THE CPA BOARD EXAMS OUTLINES

by John Mahatma G. Agripa, CPA

FINANCIAL ACCOUNTING AND REPORTING

POST-EMPLOYMENT

EMPLOYEE
BENEFITS
Based on lectures by Tom Siy, CPA and Christian Aris Valix, CPA
(CPAR)
DEFINITIONS

 Employee benefits are all considerations given by the employer for

employee services, which may be short-term (salaries, bonuses,
fringe benefits), compensated advances, and post-employment
benefits

Post-employment benefits includes pensions and life insurance.

Depending on scheme, the benefits may be contributory or
noncontributory (whether the employee will contribute to the fund
of the benefit), funded or non-funded (whether the funds are
maintained by a separate entity or not)

 The benefits may take two forms of plan. A defined contribution

plan sets fixed payments into the fund but the retirement benefits
are uncertain. The employee risks any shortfalls to the funds.
Accounting for such fund is undiscounted and is simple

On the other hand, a defined benefit plan sets fixed benefits but
uncertain contributions. The employer has to make due of any
shortfalls in the fund. The liability is accounted with a
projected/defined benefit obligation – the present value of all
benefits accrued as of date, based on future/highest salary levels

ACCOUNTING FOR
DEFINED BENEFIT PLAN

 The liability for defined benefit plans are determined through the
projected unit credit method/accrued benefit method. The
standard recognized that it makes use of actuaries, but does not
require entities to do so

The liability – projected benefit obligation (PBO) – is recorded only

in memorandum records, and thus doesn’t appear in the financial
records. It has a counterpart account – fair value of plan assets
(FVPA) – which also does not appear in the records

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The year-end balance of the aforementioned accounts can be
calculated as follows:

PBO, beginning xx
ADD: Current service cost xx
ADD: Past service cost xx
ADD: Interest expense on PBO, beginning xx
DEDUCT: Present value of PBO settled xx
ADD/DEDUCT: Actuarial gains (deduct) or losses (add) xx
DEDUCT: Benefits paid xx
Projected benefit obligation (PBO), ending xx

FVPA, beginning xx
ADD: Contributions made during the year xx
ADD: Interest income/expected return on plan assets xx
ADD/DEDUCT: Remeasurement gains (deduct) or losses (add)
on plan assets xx
DEDUCT: Benefits paid xx
DEDUCT: Settlement price xx
Fair value of plan assets (FVPA), ending xx

The difference of PBO and FVPA is called the prepaid/accured

benefit cost, an account that appears on the financial statements.
If FVPA is greater, this non-current account has a debit (prepaid)
balance

EMPLOYEE BENEFIT EXPENSE

 Unlike PBO and FVPA, this account appears as a line item in the
statement of comprehensive income, computed as follows:

Current service cost xx

ADD: Past service cost xx
ADD/DEDUCT: Settlement gains (deduct) or losses (add) xx
ADD: Interest expense on PBO, beginning xx
DEDUCT: Interest income on FVPA, beginning xx
ADD: Interest expense on the effect of asset ceiling, beginning xx
Employee benefit expense xx

 Current service cost refers to the increase in the balance of the

projected benefit obligation as accrued from services rendered
during the year. Past service costs relate to benefits for services
already rendered which has since been revised from a change of
a plan. Together with settlement gains or losses (gain:

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 settlement price less present value of PBO settled), these three
are collectively called the service cost for the period

 Both interest income and interest expense on the beginning

balances of PBO and FVPA are calculated using the same
settlement discount rate. This applies to all formulas which
includes the interest income and expense

ACTUARIAL GAINS AND LOSSES

 These are the decreases and increases, respectively, of the PBO

due to changes in actuarial assumptions, such as employee life
expectancy, salary rates and age of retirement –factors used in
the calculation of the PBO

 The changes are recorded in the financial statements as a direct

adjustment to prepaid/accrued benefit cost account – since
both PBO and FVPA, as mentioned, does not appear in the
financial statements

They are also recorded as a component of other comprehensive

income as a remeasurement gain or loss

REMEASUREMENT GAINS/LOSSES

 Remeasurement gains/losses from defined benefit plans are

recorded as a component of other comprehensive income. Other
than actuarial gains and losses, there are two other items of this
account as follows:

Actuarial losses xx
DEDUCT: Actuarial gains xx
ADD: Remeasurement loss on plan asets xx
DEDUCT: Remeasurement gains on plan assets xx
ADD: Remeasurement loss on the effect of asset ceiling
(net of interest expense on effect of asset ceiling, beg) xx
DEDUCT: Remeasurement gains on the effect of asset ceiling
(net of interest expense on effect of asset ceiling, beg) xx
Remeasurement losses (gains) xx

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 There is a remeasurement gain on plan assets when actual
returns are greater than the interest income on FVPA, beginning.
Actual return can be computed as follows:

FVPA, ending xx
DEDUCT: FVPA, beginning xx
xx
Contributions made xx
DEDUCT: Benefits paid xx
xx
Actual return on plan assets xx

THE ASSET CEILING

 Asset ceiling is defined as the present value of benefits

available for refunding from the plan, a figure which is derived
from actuarial computation. As a rule, the debit balance of
prepaid/accrued benefit cost (i.e., FVPA > PBO) must not
exceed this ceiling. Any excess is referred to as the effect of
asset ceiling

Since the debit balance must not exceed the asset ceiling, the
amount that can be reported on the financial statement must
not exceed the asset ceiling

 When the balance of the effect of asset ceiling increases during

the period, there is remeasurement loss on the effect of asset
ceiling. Remember that this must be net of any interest expense
the effect of asset ceiling, beginning