BALIUAG UNIVERSITY

CPA Review Program

Financial Accounting and Reporting (Application)
_____________________________________________________________________________________________
Module 18: Employee Benefits LPST/LVC

Employee Benefits (IAS 19)

 Definition
Employee benefits – All forms of consideration given by an entity in exchange for service rendered by employees or
for the termination of employment.
 Classification of employee benefits
1. Short-term employee benefits – Employee benefits (other than termination benefits) that are expected to be
settled wholly before twelve months after the end of the annual reporting period in which the employees render
the related service.
2. Termination benefits – 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.
3. Other long-term employee benefits – All employee benefits other than short-term employee benefits, post-
employment benefits and termination benefits.
4. Post-employment benefits – Employee benefits (other than termination benefits and short-term employee
benefits) that are payable after the completion of employment.

I. Short-term employee benefits

 Short-term employee benefits include:
a. Wages, salaries and social security contributions
b. Paid annual leave and paid sick leave
c. Profit-sharing and bonuses
d. Non-monetary benefits (such as medical care, housing, cars and free or subsidized goods or services) for
current employees.
 Recognition and measurement
 When an employee has rendered service to an entity during an accounting period, the entity shall recognize
the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.
 Accounting treatment:
a. As a liability (accrued expense), after deducting any amount already paid. If the amount already paid
exceeds the undiscounted amount of the benefits, an entity shall recognize that excess as an asset
(prepaid expense) (to the extent that the prepayment will lead to a reduction in future payments or a
cash refund).
b. As an expense, unless another IFRS requires or permits the inclusion of the benefits in the cost of an
asset (i.e. example, IAS 2 IAS 16).
 Short-term paid absences
 An entity shall recognize the expected cost of short-term employee benefits in the form of paid absences as
follows:
a. Accumulating paid absences
o Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
o Accumulating paid absences may be either be:
i. Vesting – Employees are entitled to a cash payment for unused entitlement on leaving the
entity.
ii. Non-vesting – When employees are not entitled to a cash payment for unused entitlement on
leaving the entity.
o An entity shall measure the expected cost of accumulating paid absences as the additional amount
that the entity expects to pay as a result of the unused entitlement that has accumulated at the end
of the reporting period.
b. Non-accumulating paid absences
o Do not carry forward; they lapse if the current period’s entitlement is not used in full and do not
entitle employees to a cash payment for unused entitlement on leaving the entity.
o An entity recognizes no liability or expense until the time of the absence, because employee service
does not increase the amount of the benefit.
 Profit-sharing and bonus plans
 An entity shall recognize the expected cost of profit-sharing and bonus payments when, and only when:

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Module 18: Employee Benefits LPST/LVC
a. The entity has a present legal or constructive obligation to make such payments as a result of past
events; and
b. A reliable estimate of the obligation can be made.
 A present obligation exists when, and only when, the entity has no realistic alternative but to make the
payments.
 Under some profit-sharing plans, employees receive a share of the profit only if they remain with the entity
for a specified period.
 Such plans create a constructive obligation as employees render service that increases the amount to be
paid if they remain in service until the end of the specified period.
 The measurement of such constructive obligations reflects the possibility that some employees may leave
without receiving profit-sharing payment.

II. Termination benefits

 A termination benefit liability is recognized at the earlier of the following dates:
a. When the entity can no longer withdraw the offer of those benefits
b. When the entity recognizes costs for a restructuring under IAS 37 which involves the payment of termination
benefits.
 Termination benefits are measured in accordance with the nature of employee benefit, i.e. as an enhancement
of other post-employment benefits, or otherwise as a short-term employee benefit or other long-term employee
benefit.

III. Other long-term benefits

 IAS 19 prescribes a modified application of the post-employment benefit model described for other long-term
employee benefits.
 The recognition and measurement of a surplus or deficit in another long-term employee benefit plan is consis-
tent with the requirements outlined in IAS 19.
 Service cost, net interest and remeasurements are all recognized in profit or loss (unless recognized in the cost
of an asset under another IFRS), i.e. when compared to accounting for defined benefit plans, the effects of
remeasurements are not recognized in other comprehensive income.

IV. Post-employment benefits

 Post-employment benefits are formal or informal arrangements under which an entity provides post-
employment benefits for one or more employees.
 Post-employment benefits include items such as the following:
a. Retirement benefits (e.g. pensions and lump sum payments on retirement)
b. Other post-employment benefits, such as post-employment life insurance and post-employment medical
care.
 Classification of post-employment benefit plans
1. Defined contribution plans –Post-employment benefit plans under which an entity pays fixed
contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further
contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee
service in the current and prior periods. (i.e. SSS, GSIS)
2. Defined benefit plans –Benefit plans other than defined contribution plans. (i.e. R.A. 7641)
3. Multi-employer plans – Defined contribution plans (other than state plans) or defined benefit plans (other
than state plans) that:
a. Pool the assets contributed by various entities that are not under common control;
b. Use those assets to provide benefits to employees of more than one entity, on the basis that
contribution and benefit levels are determined without regard to the identity of the entity that
employs the employees.
 Accounting for defined contribution plans
 Recognition and measurement
o When an employee has rendered service to an entity during a period, the entity shall recognize the
contribution payable to a defined contribution plan in exchange for that service:
1. As a liability (accrued expense), after deducting any contribution already paid. If the contribution
already paid exceeds the contribution due for service before the end of the reporting period, an
entity shall recognize that excess as an asset (prepaid expense) to the extent that the prepayment
will lead to, for example, a reduction in future payments or a cash refund.
2. As an expense, unless another IFRS requires or permits the inclusion of the contribution in the cost
of an asset (for example, IAS 2 and IAS 16).

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Module 18: Employee Benefits LPST/LVC
o When contributions to a defined contribution plan are not expected to be settled wholly before twelve
months after the end of the annual reporting period in which the employees render the related
service, they shall be discounted using the discount rate.
o An entity shall disclose the amount recognized as an expense for defined contribution plans.
 Accounting for defined benefit plans
 Recognition and measurement
o Defined benefit plans may be unfunded, or they may be wholly or partly funded by contributions by an
entity, and sometimes its employees, into an entity, or fund, that is legally separate from the reporting
entity and from which the employee benefits are paid.
o Therefore, the entity is, in substance, underwriting the actuarial and investment risks associated with
the plan. Consequently, the expense recognized for a defined benefit plan is not necessarily the
amount of the contribution due for the period.
 Accounting by an entity for defined benefit plans involves the following steps:
1. Determining the deficit or surplus. This involves:
i. Using an actuarial technique, the projected unit credit method, to make a reliable estimate of the
ultimate cost to the entity of the benefit that employees have earned in return for their service in
the current and prior periods.
ii. Discounting that benefit in order to determine the present value of the defined benefit obligation
and the current service cost.
iii. Deducting the fair value of any plan assets from the present value of the defined benefit obligation.
2. Determining the amount of the net defined benefit liability (asset) as the amount of the deficit or
surplus determined in adjusted for any effect of limiting a net defined benefit asset to the asset
ceiling.
3. Determining amounts to be recognized in profit or loss.
4. Determining the remeasurements of the net defined benefit liability (asset), to be recognized in other
comprehensive income.
 Summary of defined benefit costs
Employee Benefit Expense in P/L Remeasurements in OCI
a. Service cost (past and current) a. Actuarial gains and losses
b. Settlement gain/loss b. Return on plan assets, excluding amounts
c. Net interest (interest expense net of interest included in net interest.
income c. Any change in the effect of the asset ceiling,
excluding amounts included in net interest.

 Present value of defined benefit obligations and current service cost

o Measurement of present value
a. Apply an actuarial valuation method
b. Attribute benefit to periods of service
c. Make actuarial assumptions
o Actuarial valuation method
- An entity shall use the projected unit credit method to determine the present value of its defined
benefit obligations and the related current service cost and, where applicable, past service cost.
- The projected unit credit method (sometimes known as the accrued benefit method pro-rated on
service or as the benefit/years of service method) sees each period of service as giving rise to an
additional unit of benefit entitlement and measures each unit separately to build up the final
obligation.
- This Standard encourages, but does not require, an entity to involve a qualified actuary in the
measurement of all material post-employment benefit obligations.
 Other considerations in accounting for defined benefit plan
a. Past service cost is the change in the present value of the defined benefit obligation resulting from a
plan amendment or curtailment.
b. Gains and losses on settlement is the difference between the present value of the defined benefit
obligation being settled and the settlement price, including any plan assets transferred and any
payments made directly by the entity in connection with the settlement.
c. The fair value of any plan assets is deducted from the present value of the defined benefit obligation in
determining the deficit or surplus.
d. Remeasurements of the net defined benefit liability (asset) recognized in other comprehensive income
shall not be reclassified to profit or loss in a subsequent period. However, the entity may transfer
those amounts recognized in other comprehensive income within equity.
e. Net interest on the net defined benefit liability (asset) shall be determined by multiplying the net
defined benefit liability (asset) by the discount rate, both as determined at the start of the annual

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Module 18: Employee Benefits LPST/LVC
reporting period, taking account of any changes in the net defined benefit liability (asset) during the
period as a result of contribution and benefit payments.
 Computations Related to Plan Assets and Benefit Obligation
Fair value of plan assets (FVPA) xx PBO, beg. xx
Projected benefit obligation (PBO) (xx) Current service cost xx
Prepaid/(Accrued) benefit costs xx Past service cost xx
FVPA, beg. xx Interest expense xx
Contribution to the plan xx Actuarial loss/(gain) xx
Actual return/(loss) on plan assets xx Benefits paid (xx)
Benefits paid (xx) PBO, end. xx
FVPA, end. xx
Benefits paid = PV of defined benefit obligation
Benefits paid = Settlement price on defined settled
benefit obligation

 Computations Related to Defined Benefit Costs (P/L and OCI)

Computations Related to Defined Benefit Costs (P/L and OCI)
Current service cost xx Remeasurement gain/loss – plan assets xx
Past service cost xx Actuarial gain/loss xx
Interest expense on PBO xx Net remeasurement gain/loss – OCI xx
Interest income on FVPA (xx)
Settlement loss/(gain) xx Actual return/loss on plan assets xx
Employee benefit expense xx Interest income of FVPA (xx)
Remeasurement gain/(loss) – plan assets xx

Interest expense = PBO, beg. x Discount rate PBO – actual xx

PBO – estimated (xx)
Interest income = FVPA, be. x Discount rate Actuarial (gain)/loss‡ xx

PV of defined benefit obligation settled xx Employee benefit expense xx

Settlement price on benefit obligation (xx) Net remeasurement loss/(gain) – OCI xx
Settlement gain/(loss) xx Total/Net defined benefit costs xx

 Asset ceiling
o Asset ceiling is the present value of any economic benefits available in the form of refunds from the
plan or reductions in future contributions to the plan.
o IAS 16 provides that the surplus in a defined benefit plan must not exceed the asset ceiling determined
by using the discount rate in the measurement of the defined benefit obligation.
o Related computations on asset ceiling:
Prepaid benefit cost (surplus) xx
Asset ceiling (xx)
Effect of asset ceiling xx
Effect of asset ceiling (beginning of reporting period) xx
Multiplied by discount rate x %
Interest expense on effect of asset ceiling* xx.
*Included in the computation of employee benefit expense
Effect of asset ceiling (end of reporting period) xx
Effect of asset ceiling (beginning of reporting period) xx
Total change in effect of asset ceiling xx
Interest expense on effect of asset ceiling (xx)
Remeasurement gain/loss on asset ceiling** xx
**Increase in the effect of asset ceiling is a remeasurement loss and a decrease in asset ceiling is a
remeasurement gain.
** Remeasurement gain/loss on asset ceiling is included in the computation of net remeasurement
gain/loss - OCI

 Illustration: Accounting for defined benefit plan

Fair value of plan assets, Jan. 1 P 5,000,000
Projected benefit obligation, Jan. 1 6,000,000
Actuarial gain on defined benefit obligation 100,000
Actual return on plan assets 700,000

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Module 18: Employee Benefits LPST/LVC
Contribution to plan assets 600,000
Past service cost on defined benefit obligation 200,000
Current service cost on defined benefit obligation 800,000
Present value of defined benefit obligation 400,000
Settlement price of defined benefit obligation 500,000
Discount rate 10%
Requirements:
1. Interest expense
2. Interest income
3. Settlement gain/loss
4. Employee benefit expense
5. Remeasurement gain/loss on plan assets
6. Net remeasurement gain/loss – OCI
7. Total/Net benefit costs
8. Fair value of plan assets, Dec. 31
9. Projected benefit obligation, Dec. 31
10. Prepaid/Accrued benefit cost, Jan. 1
11. Prepaid/Accrued benefit cost, Dec. 1
12. Journal entry to reconcile the computations

 Illustration: Effect of asset ceiling

Fair value of plan assets, Jan. 1 6,000,000
Fair value of plan assets, Dec. 31 7,000,000
Projected benefit obligation, Jan. 1 5,000,000
Projected benefit obligation, Dec. 31 5,600,000
Asset ceiling, Jan. 1 900,000
Asset ceiling, Dec. 31 1,200,000
Current service cost 550,000
Actuarial loss 100,000
Settlement gain 300,000
Actual return on plan assets 750,000
Discount rate 10%
Requirements:
1. Effect of asset ceiling, Jan 1
2. Effect of asset ceiling, Dec 31
3. Interest expense on effect of asset ceiling
4. Remeasurement gain/loss on asset ceiling
5. Employee benefit expense
6. Net remeasurement gain/loss – OCI

 Multiple Choice Questions

1. During the first year of the entity’s existence, employees earned accumulating vacation leave as follows:
Employee Ave. wage per day Vacation leave earned Vacation leave taken
Alma 400 10 10
Lorna 600 15 10
Fe 800 20 5
What amount should be recognized as expense from vacation leave during the first year?
A. 29,000 C. 15,000
B. 14,000 D. 19,000
2. Refer the preceding problem. What should be reported as accrued vacation pay at year end?
A. 29,000 C. 15,000
B. 14,000 D. 19,000
3. A profit sharing bonus plan requires an entity to pay 10% of net income before bonus and tax to employees
who served throughout the current year and will continue to serve the following year. The entity reported P20
million net income before tax and tax. The entity expects to save 5% of the maximum bonus through staff
turnover. What should be the bonus expense for the year?
A. 2,000,000 C. 1,900,000
B. 1,000,000 D. 1,800,000
4. A company has a defined benefit plan for its employees. Annual payments under the pension are equal to 3%
multiplied by the number of years of stay. On December 31, Year 1, an employee had worked for 15 years.
Current salary is P500,000. The employee is expected to retire in 5 years and the salary increases are expected
to average 4% per year. The employee is expected to live for 6 years after retirement. Discount rate is 12%
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Module 18: Employee Benefits LPST/LVC
FV of 1 at 4% for 5 periods 1.217
PV of an ordinary annuity at 12% for 6 periods 4.111
PV of 1 at 12% for 5 years 0.567
What is the projected benefit obligation on December 31, Year 1?
A. 638,269 C. 524,460
B. 225,000 D. 608,500
5. An officer of a company shall receive a retirement benefit of 20% of final salary per annum for a contractual
period of 3 years. The salaries for Year 1, Year 2 and Year 3 are P1 million, P1.2 million and P1.5 million,
respectively. Discount rate is 10%. PV of 1 at 10% for 1 period is 0.909 and PV of 1 at 10% for 2 periods is 0.826.
Under projected credit unit method, what is the pension liability on December 31, 2025.
A. 900,000 C. 600,000
B. 520,500 D. 545,280
6. A company provided the following information for the current year:
Current service cost 1,300,000
Actual return on plant assets 600,000
Interest expense-PBO 550,000
Interest income on plan assets 500,000
Loss on plan settlement 250,000
Past service cost during the year 400,000
Actuarial gain during the year 200,000
What is the defined benefit expense for the current year?
A. 1,700,000 C. 2,300,000
B. 2,000,000 D. 1,900,000
7. Refer the preceding problem. What is the net remeasurement gain – OCI?
A. 100,000 C. 300,000
B. 200,000 D. 400,000
8. On January 01, Year 1, a company reported the following information about its defined benefit plan:
Fair value of plan assets (FVPA) 7,000,000
Projected benefit obligation (PBO) 7,500,000
Other information for Year 1 are as follows:
Current service cost 1,400,000
Contribution to the plan 1,200,000
Benefits paid to retirees 1,500,000
Actual return on plan assets 840,000
Decrease in PBO due to actuarial assumptions 200,000
Present value of defined benefit obligation settled 500,000
Settlement price of defined benefit obligation 400,000
Discount rate 10%
The employee benefit expense to be reported in the statement of income
A. 2,150,000 C. 1,350,000
B. 2,050,000 D. 1,450,000
9. Refer the preceding problem. The net remeasurement gain or loss – OCI
A. 140,000 gain C. 340,000 gain
B. 140,000 loss D. 60,000 loss
10. Refer the preceding problem. The FVPA on December 31, Year 1
A. 7,140,000 C. 8,200,000
B. 7,540,000 D. 7,000,000
11. Refer the preceding problem. The PBO on December 31, Year 1
A. 7,950,000 C. 7,650,000
B. 7,450,000 D. 9,650,000
12. Refer the preceding problem. The prepaid/accrued benefit cost on December 31, Year 1
A. 310,000 prepaid C. 650,000 prepaid
B. 310,000 accrued D. 650,000 accrued

“If we become increasingly humble about how little we know, we may be more eager to search.” John Templeton

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