Lesson: Employee Benefits c.

Post Employment Benefits

- all forms of consideration given by an - benefits which are payable after

entity in exchange for services rendered by completion of employment; such as:
employees.
▪ pensions
▪ lump sum retirement pay

a. Short Term Employee Benefits - in exchange for services rendered –

received after employment.
- benefits which are expeced to be settled
wholly within 12 months (except for
termination benefits); includes the
d. Other Long Term Benefits
following:
- benefits that are not under short term
▪ salaries, wages, and social security
benefits, termination benefits, or post
contributions
employment benefits; it is the residual
▪ short-term compensated or paid
definition; includes:
absences
▪ profit sharing and bonuses ▪ sabbatical leave, disability leave,
▪ non-monetary benefits, such as jubilee leave, deferred
medical care, housing, car, and free compensation, maternity leave
or subsidized goods
- in exchange for services rendered –
- in exchange for services rendered – received during employment in a long period
received during employment in a short of time.
period of time.

b. Termination Benefits

- 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 I. Classifications of Employee Benefits
date
i. In Terms of Contributions:
▪ employee’s decision to accept an
offer of benefit in exchange for the ▪ Non-Contributory – only the
termination employer makes the contributions.
▪ Contributory – the employer and the
- to compensate for the termination –
employee make the contributions.
received after employment.
ii. In Terms of Managing the Funds: - the cost of the company is equal to
actuarial assumptions.
▪ Unfunded – the company is the one
who manages the fund. - e.g., the employer and employee agreed
▪ Funded – the fund is being managed that employee will receive P 100 per year.
by the hired pension fund entity.
A B
Benefit (fixed) 100 100
Return on Funds (-) 90 10
iii. In Terms of the Plan: Contribution (vary) 10 90
▪ Defined Contribution Plan –
contribution is fixed; benefits will II. Projected Benefit Obligation (basis of
vary on the performance of the fund benefit received by employees)
(returns)
▪ Defined Benefit Plan – benefit is - ignore the accumulated benefit obligation,
fixed; contribution will vary on the which considers the current salary of the
performance of the fund (returns) employee.

A. Defined Contribution Plan – the Future Salary XX

contribution by employer is agreed and Certain % X%
fixed; the benefits of employee will vary on Years Employed XX
the return on the fund. Benefit XX
- the employee bears the risk of investment.

- the cost of the company is equal to the III. Benefit Cost (cost less income)
contribution. a. Presented in Statement of Profit or Loss:
- e.g., the employer and employee agreed ▪ Service Cost
that employer will contribute P 100 per year.
- current service cost, past service
A B cost, and gain or loss on settlement of
Contribution (fixed) 100 100 PBO.
Return on Funds (+) 90 10
Benefit (vary) 190 110

i. Current Service Cost – increase in benefit

B. Defined Benefit Plan – the benefit that obligation resulting from services rendered
the employee will receive is agreed and in the current period.
fixed; the contribution wil vary on the return
- the portion of retirement pay that was
on the fund.
earned by the employee because he/she
- the employer bears the risk of investment. rendered services for the current year.
Future Salary 50,000 i. Interest Expense – the amortization of
Certain % x 10% discount – the PBO is measured at present
Earnings Per Year 5,000 value.

ii. Past Service Cost – change in the benefit PBO – beginning XX

obligation resulting from introduction Discount Rate (beg.) X%
and/or curtailment.
Interest Expense XX
- e.g., the company agreed to their employee
to pay retirement pay of P 100 per year of
- discount rate (1st – yield rate of high quality
service; an employee will be introduced
corporate bonds; 2nd – yield rate of
(included) to the plan only when regularized
government issued bonds/treasury bonds)
by the 3rd year.

Year 1 – P 100 not yet incurred (no

obligation) ii. Interest Income – the standard earnings
of investment in the financial market.
Year 2 – P 100 not yet incurred (no
obligation) - this is not the actual income of the
company but only a benchmark in
Year 3 – P 100 (current service) + P 200 for
determining how good the fund was
years rendered in the past (past service)
managed.

iii. Gain or Loss on PBO Settlement – the

Plan Asset – beginning XX
benefit obligation is paid ahead of time than
Discount Rate (beg.) X%
expected date of retirement.
Interest Income XX
- obligation is transferred to financial
institution.
iii. Interest on Effect of Asset Ceiling
- if settled (pain in advance), with gain or
loss; if paid (on time), no gain or loss.
b. Presented in Other Comprehensive
Income:
CA (PV) of BPO Settled XX
Less: Settlement Price (XX) ▪ Remeasurements
Gain or Loss on Settlement XX - actuarial gain or loss on plan asset,
actuarial gain or loss on benefit
obligation, change in effect of asset
▪ Net Interest
ceiling.
- interest expense, interest income,
interest on effect of asset ceiling.
i. Actuarial Gain or Loss on Plan Asset V. Projected Benefit Obligation

Actual Return XX Projected Benefit Obligation

Less: Interest Income X% Actuarial Gain - Beginning Balance
PBO
Actuarial Gain (Loss) XX
Benefits Paid Interest Expense
CA of Benefits Current Service
▪ Actuarial Gain – the excess of actual Settled Cost
earnings over the standard earnings Past Service Cost
Actuarial Loss -
in the financial market. The fund was
PBO
managed properly.
Ending Balance
▪ Actuarial Loss – the excess of
standard earnings over the actual
earnings in the financial market. The VI. Prepaid (Accrued) Benefit
fund was managed poorly.
FVPA, Ending XX
PBO, Ending (XX)

ii. Actuarial Gain or Loss on Benefit Prepaid (Accrued) Benefit XX

Obligation – change in the projected benefit
obligation due to change in statistical - (prepaid benefit) recorded to other non-
estimate. Estimated benefit is based on: current assets in the balance sheet.
a. Demographic – disability, early - (accrued benefit or deficit) recorded to non-
retirement, employee turnover. current liabilities in the balance sheet.
b. Financial – discount rate, future salary,
taxes.
Problem 1: On January 1, 2022, Okubo
▪ Actuarial Gain – change in estimate Company reported the following information
that led to lower benefit obligation. in relation to a defined benefit plan:
▪ Actuarial Loss – change in estimate
that led to higher benefit obligation. Fair Value of Plan Asset
7,000,000
(FVPA)
Projected Benefit
7,500,000
iii. Change in Effect of Asset Ceiling Obligation (PBO)

During the current year, the entity

IV. Plan Asset determined that the current service cost
was P 1,000,000 and the past service cost is
Plan Assets
Beginning Balance Benefits Paid P 400,000. The actual return on plan asset
Contributions Settlement Price during the year was P 840,000. Other related
Actual Return information for the current year:
Ending Balance
 Contributions to the Plan 1,200,000 Actuarial Gain – PA 140,000
Benefits Paid to Retirees 1,500,000 Actual Return on PA 840,000
Decrease in PBO due to Interest Income (700,000)
Changes in Actuarial 200,000
Actuarial Gain – PBO 200,000
Assumptions
CA of Defined Benefit Effect of Asset Ceiling 0
500,000
Obligation Settled Net Remeasurement (gain) 340,000
Settlement Price of
400,000
Defined Benefit Obligation
Discount Rate 10% 3. What is the total amount of defined
benefit cost?

1. What amount should be reported in the

income statement for the current year as Service Cost 1,300,000
employee benefit expense?
Net Interest 50,000
Remeasurement (340,000)

Current Service Cost 1,000,000 Defined Benefit Cost 1,010,000

Past Service Cost 400,000

Gain on Settlement (100,000) 4. What is the fair value of plan assets on
Carrying Amount – 500K December 31, 2022?
Settlement Price – 400K
Total Service Cost 1,300,000
Plan Assets
7,000,000 (Beg.) 1,500,000 (Paid B.)
Interest Expense – PBO 750,000 1,200,000 (Contrib.) 400,000 (Settle.)
(7,500,000 x 10%) 840,000 (Act. Ret.)
Interest Income – PA (700,000) 9,040,000 1,900,000
(7,000,000 x 10%) (1,900,000) (1,900,000)
7,140,000 (End.)
Interest Expense – Asset Ceiling 0
Total Net Interest 50,000
Total 1,350,000
(1,300,000 + 50,000)

2. What is the net amount of

“remeasurements” for 2022?
5. What is the projected benefit obligation Current Service Cost 30,000
on December 31, 2022? Past Service Cost 115,000
Benefits Paid 31,000
Contribution to Fund 21,000
Projected Benefit Obligation
200,000 (Act. Gain) 7,500,000 (Beg.)
Plan Assets
1,500,000 (Paid B.) 750,000 (Int. Exp.)
2,100,000 (Beg.) 31,000 (Paid B.)
500,000 (CA of B.) 1,000,000 (Cur SC)
21,000 (Contrib.) 0 (Settle.)
400,000 (Past SC)
? (Act. Ret.)
0 (Act. Loss)
2,431,000 31,000
2,200,000 9,650,000
(31,000) (31,000)
(2,200,000) (2,200,000)
2,400,000 (End.)
7,450,000 (End.)

7. What is the actual return on plan asset?

6. What is the balance of the prepaid or
accrued benefit cost on December 31, 2022? ? = (2,400,000 + 31,000) - (2,100,000 +
21,000)

? = 2,431,000 – 2,121,000
FVPA, Ending 7,140,000
PBO, Ending (7,450,000) ? = 310,000 (actual return on PA)
Prepaid (Accrued) Benefit (310,000)

8. What is the amount of remeasurement of

Problem 2: The Baby Company provided the plan asset?
following information related to a defined
benefit plan for the years ended December
31, 2022: Actual Return on PA 310,000
January 1 December 31 Interest Income (105,000)
FVPA 2,100,000 2,400,000 (2,100,000 x 5%)
PBO 2,200,000 2,500,000 Actuarial Gain – PA 205,000

On January 1, 2022, the discount rate and

expected rate of return are 5% and 7%
respectively. On January 1, 2023, the
discount rate and expected rate of return are
6% and 8% respectively. Other related
information for the year:
9. What is the actuarial loss arising from the Beg. End. Change
increase in projected benefit obligation? Plan Asset XX XX
PBO (XX) (XX)
Surplus (Def) XX XX
Projected Benefit Obligation Asset Ceiling (XX) (XX)
0 (Act. Gain) 2,200,000 (Beg.) Effect XX XX XX
31,000 (Paid B.) 110,000 (Int. Exp.)* Discount % X%
0 (CA of B.) 30,000 (Cur SC) Interest XX (XX)*
115,000 (Past SC) Change XX**
? (Act. Loss)
31,000 2,531,000
* - report to Income Statement (P/L)
(31,000) (31,000)
2,500,000 (End.) ** - report to Other Comprehensive Income
(OCI)
*Interest Expense – PBO = 2,200,000 x 5%

Problem 3: Platon Company’s defined

? = (2,500,000 + 31,000) – (2,200,000 + benefit plan has the following information:
110,000 + 30,000 + 115,000) January 1 December 31
? = 2,531,000 – 2,455,000 FVPA 2,100,000 2,400,000
PBO 2,200,000 2,500,000
? = 76,000 (actuarial loss - PBO) Discount 10% 10%
Asset
1,600,000 2,000,000
Ceiling*
10. What is the net remeasurement gain or
loss on December 31, 2022?
* - present value of available future refunds
and reduction in future contributions.

Actuarial Gain – PA 205,000

Actuarial Loss – PBO (76,000)
Effect of Asset Ceiling 0
Net Remeasurement (gain) 129,000

VII. Asset Ceiling

- the maximum amount of surplus that the

pension fund can manage.

- (effect) the excess fund that can no longer

be managed by the pension fund.
11. In relation to the asset ceiling, the Plan Assets
amount that the entity would recognize in 10,000,000 (Beg.) 2,500,000 (Paid B.)
other comprehensive income for the year 4,000,000 (Contrib.) 500,000 (Settle.)
2020 should be: 1,200,000 (Return)
15,200,000 3,000,000
Beg. End. Change (3,00,000) (3,000,000)
FVPA 10M 12M 2M 12,200,000 (End.)
PBO (8M) (9M) (1M)
Surplus (Def) 2M 3M 1M
Asset Ceiling (1.6M) (2M) (400K) Projected Benefit Obligation
Effect 400K 1M 600K 0 (Act. Gain) 8,000,000 (Beg.)
Discount % 10% 2,500,000 (Paid B.) 800,000 (Int. Exp.)
Interest 40K (40K) 600,000 (CA of B.) 3,000,000 (Cur SC)
500,000 (Past SC)
Change 560K
400,000 (Act. Loss)
3,100,000 12,700,000
40,000 – to Net Interest (P/L) (3,100,000) (3,100,000)
9,600,000 (End.)
560,000 – to Remeasurement (OCI)

Beg. End. Change

Problem 4: Margaret Alarcio Company FVPA 10M 12.2M 2.2M
reported a prepaid benefit cost of P PBO (8M) (9.6M) (1.6M)
1,500,000 on January 1, 2019. The entity Surplus (Def) 2M 2.6M 600K
provided the following information related Asset Ceiling (1.5M) (2M) (500K)
Effect 500K 600K 100K
to a defined benefit plan during the current
Discount % 10%
year:
Interest 50K (50K)
Current Service Cost 3,000,000 Change 50K
Actual Return – PA 1,200,000
Interest Expense – PBO 800,000
Current Service Cost 3,000,000
Settlement Price 500,000
PV of BO Paid 600,000 Past Service Cost 500,000
Interest Income – PA 1,000,000 Gain on Settlement (100,000)
Actuarial Loss – PBO 400,000 Carrying Amount – 600,000
Past Service Cost 500,000 Settlement Price – 500,000
Benefits Paid 2,500,000
Total Service Cost 3,400,000
Contribution to the Plan 4,000,000
PBO – January 1 8,000,000
FVPA – January 1 10,000,000
Asset Ceiling – January 1 1,500,000
Asset Ceiling – December 31 2,000,000
Discount Rate 10%
Interest Expense – PBO 800,000 Interest Expense – PBO 500,000
Interest Income – PA (1,000,000) Interest Income – PA (600,000)
Interest Expense – Asset Ceiling 50,000 Interest Expense – Asset Ceiling 30,000
Total Net Interest (150,000) Total Net Interest (70,000)
Total Benefit Expense (P/L) 3,250,000 Total Benefit Expense (P/L) 830,000
(3,400,000 – 150,000) (900,000 – 70,000)

Actuarial Gain – PA 200,000 Actuarial Gain – PA 300,000

Actual Return on PA 1,200,000 Actual Return on PA 900,000
Interest Income (1,000,000) Interest Income (600,000)
Actuarial Loss – PBO 400,000 Actuarial Gain – PBO 500,000
Effect of Asset Ceiling 50,000 Effect of Asset Ceiling (470,000)
Net Remeasurement (loss) 250,000 Net Remeasurement (gain) 330,000
Total 3,500,000 Total 500,000
(3,400,000 – 150,000 + 250,000) (900,000 – 70,000 – 330,000)

Contribution to the Fund 4,000,000

Less: Benefit Cost (Total) (3,500,000)
Over (Under) Funding 500,000

Beg. End. Change

FVPA 6M 7.9M 1.9M
PBO (5M) (5.9M) (0.9M)
Surplus (Def) 1M 2M 1M
Asset Ceiling (700K) (1.2M) (500K)
Effect 300K 800K 500K
Discount % 10%
Interest 30K (30K)
Change 470K

Current Service Cost 700,000

Past Service Cost 200,000
Gain on Settlement (0)
Total Service Cost 900,000