* Supplementary Video provided ni sir
IAS 19 EMPLOYEE BENEFITS
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Short-term benefits – how to account for wages/salaries/bonus (accrual basis)
Long-term benefits – healthcare
Post-employment benefits - pensions
1. Pensions
Defined contribution scheme (money purchase)
This does not present any accounting problems as the income statement charge will equal the
contributions payable into the scheme.
*the risk lies with the employee with regards with the money value of the contributions
Contributions are accrued in the financial statements with an expense recognized in profit or
loss.
Defined Benefit Scheme (final salary)
At any point in time (usually each year) we need to know the value of the scheme so that we
can decide whether or not it is worth enough (ie. The assets will be enough to cover the
liabilities)
Statement of financial position (extract)
*the valuation of a defined benefit scheme will be carried out by an actuary who will decide the
scheme is in surplus (net pension asset) or deficit (net pension liability)
[definition] actuary – An actuary reviews data to calculate risks, typically for insurance premiums
or business decisions.
This is done by making a number of assumptions:
-
Level of investment return
Number of leavers
Number of new members
Number of people
As time goes by the actual outcome will not be the same as the assumed outcome. The
differences are known as actuarial differences (remeasurement component).
Statement of profit or loss and other comprehensive income (extract)
[definition]
Operating costs – day to day expenses where you’ll record your wage and salaries
recording the ff:
1. Current service cost (SPL) - increase in the value of the scheme liabilities as a result
of employee service during the period.
2. Past service cost (SPL) – increase in the value of the scheme liabilities as a result of
employee service in previous periods.
Journal Entries:
Statement of P/L (expense)
Pension Liability
xx
xx
Financing cost
*to account the interest expense, you take percentage given within the question (normally
the interest rate on high-quality corporate bonds or government bonds) and multiply that by
the value of the opening liability. You take the liability at the start of the year and apply the
percentage.
Journal Entries:
Statement of P/L (expense)
Pension Liability
xx
xx
3. Interest cost – represents the unwinding of the discount factor – the nearer you get to
paying off a liability the bigger it gets.
4. Return on investment – it is the interest or dividends receivable on the pension fund
assets.
[formula] percentage (%) x brought forward asset *whatever the opening asset is you
apply the opening percentage
Pension asset
Statement P/L (income)
xx
xx
Re-measurement – if there is a gain (cr); if loss (dr)
[note] Actuarial differences are recognized in other comprehensive income, hence no
impact on profit or loss.
*from the figure above*
-
(assets) Contributions paid in
Pension asset
xx
Bank
xx
- (assets & liabilities) benefits paid out
Pension Liability
xx
Pension asset
xx
- Re-measurement component – is a balancing figure
Example illustration – Defined benefit scheme
Answer:
Statement of Financial Position
Assets
Liabilities
Net Liabilities
66,000
(75)
(9)
Statement of Profit or Loss
Service cost
(9,000 + 8,000)
Interest Expense
(5% x 64M)
Return on the assets
(5% x 60M)
Net Expenses
(17,000)
(3,200)
3,000
(17,200)
Other Comprehensive Income
Assets
Brought forward opening asset
Return on assets
Contributions paid in
Paid out
Total
Balancing Figure
Compare FV
60M
3M
5,000
(6,000)
62,000
4,000
66,000
Journal Entries:
Pension asset
OCI
xx
xx
Liabilities
Brought forward opening asset
Interest Expense
Service cost
Paid out
TOTAL
Balancing figure (gain)
Compare FV
64M
3,200
17,000
(6,000)
78, 200
(3,200)
75,000
*reduction in liability is a good sign, hence considered as a gain
Journal Entries:
Pension liability
OCI
xx
xx
Other comprehensive Income
Assets
Liabilities
Re-measurement gain
4,000
3,200
7,200
From Dean CJ Formaran Accounting Lecture (YT Lecture)
Post-Employment Benefit Plan
Actuarial and investment
risks
How to account?
Are there actuarial
assumptions?
Do we recognize actuarial
gains and losses?
How to value? (Measurement)
Defined Contribution Plan
Borne by Employees
Defined Benefit Plan
Borne by the employers
Straightforward
With complex computations
(because of the actuarial
assumptions)
Meaning, the contribution of the
employer is recorded at
expense. No more liability other
than the contribution
None
No
Yes, required
Possibility of actuarial gains
and losses
Normal, undiscounted
Actuarial gains and loses –
during the time that the funds
will be allocated for the
retirement benefit of the
employees (kukulangin)
Normally, discounted
(present value)
How to present in the Financial Statements?
Defined Contribution Plan (DCP)
Profit & Loss (P/L)
Expense = Contribution
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Balance Sheet
If not yet paid – Accrued
Overpayment – prepaid
Defined Benefit Plan (DBP)
Profit & Loss (P/L) and OCI
S – service cost (P/L)
I – Interest (P/L)
R – Remeasurement (OCI)
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Balance Sheet
Underfunded – Deficit
Overfunded - Surplus
Illustration Investment Risk
Figure 1.
Figure 2.
Figure 3.
Figure 4.
*From Amaya
Figure 1.
Figure 2.
Figure 3.
Figure 4.
Figure 5.
Figure 6.
Figure 7
Figure 8
Figure 9
Figure 10.
2nd Face to face discussion
P/A BC
FVPA> (net asset)
< PBO  PUCM - projected unit credit method – considered as one unit (net liability)
1. Pension expense
a. Current service cost – the increase out from the services rendered along the years.
The longer the service of the employee, the higher the current service cost
b. Past service cost (expand in the current period) – existing because of the
amendment.
The cost that the company had incurred in the previous period.
*1 and 2 increase the PBO
c. Net Asset
a. Interest expense (PBO)
b. Interest revenue (FVPA)
= will go to income statement (net income)
2. Remeasurements
a. Asset gain (loss)
i. (Interest revenue) IR>AR (Actual return) (loss)
ii. AR>IR (gain)
*Increase in PBO (loss)
*Decrease in PBO (gain)
b. Liability gain (loss) – based on actuarial assumptions.
c. Effect of asset ceiling
= will go to OCI
3. Contributions
Increase in FVPA
4. Benefits Paid
 Reduce FVPA since we are taking funds away from the employees.
 Reduce PBO