EMPLOYEE BENEFITS Employee Benefits – all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management. contributions paid Recognition Measurement Note: so, employee benefits is yung mga benefits na makukuha ng isang employee after he/she rendered his/her service sa company. Basta ganorn. • • General Recognition i. Liability – after deducting amounts that have been paid ii. Asset – if there is excess iii. Expense – unless the cost is recognized as part of an asset a. • Short-term employee benefits – within 12 months • Wages, salaries • Short-term compensated absences • Profit-sharing and bonuses payable within 12months • Non-monetary benefits Liability, after deducting the amount already paid. Asset, if contribution payments exceed the contribution due for service before the reporting date. Expense, the cost is recognized as part of the cost of an asset Measurement: shall be measured at the undiscounted amount experience is worse than expected Recognition • Liability, for its obligations under defined benefit plans net of plan assets • Expense, for the net change in the defined benefit liability during the period. Measurement: Defined Benefit Liability • Present value of obligations at the reporting date minus the fair value of the plan assets at the reporting date, out of which the obligations are to be settled directly. Recognition Short-term compensated absences may be: c. Accumulating – can be carried forward and used in future periods ii. Non-accumulating – not carried and are forfeited i. Accumulating Compensated Absences When employees render service increases their entitlement to future compensated absences Presented as a current liability b. Non-accumulating Compensated Absences When the absences occur. No liability or expense shall be recognized until the absence occur Post-employment – payable after the employment (retirement) Examples: a. Retirement benefits b. Post-employment life insurance c. Post-employment medical care Defined Benefit Scheme Promises a specific income Defined Contribution Scheme Depends on factors such as the amount you pay into the person d. Other long-term – beyond 12 months Examples: a. Long-term compensated absences b. Long-service benefits c. Long-term disability benefits d. Profit-sharing and bonuses payable 12 months or more e. Deferred compensation paid 12 months or more - Liability is measured at the net total of the ff: i. Present value of the benefit obligation at the reporting date minus ii. Fair value at the reporting date of plan asset - Net change in liability during the period, other than a change attributable to benefits paid during the period, is recognized as expense in profit or loss unless it is capitalizable to the cost of other assets. Termination – benefits payable as a result of: - An entity’s decision (involuntary) - Employee’s decision (voluntary) Recognition: Expense in profit or loss immediately. - Employer-sponsored retirement plans: Defined contribution plans Definition • • • Entity pays fixed contributions. Entity has no legal or constructive obligation The amount is determined by the amount of Defined benefit plans Shall recognize as a liability and expense when: i. Terminate the employment of an employee before the normal retirement date ii. Provide termination benefits as a result of an offer made in order to encourage voluntary redundancy. Measurement • Actuarial risky (pedeng mas mataas or mas mababa sa expected amount) • Entity’s obligation is to provide the agreed benefits. • Actuarial or investment • • Shall measure termination benefits at the best estimate of the expenditure that would be required to settle the obligation at the reporting date. When due more than 12 months, shall be measured at their discounted present value. Multi-employer plans and State plans - Classified as defined contribution plans or defined benefit plans on the basis of the terms of the plan Discounting - Defined benefit obligation shall be measured on a discounted present value basis. Rates used shall be determined by reference to market yields at the reporting date on high quality corporate bonds Actuarial Valuation Method • Projected Unit Credit Method – shall be uses if an entity is able to do so without undue cost or effort. requires the measurement of defined benefit obligations on a basis that reflects estimated future salary increases Defined Benefit Plan Asset - - present value of the defines benefit obligation at reporting date < the fair value of plan asset = plan is surplus shall recognize a plan surplus only to the extent that it is able to recover the surplus: 1.) reduced contributions or 2.) refunds. Cost of a Defined Benefit Plan - recognized either entirely profit or loss as an expense or partly profit or loss pr partly as an item of OCI Recognition - - - all actuarial gains and losses shall be recognized in the period in which they occur either: b. profit or loss c. OCI Accounting policy chosen shall be applied consistently to all of defined benefit plans and all actuarial gains and losses. Actuarial gains and losses recognized in OCI shall be presented in the statement of comprehensive income. Accounting for Employee Benefit Cost • Fair value of plan assets – the fair value of the funds invested to pay pension obligations • Projected Benefit Obligation (PBO) – the estimated present value of an employee's pension, under the assumption that the employee continues to work for the employer. This information is needed by the employer to account for a pension liability, but is only needed when the pension is of the defined benefit variety. • Current service cost – the increase in the present value of a defined benefit obligation resulting from employee service in the current period • Past service cost – the change in the present value of the defined benefit obligation for employee service in prior periods, resulting in the current period from the introduction of, or changes to, post-employment benefits or other longterm employee benefits. • Asset Ceiling – It is the present value of economic benefits available in the form of refund from plan asset and reduction in future contribution to the plan asset. • Service cost includes: 1. current service cost 2. Past service cost 3. gain or loss on plan settlement before normal retirement date. (P and L) • Net interest expense (income): 1. Interest on Projected benefit obligation (expense) 2. interest of FV of plan asset (income) 3. interest expense on effect of asset ceiling at the beginning. (P and L) • Projected Benefit Obligation can be computed: Highest salary*Benefit rate* 3 of years of service • Remeasurements: 1. PBO 2. FVPA 3. effect of asset ceiling (OCI then reclassified to Retained earnings) • If the contribution to the plan is more than the defined benefit cost, the difference is prepaid benefit cost during the year. • If the contribution to the plan is less than the defined cost, the difference is accrued benefit cost during the year. What is the Pension Asset Ceiling? The ‘pension asset ceiling adjustment’ sometimes appears in the footnotes to accounts, as an adjustment to the balance sheet value of a pension asset or liability. However, it’s one of those quirky areas of accounting which isn’t well understood…why does a pension asset need a ceiling? And why is it sometimes also applied to pension liabilities? The aim of the pension asset ceiling is to make sure that a company’s balance sheet properly reflects how the value of any defined benefit deficit or surplus is affected by a pensions scheme’s rules and funding requirements. These rules and regulations can mean that the ‘normal’ calculation of a pension liability or asset – the difference between the fair value of the scheme assets and the present value of the projected benefit obligation (PBO) – is in adequate. This is particularly the case when the scheme rules state that any surplus in the scheme belongs to the scheme members, rather than the company. Reducing a Pension Asset The fair value of the scheme assets and the present value of the PBO are volatile numbers (estimations of actuaries). Therefore, at certain points in time, it is possible that the value of the scheme assets will exceed the value of the PBO. If the scheme rules state that the surplus in the pension scheme belongs to the scheme members, rather than the company, then an asset ceiling adjustment is required to prevent the company recognizing a pension asset on the balance sheet; this ‘asset’ doesn’t benefit the company in any way so it isn’t their asset to recognize. Why Does the Asset Ceiling Affect Some Companies but Not Others? 1. 2. remember that the asset ceiling will only have an effect when the scheme is already in surplus, or the current recovery plan would result in a surplus. This situation is surprisingly common at the moment, with many pension assets benefiting from buoyant equity markets, whilst the companies are still locked into punitive recovery plans agreed during the QE program. it’s important to note that the asset ceiling applies only where a surplus ‘belongs’ to the scheme members. If the scheme rules allow the company to benefit from the surplus, then the asset ceiling would not be relevant – hence why the asset ceiling will affect some companies but not others.
