the

termination

Kapag voluntary walang termination benefit

To compensate for the termination

Received after employment

Postemployment Benefit
Benefits which are payable after completion of employment. Such as:

Pensions

Lump sum retirement pay

Employee benefits, other than termination benefits and short-term employee

benefits, which are payable after completion of employment (book meaning)
Postemployment benefits include:

a. Retirement benefits, such as pensions and lump sum payments on

retirement
b. Postemployment life insurance

c. Postemployment medical care

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 In exchange for services rendered

Received after employment

Other Long-Term Benefits

Benefits that are not:

 Short-term

 Termination

 Postemployment

It is the residual definition

This includes:

 Sabbatical leave

 Disability leave

 Jubilee benefits

 Deferred compensation

 Profit sharing plan

In exchange for services rendered

Received during employment in a long period of time

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 Funded plan
The entity sets aside funds for future retirement benefits by making payments
to a funding agency, such as trustee, bank or insurance company

Unfunded plan
The entity retains the obligation for the payment of retirement benefits
without the establishment of a separate fund

Defined contribution plan:

Contribution is fixed

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 Benefit will vary on the performance of fund

The contribution by employer is agreed and fixed

The benefit of employee will vary on the return on the fund

If the plan is exceptionally good, the employee will share in the gain in the
form of larger retirement benefit

If the plan is poor, the employee will share in the loss by receiving smaller
retirement benefit

💡 Once the defined contribution is paid, the employer has no more

obligation under the plan.

E.g., The employer and employee agreed that employer will contribute P100 per
year.

Scenario 01 Scenario 02

Contribution (fixed) P100 P100

Return P90 P10

Benefit (vary) P190 P110

Defined benefit plan:

Benefit is fixed

Contribution will vary on the performance of fund

Assumes the investment risk

If the plan is exceptionally good, the entity may take a "contribution holiday",
meaning to stop paying the contribution for a while.

If the plan is poor, the entity must make additional contributions

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 The benefit that the employee will receive is agreed and fixed

The contribution will vary on the return on the fund

E.g., The employer and employee agreed that employee will receive P100 per year.
Scenario 01 Scenario 02

Benefit (fixed) P100 P100

Fund P90 P10

Contribution (vary) P10 P90

Projected Benefit Obligation: Accumulated Benefit Obligation

Future Salary xx Current Salary xx

Certain % x% Certain % x%
Years employed xx Years employed xx

Benefit xx Benefit xx

"Actuarial Assumption" → Actuary Hindi magagamit!!!

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 Service Cost
Current service cost

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 Increase in benefit obligation resulting from employee services rendered in the
current period.

The portion of retirement pay that was earned by the employee because
he/she rendered services for the current year

Increases expense and defined benefit obligation

Future Salary xx

Certain % x%
Earnings per year xx

Past service cost

Change in the benefit obligation resulting from introduction and/or curtailment

May amendment sa pension plan or may nag bago sa pension plan

Illustration:
The Company agreeed to their employee to pay retirement pay of P100 per year of
service. An employee will be introduced (included) to the plan only when
regularized after 3 years.
Year 1 - P100 not yet incurred (no obligation)

Year 2 - P100 not yet incurred (no obligation)

Year 3 - P100 + P200 for years rendered in the past
P100 current service. P200 past service

Gain or loss on settlement of PBO

Settlement

The benefit obligation is paid ahead of time than expected date of retirement

Obligation is transferred to financial institution

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 Transaction that eliminates all further legal or constructive obligations for part
or all of the benefits provided under a defined benefit plan.

CA PV of PBO Settled xx

Settlement Price (xx)

Gain or loss x (x)

Net Interest
Interest Expense
The amortization of discount - The PBO (projected benefit obligation) is
measured at present value

Computed by:
PBO - beginning xx
Discount rate x%

Interest expense xx

Discount rate:

1st - Yield rate of high quality corp. bonds

2nd - Yield rate of government issued bonds

Interest Income

The standard earnings of investment in the financial market.

This is not the actual income of the company but only a benchmark in
determining how good the fund was manage.

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 Computed by:
Plan Asset - beginning FVPA xx

Discount rate x%
Interest income xx

Remeasurements
Actuarial gain or loss on plan asset
Computed by:

Actual return xx
Interest income (standard) (xx)
Actua. Gain (loss) on PA x (x)

Actuarial Gain - The excess of Actual Earnings over the Standard Earnings in
the financial market. The fund was managed well.

Actuarial Loss - The excess of Standard Earnings over the Actual Earnings in
the financial market. The fund was managed poorly

If the actual return > expected return = actuarial gain

If the actual return < expected return = actuarial loss

If the actual benefit obligation > expected obligation = actuarial loss

If the actual benefit obligation < expected obligation = actuarial gain

Actuarial gain or loss on benefit obligation

Change in the Projected Benefit Obligation due to change in statistical
estimate.

Estimated benefit is based on:

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 Demographic - disability, early retirement, employee turnover

Financial - discount rate, future salary, taxes

Actuarial gain: change in estimate that led to lower benefit obligation

Actuarial loss: change in estimate that led to higher benefit obligation

Fair Value of Plan Asset

MNEMONIC: CA-BS

FV of plan assets – beginning                              xx

Add: contribution to the fund                               xx

Actuarial gain                                             xx
Actual return                                             xx

Total                                                                 xx
Less: benefits paid                                              xx
Actuarial loss                                             xx

FV of plan assets – ending                                   xx

PV of Benefit Obligation

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 MNEMONIC: ABC -iCPA

PBO – beginning                                     xx
Add: Current service cost                      xx
Past Service cost                            xx

Actuarial loss                                xx
Interest Cost                                 xx
Total                                                     xx

Less: Benefits paid                                 xx

Actuarial gain                                 xx

PBO – ending                                        xx

Prepaid (Accrued) Benefit Cost

FVPA, Ending PXX
PBO, Ending XX

Prepaid Accrued) Benefit PXX

Non Current Asset Prepaid) → FVPA is higher than PBO

Non Current Liability/Long term payable Accrued) → FVPA is less than

PBO (utang))

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 Illustration:
Total Benefit Expense, Remeasurements and Total Defined Benefit Cost
On January 1, 2022, Okubo Company reported the following information in relation
to a defined benefit plan:

 What amount should be reported in the income statement for the current
year as employee benefit expense?

Solution:

 Service cost

Current service cost = P1,000,000

Past service cost = P400,000
Gain or loss on settlement of PBO = P100,000
CA PV of BPO Settled P500,000

Settlement Price 400,000

Gain or loss P100,000 Gain)

Total = P1,300,000
2. Net Interest

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 Interest Expense = P750,000
PBO, beg. 7,500,000
Discount rate 10%
Interest Expense 750,000

Interest income = P700,000

FVPA, beg. 7,000,000
Discount rate 10%
Interest Income P700,000
Interest on the effect on asset ceiling = 0

Total = 50,000

Ans: 1,350,000

2. What is the net amount of "remeasurements" for 2022?

Solution:
Actuarial gain or loss on plant asset = P140,000
Actual return P840,000
Int. income 700,000
Act. FVPA 140,000

Actuarial gain or loss on benefit obligation = P200,000

Change in effect of Asset ceiling = 0

Ans: P340,000 Gain)

3. What is the total amount of defined benefit cost?

Solution:

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 Service cost 1,300,000
Net interest 50,000
Remeasurement 340,000

Total benefit cost P1,010,000

Ans: P1,010,000

4. What is the fair value of plan assets on December 31, 2022?

Ans: P7,140,000

5. What is the projected benefit obligation on December 31, 2022?

6. What is the balance of the prepaid or accrued benefit cost on December 31,
2022?

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 Solution:
FVPA, Ending P7,140,000
PBO, Ending 7,450,000

Accrued Benefit cost P310,000

Accrued kasi mas malaki yung PBO or utang mo kaysa sa FVPA

Ans: 310,000 credit

Actuarial Gains and Losses on Plan Asset and PBO

The Baby Company provided the following information related to a defined benefit
plan for the years ended December 31, 2022

 What is the actual return on plan asset?

Solution:

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 Ans: 310,000

 What is the amount of remeasurement of plan asset?

Solution:
Actuarial gain or loss on plant asset = P205,000

Actual return P310,000

Int. income 2.1M x 5% 105,000
Act. FVPA 205,000

Ans: P205,000 Gain)

 What is the actuarial loss arising from the increase in projected benefit
obligation?

Ans: 76,000

 What is the net remeasurement gain or loss on December 31, 2022?

Solution:

Actual return on plant asset 205,000

Actuarial loss 76,000
Net remeasurement 129,000 Gain)

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 Ans: 129,000 Gain

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