POST-EMPLOYEE BENEFITS Payment/

FIXED or DEFINITE EMPLOYEES bear the risk of the

 Benefits which are payable AFTER completion of employment Contribution
investment.
 These include: Benefits INDEFINITE
o Retirement benefits, such as pensions and lump sum payments on EMPLOYEES will share in the LOSS in
POOR management of contributions
retirements the form of smaller retirement benefits.
o Post-employment life insurance EMPLOYEES will share in the GAIN in
GOOD management of contributions
o Post-employment medical care the form of larger retirement benefits.
 SORIANOTES:
CONTRIBUTORY ON NON-CONTRIBUTORY PLAN 1. REQUIRED Contribution is recognized as an EXPENSE in the period
 CONTRIBUTORY PLAN payable.
- The employer and employee make contributions to the retirement benefit 2. REQUIRED Contribution versus ACTUAL Contribution
plan but they DO NOT necessarily contribute EQUAL amounts. Required > Actual LIABILITY/ DEFICIT (Accrued Benefit Expense)
- In simple terms, both employer and employee share in the retirement
benefit cost. Required < Actual ASSET/ SURPLUS (Prepaid Benefit Expense)

 NON-CONTRIBUTORY PLAN ILLUSTRATIVE PROBLEM 1

- ONLY the employer makes contributions to the retirement benefit plan. Rain, is a member of the faculty of the Alfredo M. Velayo – College of
- In simple terms, the employer shoulders ALL the retirement benefit cost. Accountancy at University of Santo Tomas. During the current year, Rain earned P840,
000.
FUNDED OR UNFUNDED Rains covered by the university’s defined contribution plan which requires the
 FUNDED PLAN university to contribute the equivalent of 5% of Rain’s salary of P42, 000 for the current
- The entity sets aside funds for future retirement benefits by making year to the trustee.
payments to a funding agency.
o Funding Agency – responsible for the accumulation of funds and for Required: What is the entry to record the contribution?
making payments to the retired employees when the benefits become
due. Employee Benefit Expense P42, 000
o Funding – the transfer of assets to an entity called the Retirement Cash P42, 000
Fund, which is separate from the reporting entity for the purpose of
meeting obligations arising from a retirement benefit plan.
ILLUSTRATIVE PROBLEM 2
 UNFUNDED PLAN On January 31, 2018, Hilda Company paid P100, 000 contributions to a defined
- The entity retains the obligation for the payment of retirement benefits contribution plan in exchange for services performed by the employees in December
WITHOUT the establishment of separate fund. 2017.

TWO (2) CLASSIFICATIONS Required:

 DEFINED CONTRIBUTION PLAN 1. What is the entry to record the accrual of benefit on December 31, 2017?
- A post-employment benefit plan under which an entity pays FIXED 2. What is the entry to record the payment of contribution on January 31, 2018?
contributions into a separate entity known as the fund.
- NO actuarial assumptions to measure the contribution and NO possibility of 12/31/17 Employee Benefit Expense P100, 000
actuarial gains or losses. Accrued Benefit Expense P100, 000

01/31/18 Accrued Benefit Expense P100, 000

Cash P100, 000
ILLUSTRATIVE PROBLEM 3  DEFINED BENEFIT PLAN
On December 31, 2017, Pepper Company paid P200, 000 contributions to a - Is simply defined as a post-employment plan OTHER THAN a Defined
defined contribution plan. Of this amount, P150, 000 is in part exchange for services Contribution Plan.
performed by the employees in December 2017, and the balance of P50, 000 is in respect Payment/
INDEFINITE EMPLOYERS bear the risk of the
of services to be performed in 2018. Contribution
investment.
Benefits FIXED or DEFINITE
Required: What is the entry on December 31, 2017? EMPLOYERS should contribute
POOR management of contributions
additional cash/ contribution.
Employee Benefit Expense P150, 000 EMPLOYERS can take a Contribution
Prepaid Benefit Expense 50, 000 Holiday which means he could not
Cash P200, 000 GOOD management of contributions
make any contributions for the time
being.
 SORIANOTES:
ILLUSTRATIVE PROBLEM 4 1. PLAN ASSETS and PROJECTED BENEFIT OBLIGATION
Connor’s retirement benefit plan provides for an annual contribution of P2, a. PROJECTED BENEFIT OBLIGATION (PBO)
000, 000 to a fund held and managed by a third party. The fund is legally separate from  Projected amount
the entity and is to be used solely for the retirement pay of the employees. The amount to  Actuarial PRESENT VALUE of all benefits attributed by
be received by a retiring employee is dependent on the amount of contributions and the pension benefit formula to the employee services rendered
investment income earned on those contributions. The third party assumes the before a specified date based on future compensation level.
obligation of disbursing the fund to the retiring employees. The entity made the  ESTIMATE of the amount of obligation of that employer to its
following contributions to the fund. employee, and based on employee’s remuneration package.
2021 P0
2022 P4, 700, 000 b. PLAN ASSETS (FAIR VALUE OF PLAN ASSETS or FVPA)
2023 P1, 200, 000  Source of funds set aside for meeting future payments
 Measured AT FAIR VALUE
Required: Provide the entries to record the contributions and compute the employee
benefit expense for the years 2021, 2022, and 2023. 2. PBO versus FVPA
PBO > FVPA LIABILITY/ DEFICIT (Accrued Benefit Expense)
2021 Employee Benefit Expense P2, 000, 000
Accrued Benefit Expense P2, 000, 000 PBO < FVPA ASSET/ SURPLUS (Prepaid Benefit Expense)

2022 Employee Benefit Expense 2, 000, 000 3. EMPLOYEE BENEFIT COST (EBC)
Accrued Benefit Expense 2, 000, 000 o TOTAL COST of giving post-employment benefits to the employees
Prepaid Benefit Expense 700, 000 o
Cash 4, 700, 000
4. EMPLOYEE BENEFIT EXPENSE (EBE)
2023 Employee Benefit Expense P2, 000, 000 o Amount will go to Profit or Loss
Cash 1, 200, 000 o
Prepaid Benefit Expense 700, 000
Accrued Benefit Expense 100, 000 5. SERVICE COSTS (SC)
o Include:
 Current Service Costs (CSC) Should also be
 Past Service Costs (PSC) ADDED to PBO
 Gain/ Loss on Early Settlement
6. GAIN/ LOSS ON EARLY SETTLEMENT c. CHANGE IN EFFECT OF ASSET CEILING, NET OF INTEREST
o SETTLEMENT PRICE versus PV OF OBLIGATION SETTLED  Amount that CANNOT be recognized as an asset (net change
DEDUCTED to FVPA Increase or Decrease)
DEDUCTED to PBO
 ONLY the Residual amount shall be recognized to Other
SP > PVOS LOSS on Early Settlement ADDED to Service Cost Comprehensive Income
INCREASE in Effect of Asset Ceiling Recognize a LOSS
SP < PVOS GAIN on Early Settlement DEDUCTED to Service Cost
DECREASE in Effect of Asset Ceiling Recognize a GAIN
 According to Sir Macariola, the Effect of Asset Ceiling is can
7. NET INTEREST
be termed as IMPAIRMENT
o
Surplus (or Carrying Value) > Asset
 Interest Expense = PBO, beg x Discount Rate IMPAIRMENT
Ceiling (Recoverable Value
ADDED to PBO
 REQUISITES OF EFFECT OF ASSET CEILING:
 Interest Income = FVPA, beg x Discount Rate
1. There is an ASSET CEILING
ADDED to FVPA
2. There is a SURPLUS (FVPA > PBO)
3. SURPLUS > ASSET CEILING
8. RE-MEASUREMENTS
 ASSET CEILING
o Amount will go to Other Comprehensive Income
 This is the PREPAID BENEFIT COST (PBC) that
Actuarial Gains/ Losses xx
will be recognized, MUST NOT EXCEED this ceiling.
+ Return on Plan Assets xx
 “Present Value of future economic benefits in a
+ Change in Effect of Asset Ceiling xx
form of reduction in the future contribution or
RE-MEASUREMENTS xx
refund.
a. ACTUARIAL GAINS/ LOSSES
 Can be termed as RECOVERABLE VALUE.
 Changes in PRESENT VALUE of Defined Benefit Obligation
resulting from experience adjustments The amount will not be recognized
PBC > Asset Ceiling
FULLY.
 Previous actuarial assumptions versus actual
amount occurred  Example: Discount Rate = 10%
 The effects of changes in actuarial assumptions 01/01/2020 12/31/2020
 The entity’s best estimates of the variables that will FVPA 10, 000, 000 12, 000, 000
determine the ultimate cost of providing post- PBO 8, 000, 000 8, 500, 000
employment benefits Prep. Ben. Exp. - Surplus 2, 000, 000 3, 500, 000
ONLY if there is a Asset Ceiling 1, 000, 000 2, 000, 000
ACTUARIAL GAIN DEDUCTED to PBO Effect of Asset Ceiling 1, 000, 000 1, 500, 000
DECREASE in PBO
ONLY if there is an NET CHANGE 500, 000 increase*
ACTUARIAL LOSS ADDED to PBO *NOTE: The NET INTEREST EXPENSE should be deducted to
INCREASE in PBO
this amount to arrive in the RESIDUAL AMOUNT.
b. RETURN ON PLAN ASSETS (Gain/Loss) INTEREST EXPENSE 50, 000 (500 000 x 10%)
 INTEREST INCOME versus ACTUAL RETURN RESIDUAL AMOUNT 450,000 (500, 000 – 50, 000)
Interest Income > Actual Return LOSS DEDUCTED to FVPA Question: How much is the Prepaid Benefit Expense at the
end of 2020?
Interest Income < Actual Return GAIN ADDED to FVPA Answer: P2, 000, 000. This is due to the asset ceiling
(maximum amount of asset to be recognized)
T-ACCOUNT: TOTAL DEFINED BENEFIT COST (TDBC) versus CONTRIBUTION PAID (Cash)
 DEFINED BENEFIT COST TAKEN TO PROFIT OR LOSS UNDERFUNDED (INCREASE in Net Defined Benefit
TDBC > Cash
DEFINED BENEFIT COST (Profit/ Loss) / Retirement Benefit Expense LIABILITY or DECREASE in Net Defined Benefit ASSET)
CURRENT Service Cost Pxx Interest from FVPA Pxx OVERFUNDED (DECREASE in Net Defined Benefit LIABILITY
TDBC < Cash
PAST Service Cost xx Settlement GAIN xx or INCREASE in Net Defined Benefit ASSET)
Interest on DBO xx
Interest on EAC xx RECONCILIATION
Settlement LOSS xx Net Defined Benefit ASSET, 01/01/xx Pxx
ENDING BALANCE Pxx OVERFUNDING (UNDERFUNDING) for the year xx xx
NET DEFINED BENEFIT ASSET, 12/31/xx Pxx
SHORTCUT METHOD:
FAIR VALUE of Plan Asset, 12/31, xx xx
TOTAL SERVICE COST
Defined Benefit Obligation, 12/31,xx (xx)
 CURRENT Service Cost Pxx
SURPLUS, 12/31/xx Pxx
 PAST Service Cost xx
Effect of Asset Ceiling, 12/31/xx xx
 Settlement Loss (Gain) __ xx(xx)
NET DEFINED BENEFIT ASSET, 12/31/xx Pxx
NET AMOUNT Pxx

INTEREST ON NET DEFINED LIABILITY (ASSET)

ILLUSTRATIVE PROBLEM 5
 Discount Rate x Net Defined Liability (Asset) _______________xx(xx)
On January 1, 2017, Jonathan Company reported the following information in
relation to a defined benefit plan:
DEFINED BENEFIT COST TAKEN TO P/L or RETIREMENT FVPA P7, 000, 000
BENEFIT EXPENSE Pxx
PBO 7, 500, 000
During the current year, the entity determined that the current service cost was
 DEFINED BENEFIT OBLIGATION P1, 400 000 and the discount rate is 10%. The actual return on plan assets during the
DEFINED BENEFIT OBLIGATION (Other Comprehensive Income) year was P840, 000. Other related information for the current year:
CARRYING VALUE of DBO settled Pxx Beginning balance Pxx
Benefits paid xx Interest on DBO xx Contribution to the plan P1, 200, 000
CURRENT Service Cost xx Benefits paid to retirees 1, 500, 000
PAST Service Cost xx DECREASE in PBO due to changes in actuarial assumptions 200, 000
BALANCE before re-measurement Pxx PRESENT VALUE of DBO settled 500, 000
Re-measurement GAIN– OCI xx Re-measurement LOSS – OCI xx Settlement price of DBO 400, 000
ENDING BALANCE Pxx
Required:
 FAIR VALUE of Plan Assets (FVPA) 1. What amount should be reported in the income statement for the current year as
employee benefit expense? P1, 350, 000
FAIR VALUE of Plan Assets (FVPA)
2. What is the net amount of “re-measurements” for 2017? P340, 000 gain
Beginning balance Pxx Benefits paid xx 3. How much is the defined benefit costs? P1, 010, 000
Interest on FVPA xx Settlement price xx 4. What is the FAIR VALUE of plan assets on December 31, 2017? P7, 140 000
Contribution paid xx 5. What is the Projected Benefit Obligation on December 31, 2017? P7, 450, 000
BALANCE before re-measurement Pxx 6. What is the balance of prepaid/ accrued benefit cost on December 31, 2017?
Re-measurement GAIN– OCI xx Re-measurement LOSS– OCI xx P310, 000 ABC
ENDING BALANCE Pxx
 Projected Employee ILLUSTRATIVE PROBLEM 6
FAIR VALUE of Re- On January 1, 2017, Anchor Company had a projected benefit obligation of P10,
Benefit Benefit
Plan Assets measurements 000, 000 and a pension fund with a fair value of P9, 200, 000.
Obligation Expense
The entity provided the following information related to the pension plan
FVPA, beg 7, 000, 000
during the current year:
PBO, beg 7, 500, 000
Current Service Current Service Cost P1, 200, 000
1, 400, 000 1, 400, 000 Actual Return on the pension fund 250, 000
Cost
Interest Expense 750, 000 750, 000 Benefits paid to the retirees 1, 100, 000
Interest Income 700, 000 (700, 000) Contribution to the pension fund 1, 050, 000
GAIN on Return Discount Rate 9%
140, 000 140,000 Expected return on the pension fund 10%
on Plant Assets
Contribution to
1, 200, 000
the plan Required:
Benefits paid to 1. What is the pension expense for the current year? P1, 272, 000
(1, 500, 000) (1, 500, 000)
retirees 2. What is the re-measurement gain or loss on December 31, 2017? P578, 000 loss
Actuarial GAIN (200, 000) 200, 000 3. What is the pension asset or liability on December 31, 2017? P1, 600, 000 ABC
PV of DBO
(500, 000)
settled Projected Employee
(100, 000) FAIR VALUE of Re-
Settlement Price Benefit Benefit
(400, 000) Plan Assets measurements
of DBO Obligation Expense
NET AMOUNT P7, 140 000 P7, 450, 000 P1, 350, 000 P340, 000 FVPA, beg 9, 200, 000
Accrued Benefit PBO, beg 10, 000, 000
P310, 000
Expense Current Service
1, 200, 000 1, 200, 000
Defined Benefit Cost
P1, 010, 000
Cost Interest Expense 900, 000 900, 000
Interest Income 828, 000 (828, 000)
JOURNAL ENTRIES: LOSS on Return
(578, 000) (578,000)
Employee Benefit Expense P1, 350, 000 on Plant Assets
Accrued Benefit Expense 140, 000* Contribution to
1, 050, 000
Cash P1, 200, 000 the plan
Re-measurement Gain 340, 000 Benefits paid to
(1, 100, 000) (1, 100, 000)
*(500, 000 – 310, 000) retirees
NET AMOUNT P9, 400, 000 P11, 000, 000 P1, 272, 000 (P578, 000)
Accrued Benefit
P1, 600, 000
Expense
Defined Benefit
P1, 850, 000
Cost
ILLUSTRATIVE PROBLEM 7: Actuarial LOSS 76, 000 (76, 000)
Lony Company provided the following information related to a defined benefit NET AMOUNT P2, 400, 000 P2, 500, 000 P150, 000 P129, 000
plan for the year ended December 31, 2017: Accrued Benefit
P100, 000
Current Service Cost P30, 000 Expense
Benefits paid 31, 000 Defined Benefit
P324, 000
Contribution to the fund 21, 000 Cost
Fair Value of Plan Assets
January 1 2, 100, 000
December 31 2, 400, 000 ILLUSTRATIVE PROBLEM 8
Projected Benefit Obligation Gracie Company provided the following information in relation to a defined
January 1 2, 200, 000 benefit plan for the current year:
December 31 2, 500, 000 January 1 December 31
Past Service Cost 115, 000 Fair Value of Plan Assets P2, 600, 000 P3, 000, 000
Discount Rate 5% Projected Benefit Obligation 2, 000, 000 2, 100, 000
Expected Rate of Return 7%
Prepaid/ Accrued Benefit Cost - Surplus P600, 000 P900, 000
Asset Ceiling 200, 000 300, 000
Required:
Effect of Asset Ceiling P400, 000 P600, 000
1. What amount should be recognized as employee benefit expense in the income
Current Service Cost 100, 000
statement for the current year? P150, 000
Contribution to the plan 350, 000
2. What is the actual return on plan assets? P31, 000
Benefits paid 150, 000
3. What is the actuarial loss arising from the increase in the projected benefit
obligation? P76, 000 loss Discount Rate 10%
4. What is the net re-measurement gain or loss on December 31, 2017? P129, 000
GAIN Required:
5. What amount should be reported as prepaid/ accrued benefit cost on 1. What is the actual return on plan assets for the current year? P200, 000
December 31, 2017? P100, 000 ABC 2. What is the actuarial gain due to decrease in PBO? P150, 000 gain
3. What amount should be reported as employee benefit expense? P180, 000
Projected Employee 4. What is the net re-measurement loss for the current year? P70, 000
FAIR VALUE of Re-
Benefit Benefit
Plan Assets measurements FAIR VALUE Projected Employee
Obligation Expense Re-
FVPA, beg 2, 100, 000 of Plan Benefit Benefit
measurements
Assets Obligation Expense
PBO, beg 2, 200, 000
Current Service FVPA, beg 2, 600, 000
30, 000 30, 000 PBO, beg 2, 000, 000
Cost
Past Service Cost 115, 000 115, 000 Current Service Cost 100, 000 100, 000
Interest Expense 110, 000 110, 000 Interest Expense 300, 000 300, 000
Interest Income 105, 000 (105, 000) Interest Income 260, 000 (260, 000)
GAIN on Return LOSS on Return on
205, 000 205,000 (60, 000) (60,000)
on Plant Assets Plant Assets
Contribution to Contribution to the
21, 000 350, 000
the fund plan
Benefits Paid (31, 000) (31, 000) Benefits Paid (150, 000) (150, 000)
Actuarial GAIN (150, 000) 150, 000
Interest Expense FAIR VALUE Projected Employee
40, 000 Re-
due to Asset Ceiling of Plan Benefit Benefit
measurements
Residual Amount Assets Obligation Expense
(160, 000)
due to Asset Ceiling FVPA, beg 1, 600, 000
NET AMOUNT P3, 000, 000 P2, 100, 000 P180, 000 P70, 000 PBO, beg 1, 200, 000
Prepaid Benefit Current Service Cost 500, 000 500, 000
P900, 000
Expense Past Service Cost 200, 000 200, 000
Defined Benefit Cost P110, 000 Interest Expense 120, 000 120, 000
Interest Income 160, 000 (160, 000)
GAIN on Return on
10, 000 10,000
ILLUSTRATIVE PROBLEM 9 Plant Assets
The memorandum records of GM Corporation for its defined benefit plan show Contribution to the
700, 000
the following balances: plan
Defined benefit obligation, 01/01/2019 P1, 200, 000 Benefits Paid (800, 000) (800, 000)
FAIR VALUE of plan assets, 01/01/2019 1, 600, 000 Interest Expense
30, 000
Asset ceiling, 01/01/2019 100, 000 due to Asset Ceiling
Asset ceiling, 12/31/2019 140, 000 Residual Amount
(20, 000)
Actual return on plan assets 170, 000 due to Asset Ceiling
Settlement price of additional DBO settled 300, 000 PV of DBO settled (290, 000)
PRESENT VALUE of additional DBO settled 290, 000 Settlement price of 10, 000
(300, 000)
Defined benefit obligation, 12/31/2019 880, 000 DBO settled
Current service cost 500, 000 Actuarial GAIN (50, 000) 50, 000
Discount rate 10% NET AMOUNT P1, 370, 000 P880, 000 P700, 000 P40, 000
Benefits paid to the retirees (at scheduled retirement) 800, 000 Prepaid Benefit
P490, 000
Contribution made during the year 700, 000 Expense
Past service cost 200, 000 Defined Benefit Cost P660, 000

Required:
1. How much is the defined benefit cost/ retirement benefit expense that should SOURCES:
be reported in Profit or Loss for the year 2019? P700, 000  https://www.youtube.com/watch?v=2SuuaY4cGBo
2. How much is the defined benefit cost/ net re-measurement gain or loss that  https://www.youtube.com/watch?v=M_cvniEBAU4
should be reported in Other Comprehensive Income for the year 2019? P40,
000 gain
3. How much is the fair value of plant asset on 12/31/2019? P1, 370, 000
4. How much is the overfunding or underfunding for the year 2019? P40, 000
overfunding
5. How much is the net defined benefit asset/ liability that should be presented in
the statement of financial position on December 31, 2019? P140, 000