PAS 19 (Revised)

Employee Benefits
Coverage
• Scope of PAS 19 and Introduction on Employee Benefits
• Accounting for Short Term Employee Benefits
• Accounting for Post Employment Benefits
• Accounting for DCP
• Accounting for DBP
 Projected Unit Credit Method
 Defined Benefit Obligation (DBO)
 Plan Assets
 Net Defined Asset (Liability)
 Components of Income Statement
 Components of OCI
 Comprehensive Illustration on DBP
 Actuarial Assumptions
• Accounting for Other Long Term Benefits
• Accounting for Termination Benefits
PAS 19(R)- Employee Benefits
Scope: IAS 19 Employee Benefits (amended 2011) outlines the
accounting requirements for employee benefits. The standard
establishes the principle that the cost of providing employee benefits
should be recognized in the period in which the benefit is earned by the
employee, rather than when it is paid or payable, and outlines how each
category of employee benefits are measured, providing detailed
guidance in particular about post-employment benefits.

IAS 19 (2011) does not apply to employee benefits within the scope
of IFRS 2 Share-based Payment or the reporting by employee benefit
plans (see IAS 26 Accounting and Reporting by Retirement Benefit
Plans).

Employee Benefits are all forms of consideration given by an entity in

exchange for services rendered by employees.
PAS 19(R)- Employee Benefits
Short Term 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.

Examples:

• wages, salaries and social security contributions;

• paid annual leave and paid sick leave;
• profit-sharing and bonuses; and
• non-monetary benefits (such as medical care, housing,
cars and free or subsidized goods for current employees).
Accounting- Short Term Benefits
Accounting for Short Term Benefits are essentially an application
of basic accounting principles and practice:

a. Unpaid benefits are recognized as accrued expense.

b. Paid in advance are recognized as prepayments
c. Cost is recognized when it is incurred, regardless if paid or not.

For profit sharing and bonus payments:

An entity recognizes the expected cost of profit-sharing and bonus

payments when, and only when, it has a legal or constructive
obligation to make such payments as a result of past events
and a reliable estimate of the expected obligation can be
made.
Post Employment Benefits
- employee benefits other than termination benefits which
are payable after the completion of employment
- include retirement benefits such as:
• pensions,
• post-employment life insurance, and
• post-employment medical care benefits
Post Employment Benefits
Who are entities with post-employment benefits?
a) those with formal retirement benefit plan
b) those with no formal retirement benefit plan but
covered by R.A. 7641
c) those retail, service and agricultural establishments
or operations regularly employing not more than 10
employees and with no formal retirement benefit
plan
d) a and b
e) all of the above
Post Employment Benefits

Classification:

• Defined Contribution Plan (DCP)

• Defined Benefit Plan (DBP)
Post Employment Benefits
DCP DBP

Company’s is limited to the is to provide the

obligation amount contributed agreed benefits to
to the fund current and former
employees

Risk that benefits falls on the falls on the

will be less and employee Company
assets are
insufficient
Which is definite Contribution is Benefit is definite
and indefinite? definite but the but contribution is
benefit is indefinite indefinite
Post Employment Benefits

Post-employment Benefit Plan Classification

Based on the minimum requirement of DBP
R.A. 7641

SSS/ GSIS/ Pag-ibig DCP

Equal to the retirement policy obtained by DCP

employer for qualified employees from an
insurance company
Accounting for DCP
Accounting for DCP is straightforward.
• Cost is recognized when it is payable.
• Unpaid contribution is recognized as
accrued.
• Excess contribution is recognized a prepaid.
* Measurement is undiscounted, except when
they do not fall due within 12 months.
Accounting for DBP

• More complex
• Actuarial assumptions involved
• Measurement is discounted
• The expense recognized is not
necessarily the contribution made.
Accounting for DBP
Step 1: Determine DBO and FVPA

Sub-step 1.1. Estimate the ultimate cost of a benefit using the

Projected Unit Credit Method

Sub-step 1.2. Discount the benefit in order to determine the

present value of the defined benefit obligation and the
current service cost.

Sub-step 1.3. Determine the fair value of any plan assets.

PUCM and DBO
Illustration 1: LUMP SUM PAYMENT

Company A pays lump sum to employees when they retire. The lump sum
payment is equal to 5% of their salary in the final year of service, for every
year of service. Additional data as follows:

a. The employee is expected to work for 5 years.

b. The salary is expected to increase by 8% per annum.
c. The present salary is 200,000 per annum.
d. The discount rate is 10% per annum.

Applying PUCM,
a. How much is the lump sum benefit that the employee will
receive after 5 year?
b. How much is the present value of the benefits?
c. How much is the annual expense for 5 years?
d. How much is the DBO per year?
PUCM and DBO
a. Lump sum benefit to be received by the employee:

200,000 x 108% x 108% x 108% x 108% x 5% x 5 = 68,025, or

200,000 x 1.3605* x 5% x 5 = 68,025
*1.3605- FV of 1 at 8% for 4 years [(1.08)^4]

b. Present value of benefits:

200,000 x 1.3605 x 5% = 13,605 (annually)

Year Benefit PV Factor** Present Value

of Benefits
1 13,605 0.683 9,292
2 13,605 0.751 10,217
3 13,605 0.826 11,238
4 13,605 0.909 12,367
5 13,605 1.000 13,605
Total 68,025 56,719
**PV Factor of 1 at 10% ,for (4,3,2,1 and 0) years away from now.
PUCM and DBO
C. Annual expense recognized
D. DBO per year
Interest
Current Total
PV Present Cost DBO
Benefit Service Annual
Year Factor Value (e= c of (g = prev
(a) Cost Expense
(b) (c = a x b) prev year year g + f)
(d = c) (f = d + e)
x 10%)
0 0
1 13,605 0.68 9,292 9,292 0 9,292 9,292
2 13,605 0.75 10,217 10,217 929 11,146 20,438
3 13,605 0.83 11,238 11,238 2,044 13,282 33,720
4 13,605 0.91 12,367 12,367 3,372 15,739 49,459
5 13,605 1 13,605 13,605 4,946 18,551 68,010
Observations:
1. PV of Annual benefits equals CSC.
2. DBO at the end of employment is equal to the lump sum benefit to be
received.
WHY?
PUCM and DBO
Illustration 2: ANNUAL PENSION

Company A pays annual pension of 5% of the highest salary times the number of years in
service. Assume retirement age of 65 and life expectancy after retirement of 8 years. The
employee is 40 years old.

Additional data as follows:

a. The employee is already with the company for 5 years.

b. The salary is expected to increase by 5% per annum.
c. The present salary is 500,000 per annum.
d. The discount rate is 10% per annum.

Questions:
a. How much is the expected additional benefit for every year of service?
b. How much is the projected benefit obligation as of now?
c. How much is the annual service cost for the next 5 years?
d. How much is the annual total benefit expense over the next 5 years?
e. How much is the DBO per year, for 5 years?
PUCM and DBO
a. How much is the expected additional benefit for every year of service?

500,000 x 3.3864* x 5% = 84,660

* FV of 1 at 5% for 25 years (25 years is the remaining expected number
of years for the employee before retirement, 65-45)

b. How much is the projected benefit obligation as of now?

84,660 x 5* x 5.335** x 0.0923*** = 208,442

* 5 since the requirement is obligation now and the employee is already
with the company for 5 years.
** 5.335 is the PVOA of 1 at 10% for 8 years. This means that the
employee will receive 84,660 x 5 for 8 years but since it is to be received
over long time, then it is discounted.
*** 0.0923 is the PV of 1 at 10% for 25 years. This means that the start
of payment of the annual pension is only expected to be made after 25
years, thus consider the value of money during that time vs now, using
discount rate.

Over all, the reason for several discounting computation is to bring all expected
values in the future in the present period.
PUCM and DBO
c. How much is the annual service cost for the next 5 years?

Additional
Number of PV Factor
Benefit for PVOA (10% Age of
Years before (10% for d Service Cost
Year every year for 8 years) Employee
Retirement term) (a x b x e)
of service (b) (c)
d= 65-c (e)
(a)
0 40 25
1 84,660 5.335 41 24 0.102 45,855
2 84,660 5.335 42 23 0.112 50,440
3 84,660 5.335 43 22 0.123 55,484
4 84,660 5.335 44 21 0.135 61,032
5 84,660 5.335 45 20 0.149 67,136
PUCM and DBO
d. How much is the annual total benefit expense over the next 5 years?
e. How much is the DBO per year, for 5 years?

Interest Cost Total Benefit DBO

Service Cost
Year (b= prev year Expense (prev year DBO
(a)
DBO x 10%) (c= a + b) + c)

0 208,442
1 45,855 20,844 66,699 275,141
2 50,440 27,514 77,954 353,095
3 55,484 35,309 90,793 443,888
4 61,032 44,389 105,421 549,309
5 67,136 54,931 122,067 671,376
PLAN ASSETS
Assets held by long term benefit fund and qualifying insurance policies.

Conditions:
a. The assets are held by the entity, the fund itself, that is legally
separate from the reporting entity.
b. The assets are available to pay only employee benefits.
c. The assets are not available to the reporting entity’s own creditors
even in the event of bankruptcy.
d. The assets cannot be returned to the reporting entity or can be
returned only to the reporting entity if the remaining assets of
the fund are sufficient to meet all employee benefit
obligations or the assets are returned to the reporting entity
to reimburse it for employee benefits already paid.

Return on Plan Assets- any interest, dividends or other revenue from the
assets less any administration costs and related taxes.
- may be expected return or actual return
PLAN ASSETS
Expected Return on Plan Assets- based on market expectations at the
beginning of the period.
- reflects the expected changes in the fair value of the plan
assets
- component in the computation of total benefit expense

Actual Return on Plan Assets- reflects the actual change in the FV of the plan
assets.

Formula:

FVPA- beginning xx
Add: Contributions to the fund xx
Actual Return on Plan Assets xx (SQUEEZE)
Less: Total Benefits Paid xx
FVPA- ending xx
PLAN ASSETS
Expected Return > Actual Return - Actuarial Loss
Actual Return > Expected Return - Actuarial Gain

Illustration:

FVPA- Jan 1 5,000,000

FVPA- Dec 31 6,500,000
Actual Return on PA 800,000
Expected Return 10%

a. How much is the expected return on PA?

b. How much is the actuarial gain (loss)?

a. 500,000 (5M x 10%)

b. 300,000 actuarial gain (800,000-500,000)
NET DEFINED ASSET (LIABILITY)
Step 2: Identify the amount to be presented in the Statement
of Financial Position

DBO > FVPA - Net Defined Liability (Accrued Benefit Cost)

- Non current liability
- Underfunding

FVPA > DBO - Net Defined Asset (Prepaid Benefit Cost)

- Non current asset
- Overfunding
INCOME STATEMENT
Step 3: Determine the amount in profit or loss.

Components of Income Statement:

- Service Cost attributable to past and current periods
- Past Service Cost
- consider effects (if any) of curtailment or
settlement
- Current Service Cost
- Net interest on the net defined benefit liability or
asset, determined using the discount rate at the
beginning of the period
- Interest Cost on DBO
- Return on PA using the same rate as used for
DBO
OCI
Step 4: Determine the amount/remeasurements in OCI.

The following remeasurements are presented in OCI:

- Actuarial gains (losses)- the changes in the present value

of the defined benefit obligation resulting from experience
adjustments or the effects of changes in actuarial assumptions

- Return on plan assets, excluding amounts included in

net interest on the net defined benefit liability (asset)

Note: No recycling to Profit or Loss

Comprehensive Illustration on DBP
Company A pays annual pension of 5% of the highest salary times the number of years in
service. Assume retirement age of 65 and life expectancy after retirement of 8 years. The
average age of all employees is 40 years old.
Additional data as follows:

a. All employees are already with the company for 5 years at the average.
b. The salary is expected to increase by 5% at the average per annum.
c. The present salary is 5,000,000 per annum (total for all employees).
d. The discount rate is 10% per annum (did not change for 5 years).
e. FVPA- Beginning is 1,000,000
f. Contributions to the plan is 800,000 per year for the next 5 years.
g. No benefit payments are expected to be made in the next 5 years.
h. Actual return on plan assets is 50,000 for year 1; 100,000 for year 2; 350,000 for year 3;
100,000 for year 4 and 500,000 for year 5.
i. Beginning actuarial loss due to difference in expected and actual returns on PA is 200,000.

Requirements:
a. DBO from present (year 0) to year 5.
b. FVPA from year 1 to year 5.
c. Net defined benefit asset (liability) from year 1 to year 5.
d. Defined benefit cost, per year, to be recognized in P&L for the next 5 years
e. Amount of remeasurements to be recognized in OCI and accumulated revaluation
reserves in equity for the next 5 years
Comprehensive Illustration on DBP
a. DBO from present (year 0) to year 5.

Benefits Number of
PVOA PV Factor
(Accrued Age of Years Service Interest
(10% for 8 (10% for d DBO
and Employee before Cost Cost
Year years) term)
Additional) Retirement
(10% of
(a) (b) (c) d= 65-c (e) (a x b x e)
prev DBO)
0 4,232,944 5.335 40 25 0.092 2,084,269
1 846,589 5.335 41 24 0.102 458,539 208,427 2,751,235
2 846,589 5.335 42 23 0.112 504,393 275,124 3,530,752
3 846,589 5.335 43 22 0.123 554,832 353,075 4,438,659
4 846,589 5.335 44 21 0.135 610,316 443,866 5,492,841
5 846,589 5.335 45 20 0.149 671,347 549,284 6,713,472
Comprehensive Illustration on DBP
b. FVPA from year 1 to year 5.
Actual Return
Year FVPA-Beg Contribution Benefits Paid FVPA-End
on PA
0 1,000,000
1 1,000,000 800,000 50,000 0 1,850,000
2 1,850,000 800,000 100,000 0 2,750,000
3 2,750,000 800,000 350,000 0 3,900,000
4 3,900,000 800,000 100,000 0 4,800,000
5 4,800,000 800,000 500,000 0 6,100,000

c. Net defined asset (liability) from year 1 to year 5.

Net Defined
Year DBO FVPA Benefit Asset
(Liability)
0 2,084,269 1,000,000 (1,084,269)
1 2,751,235 1,850,000 (901,235)
2 3,530,752 2,750,000 (780,752)
3 4,438,659 3,900,000 (538,659)
4 5,492,841 4,800,000 (692,841)
5 6,713,472 6,100,000 (613,472)
Comprehensive Illustration on DBP
d. Defined benefit cost, per year, to be recognized in P&L for the next 5 years

Interest Income Total Defined

Year Service Cost Interest Cost
from PA Benefit Cost

1 458,539 208,427 (100,000) 566,966

2 504,393 275,124 (185,000) 594,517
3 554,832 353,075 (275,000) 632,908
4 610,316 443,866 (390,000) 664,182
5 671,347 549,284 (480,000) 740,631

e. Amount of remeasurements to be recognized in OCI and accumulated revaluation reserves in

equity for the next 5 years
Actuarial Gain Accumulated
Expected Return Actual Return on
Year (Loss) for the Gain (Loss) to
on PA PA
Year- OCI Equity Item
0 (200,000)
1 100,000 50,000 (50,000) (250,000)
2 185,000 100,000 (85,000) (335,000)
3 275,000 350,000 75,000 (260,000)
4 390,000 100,000 (290,000) (550,000)
5 480,000 500,000 20,000 (530,000)
Actuarial Assumptions
Demographic
• mortality
• rates of employee turnover, disability and early
retirement
• proportion of plan members w/ dependants eligible
for benefits
• claim rates under medical plan

Financial
• discount rate
• future salary and benefit levels
• cost of administering claims
• expected rate of return on plan assets
Accounting for Long Term Employee Benefits

Other long-term benefits include the following items (if

not expected to be settled within 12 months after the end
of the period in which the employee renders the related
service):
• long-term paid absences such as long-service or
sabbatical leave;
• jubilee or other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration.
Accounting for Long Term Employee Benefits

However, the entity should perform the same steps as

described at defined benefit plans. The only difference is
that all items such as service cost, net interest on the net
defined benefit liability (asset) and remeasurements of the
net defined benefit liability (asset) are presented in the
profit or loss – so nothing goes to other comprehensive
income.
Accounting for Termination Benefits
Termination benefits are not provided in exchange for the service of the
employee; instead, they are provided in exchange for the termination of
employment.

When to recognize?
at the earlier of:
• when the company can no longer withdraw the offer of
those benefits (either the termination plan exists or
employee accepts the offer of benefits) and
• when the company recognizes cost for a restructuring (IAS
37) and involves the payment of termination benefits.

How much to recognize?

• if expected to be settled within 12 months, apply rules on
short term employee benefits (undiscounted)
• if expected to be settled in more than 12 months, apply
rules on long term employee benefits (discounted)