Employee Benefits - PAS 19

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. (Retirement, insurance, stock options, etc.)

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.
e. All other benefits expected to be realized within 12 months

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
- 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.
- Accumulating paid absences may be either be:

i. Vesting
- Employees are entitled to a cash payment for unused
entitlements on leaving the entity.

ii. Non-vesting
– When employees are not entitled to a cash payment for
unused entitlements on leaving the entity.

- 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

- 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.
- 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:

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 PAS 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

PAS 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 consistent 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).

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

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.

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.

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)
b. Settlement gain/loss
c. Net interest (interest expense net of interest income )
a. Actuarial gains and losses
b. Return on plan assets, excluding amounts included in net interest.
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

Measurement of present value

a. Apply an actuarial valuation method
b. Attribute benefit to periods of service
c. Make actuarial assumptions

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
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
Projected benefit obligation (PBO) (xx)
Prepaid/(Accrued) benefit costs xx
PBO, beg. xx
Current service cost xx
Past service cost xx
Interest expense xx
Actuarial loss/(gain) xx
Benefits paid (xx)
PBO, end. xx
Benefits paid = PV of defined benefit obligation settled FVPA, beg. xx
Contribution to the plan xx
Actual return/(loss) on plan assets xx
Benefits paid (xx)
FVPA, end. xx
Benefits paid = Settlement price on defined 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 Past service cost xx Interest expense on PBO xx

Interest income on FVPA (xx) Settlement loss/(gain) xx

Employee benefit expense xx
Remeasurement gain/loss – plan assets xx
Actuarial gain/loss xx
Net remeasurement gain/loss – OCI xx
Actual return/loss on plan assets 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) Actuarial (gain)/loss xx

Interest income
= FVPA, be. x Discount rate

PV of defined benefit obligation settled xx

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

Asset ceiling
O 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

An 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

● Lecture Notes Employee Benefits: Page 1 of 16