University of Santo Tomas

AMV – College of Accountancy

IAC 11 - Integrated Review in Financial Accounting and Reporting

EMPLOYEE BENEFITS (IAS 19)

 Employee Benefits – all forms of consideration given by an entity in exchange for services
rendered by employees or for termination of employment.
 Categories of Employment Benefits:
1. Short-term Employee Benefits
- Settled within 12 months after year end in which the employees render the related
service.
A. Accumulating Short-term Employee Benefits
 Recognized as expense during the reporting period when the employee has
rendered the service, unless it forms part of the cost of another asset.
 Liability for Compensation Absences (current liability)
 Vesting or Non-vesting
a. Vesting – paid to employees upon leaving the entity and measured at the rate
expected to apply when the employee claims the entitlement.
b. Non-vesting - measured at year end taking into consideration the benefits that
the employees will most likely claim during the availment period; LIFO
approach.
B. Non-Accumulating Short-term Employee Benefits
 Recognized as expense when the absences occur.

2. Post-Employment Benefits
- Formal or informal arrangements
- Payable after the completion of employment
Classification of Pension Plans
A. Contributory and Non-Contributory Plans
 Contributory Plans - both employee1 and employer contribute
 Non-contributory Plans – only the employer contributes
B. Funded and Unfunded Plans
 Funded Plans – trustee (or funding agency) is designated to manage the fund
 Unfunded Plans – employer manages the fund
C. Defined Contribution and Defined Benefit Plans
 Defined Contribution Plans
- Specify the employer’s contribution based on a formula
- Employee bears actuarial and investment risk
- Post-Employment Benefit Expense = Gross Payroll x %
- Journal Entry:
Post-Employment Benefit Expense (Operating Expense) xx
Prepaid/Accrued Employee Benefit Cost (Current Liability) xx
Cash xx
 Defined Benefit Plans
- Define the benefits the employees will receive at retirement based on a
formula
- Employer bears actuarial and investment risk

1 Through salary deductions.

 - Requires actuarial assumptions (may result to Actuarial G/L)
- Measured on a discounted basis
Defined Benefit Defined Benefit Liability
Cost (Deficit) or Asset (Surplus)2
P/L OCI DBO FVPA
Beginning Balance xx xx
Current Service Cost xx xx
Interest Cost:
 Interest on DBO xx xx
 Expected Return on FVPA (xx) xx
Past Service Cost xx xx
Contributions xx
Benefits Paid (xx) (xx)
Remeasurements:
 Actuarial Gain (xx) (xx) xx
 Actuarial Loss __ xx xx (xx)
Ending Balance xx xx xx xx
- Defined Benefit Obligation (DBO) – Present value of expected future payments
to employees.
- Current Service Cost
o Increase in the present value of DBO resulting from employee service in
the current period.
o Discounts each year for the remaining years to maturity
o Computed using the Projected Unit Credit Method (PUCM) which uses
demographic and financial variables
- Future Value Factor:
o (increases @ 1/1) Years – 1
o (increases @ 12/31) Years – 2
- Interest Cost – uses discount rate by reference to market yields at the end of
the period on: (1) high quality corporate bonds, or (2) government bonds.
- Return on Plan Assets = Income + Unrealized & Realized Gain/Loss – Cost of
Managing Plan Assets – Tax Payable
- Settlement occurs when:
o Payment is made to plan participants; or
o Transfer of obligations under the plan to an insurance company
- Actuarial Gains/Losses result from:
o Change in the present value of the DBO
o Difference between actual and expected return on plan assets
- Defined Benefit Liability, end = Defined Benefit Liability, beg + Accrual of
Defined Benefit Cost – Contribution
- Asset Ceiling
o Present value of future economic benefits through: (1) reduction in
future contributions, or (2) refund from funding agency.
o Amount of the FVPA that will be shown in the SFP.
o Surplus, end – Asset Ceiling, end
- Surplus, beg – Asset Ceiling, beg
Total Adjustment to Defined Benefit Asset
o Total Adjustment to DBA is taken to:

2 Presented in the Statement of Financial Position (SFP).

 a. P/L3 = (Surplus, beg – Asset Ceiling, beg) x Discount Rate
b. OCI = Excess
- Journal Entry:
Retirement Benefit Expense (P/L) xx
Remeasurement of Defined Benefit Asset/Liability (OCI) xx
Defined Benefit Asset/Liability xx

Defined Benefit Asset/ Liability xx

Cash xx
Funding (contribution to funding agency)

3. Other Long-term Employee Benefits

- Examples: Long-service leave/Sabbatical leave, Jubilee or other long-service benefits,
Long-term stability benefits, Profit sharing and bonuses, Deferred remunerations
- Same rules as those of a Defined Benefit Plan, except hat no part of remeasurement shall
be taken to OCI.

4. Termination Benefits
- Given in exchange for the termination of employment because of either: (1) an entity’s
decision, or (2) an employee’s decision.
- Recognize a liability and expense at the earlier of the following dates:
 When the entity can no longer withdraw the offer of those benefits
 When the entity recognizes cost for restructuring and involves the payment of
termination benefits.
 Discounted if due more than 12 months after the end of the reporting period.

End of Handout.

3 As an adjustment to interest costs.