ACCOUNTING FOR EMPLOYMENT BENEFITS Philippine Accounting Standard (PAS) 19 Revised or 19R prescribes the accounting and disclosure

for employee benefits. Postemployment benefits 1. Accounting for defined contribution plan According to Mr. Conrado Valix in his book entitled Financial Accounting Part 2 2013 edition, accounting for defined contribution plan is straightforward because the obligation of the entity is determined by the amount contributed for each period. Moreover, there are no actuarial assumptions to measure the contribution and there is no possibility of any actuarial gain. It is also stated in the said book that the obligations in this kind of employment benefit are measured on an undiscounted basis, except when they are not expected to be settled wholly within twelve months after the end of the period which employees render the related service. There are three things to remember in the accounting treatment of defined contribution plan: a. The contribution shall be recognized as expense in the period it is payable. b. Any unpaid contribution at the end of the period shall be recognized as accrued expense. c. Any excess contribution shall be recognized as prepaid expense but only to the extent that the prepayment will lead to a reduction in future payments or a cash refund. The disclosures required in defined contribution plan are: a. The amount recognized as expense for the defined contribution plan.

b. The

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management personnel as required by PAS 24 on related party disclosures. The following illustrations are taken also from the said reference. Illustration 1 On January 31, 2014, an entity paid P100,000 contribution to a defined contribution plan in exchange for services performed by the employees in December 31, 2013. 1. To record to accrual benefit on December 31, 2013. Employee benefit expense Accrued benefit payable 100,000 100,000

2. To record the payment of the contribution on January 31, 2014. Accrued benefit payable Cash Illustration 2 On December 31, 2014, an entity paid P200,000 contribution to a defined contribution plan. Of this amount, P150,000 is in part exchange for services performed by the employees in December 2013, and the balance of P50,000 is in respect of services to be performed in 2014. The contribution to the defined contribution plan is recorded on December 31, 2013 as follows: Employee benefit expense Prepaid benefit expense Cash 150,000 50,000 200,000 100,000 100,000

2. Accounting for defined benefit plan Contrary to the defined contribution plan, Valix stated that defined benefit plan is complex because actuarial assumptions are required to

measure the obligation and the expense and there is a possibility of actuarial gains and losses. Moreover, the obligation is measured on a discounted basis because it may be settled many years after the employees render the related service. PAS 19R, paragraph 120, provides that an entity shall recognize the components of defined benefit cost, except on the extent that another PFRS requires or permits their inclusion in the cost of an asset. Defined benefit cost includes: 1. Service cost which comprises: a. Current service cost is the increase in the present value of the defined benefit obligation resulting from employee service in the current period. It increases expense and defined benefit obligation. b. Past service cost is the change is the present value of defined benefit obligation for employee service in prior periods resulting from a plan amendment or curtailment. PAS 19R, paragraph 103, provides that an entity shall recognize past service cost as an expense at the earlier of the following dates: When the plan amendment or curtailment occurs. When the entity recognizes related

restructuring costs or termination benefits. c. Any gain or loss on settlement Settlement is a transaction of eliminating all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan. 2. Net interest which comprises: a. Interest Expense computed by multiplying the defined benefit obligation at the beginning of the reporting period by the discount rate.

b. Interest Income computed by multiplying the fair value of plan assets at the beginning of the reporting period by the same discount rate. In addition, the net interest expense or net interest income is the difference between the two components of net interest. 3. Remeasurements which comprise: a. Actuarial gain and loss are changes in the present value of the defined benefit obligation resulting from experience adjustments and the effects of changes in actuarial assumptions. Actuarial assumptions are an entitys best

estimate of the variables that will determine the ultimate cost of providing postemployment benefits. If the actual benefit obligation is higher than the estimated amount, there is an actuarial loss. If the actual benefit obligation is lower than the estimated amount, there is an actuarial gain. PAS 19R, paragraph 120, provides that all remeasurements, including actuarial gains and losses, shall be recognized immediately in other comprehensive income. The remeasurements are not subsequently recycled or reclassified to profit or loss. However, Paragraph 122 provides that an entity may transfer these amounts recognized in other comprehensive income within equity. b. Actual return on plan assets less interest income on plan assets Plan assets comprise assets held by a long-term benefit fund and qualifying insurance policies. They are measured at fair value.

Return on plan assets includes interest, dividend and other income derived from plan assets, and realized and unrealized gains and losses on the plan assets. However, the any costs of managing and any tax payable by the plan itself shall be deducted in computing return on plan assets. c.