POST-EMPLOYMENT BENEFITS

Pyet Deenes dle empioyee

payable
benerits, other than termination benefits and short-term
employment
employee

Examples of post-employmnent beneits are:

ensionsand lump sum payments on retirement
Postemployment life insurance
Postemployment medical care

NOTE: Post-employment plans can be formal or informal. A plan is FORMAL if it was established as part of
the remuneration package for the employees. A plan is INFORMAL if it is evidenced only by the entity's
practice to pay postemployment benefits.

CATEGORIES OF POST-EMPLOYMENT PLANS

MAJOR CATEGORIES
DEFINED CONTRIBUTION PLAN DEFINED BENEFIT PLAN
The employer commits make fixed to The employer commits to pay a definite
contributions a fund. The amount of
to amount of retirement benefits. Such amount is
benefits that an employee will receive independent of any fund balance.
dependent on the fund balance.
The risk that the fund may be insufficient to
The risk that the fund may be insufficient to pay for the promised benefits rests with the
meet the expected benefits rests with the employer.
employee.
OTHER CATEGORIES
CONTRIBUTORY PLAN NON-CONTRIBUTORYPLAN
Both the employer and employee contribute to Only the employer contributes to the
the retirement fund (e.g. SSS). retirement fund of the employee
FUNDED PLAN UNFUNDED PLAN
The fund is being isolated from the control of The fund being managed by the employer.
is

tne employer and sucn IS transterred to a

In addition, the employer pays directly the
func retiring employees.
and pay directly the retiring emplovees,
MULTI-EMPLOYER PLANS INSURED BENEFITS

Page 2 of 14
FAR 25 EMPLOYEEBENEFITS
Under a multi-employer plan, yarious An employer may pay insurance premiums to
unrelated employers contribute to a common fund a post-employment plan. It is classified
fund that is managed by a trustee to provide either as defined contribution or defined

post-employment benerits to the employees of benetit plan. It is classified as derined benet

either defined contribution or defined benefit either pay directly the benefits to the
plan. employee or make good any deficiency if the
insurer fails to pay in full the benefits.

ACCOUNTING FOR DEFINED cONTRIBUTION PLANS

Accounting for a defined contribution plan is straightforward because the obligation of the entity is

determined by the amount

contribuEOCoNTRIBUTION =EXPENSE
Any unpaid contribution at the end of the period shall be recognized as accrued expense.
Any excess contribution shall be recognized as prepaid expense but only to the extent that the
repayment will lead to a reduction in future payments or a cash refund.
The amount of contribution is measured at an UNDISCOUNTED amount unless it is due beyond 12
months.

ACCOUNTING FOR DEFINED BENEFIT PLANS

for a efined contribution nore complex since there is discounting and actuarial
assumntione
REQUIRED CONTRIBUTION # EXPENSE
The following steps shall be followed
accounting for defined benefit plan
in

Eti
STEP 1: Determine

STEP 4: Determine
the Defined Benefit Obligation (DBO)

the Dafcit or Surnlus

Assets

the Net Defined Liability or Asset

STEP 5: Determine the Defined Benefit Cost

STEP 1: Determine the Defined Benefit Obligation(DBO)

DBO is the present value of expected future payments required to settle the obligation resulting from
employee service in the current and past periods.
This is determined using an actuarial valuation called PROJECTED UNIT CREDIT MEHOD. This method
sees each period of service as giving rise to an additional unit of benefit entitlement and measures each
unit separately to build up the final obligation.

How to compute the ending balance of DBO? See the following T-account to answer the question.

Defined Benefit Obligation (PV)

Actuarial Gain Xx Beginning Balance XX
Benefits Paid XxCurrent Service Cost X>

c.A, of DBO settled in advance XxPast ServiceCost

X>
ActarialLoe
Ending Balance XX
NOTES:
Current service cost is the increase in the present value of the defined benefit obligation resulting

from employee service in the current period. An employee's retirement benefit expense increases as
he or she renders service.

Past service cost is the change in the present value of defined benefit obligation for employeeservice
in prior periods resulting from a plan amendment or curtailment.
Plan amendment includes introduction of defined benefit plan or changes to an existing defined
benefit plan.

Plan curtailment is a significant reduction in the number of employees covered by the defined benefit

All past service costs, whether vested or unvested, shall be recognized as expense immediately.

Interest expense is computed by multiplying the defined benefit obligation at the beginning of the
reporting period by the "discount rate". The discount rate is based on HIGH QUALITY CORPORATE
BONDS or ON GOVERNMENT BONDS in the absence thereof.
Actuarial gains and losses 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 entity's best estimate of the variables that would determine the ultimate
cost of providing postemployment benefits. Actuarial assumptions shall be unbiased and mutually
compatible.
FAR 25 EMPLOYEEBENEFITS

Actuarial assumptions comprise of demographic assumptions and financial assumptions.

Demographic assumptions deal with mortality, rate of employee turnover, disability, early retirement,
proportion of plan members eligible for benefits, and claim rates under medical plans.

Financialassumptions deal with discount rate, future salary and benefit levels, future medical costs
and taxes payable by the plan.

If the actualbenefit obligation is higher than the estimated amount, there is an actuarial loss. This
means that the projected benefit obligation has increased and the increase is recognized as an
actuarial loss.

If the actual benefit obligation is lower than the estimated amount,there is an actuarial gain. This
means that the projected benefit obligation has decreased and the decrease is recognized as an
actuarial gain.

Benefits paid results from the settlement of the plan. A settlement is a transaction that eliminates all
further legal or constructive obligations for part or all of the benefits provided under a defined benefit
plan. This is referred to as "routine settlement".

An entity shall recognize gain or loss on the settlement of a defined benefit plan when the settlement
occurs. This happens if the employee opted an early retirement.

STEP 2: Determine the Fair Value Plan Assets

of
FVPA represents the balance of any fund set aside for the payment of the retirement benefits.

Plan Assets comprise:

(1) Assets held by a long-term employee benefits fund
entity, the fund itself, that is legally separate from the reporting entity.
(2) Qualifying insurance policies
A qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of

the reporting entity

NOTE: Both are not available to the employer's creditors even in bankruptcy and cannot be returned to the
employer unless the amount returned represents surplus assets.

How to compute the ending balanceof FVPA? See the following T-account to answerthe question.
Fair Value of Plan Assets

Beginning Balance xxBenefits paid

Actual Return Xx Settlement price PBO settled in advance XX
of
Contributions made KX

Ending Balance
NOTESE
Actual return comprises interest income and remeasurementgain. Interest income is computed by
multiplying the fair value of plan assets at the beginning of the reporting period by the same
discount rate used for interest expense.

STEP 3: Determine the Deficit or Surplus

fFVPA < DBO = Deficit

If FVPA > DBO =Surplus

STEP 4: Determine
the Net Defined Liability or Asset
Net Defined Benefit Liability (Accrued Pension) Deficit =
Net Defined Benefit Asset (Prepaid Pension) =
The lower of Surplus and Asset Ceiling
NOTE: Ass in the form of refunds from the
nlan reductiePaue o dny economic benerits available
or
DBO and FVPA are items kept only in the memorandum records or the sub-entity. The "prepaid/accrued
benef the item appears in itatemen positior the employer entity.

STEP 5: Determine the Defined Benefit Cost

FAR 25 EMPLOYEE BENEFITS

DEFINED BENEFIT coST

SERVICE COST NET INTEREST REMEASUREMENTS

Curent Service Cost Interest expense Remeassurement on FVPA )

Past Service Cost XX Interest income (x) Reaeasrement on PBO

Lossor (gain) on laterest on eflect ot
Change in effect of asset
early settlement
Total Total Totnl x3)

Prescuted in PROFII OR LOSS Presenited in OCT orOCI.

Disclosures - defined contribution plan

e for the defined contribution plan
The contribution to defined contribution plan for key management personnel as required by PAS 24 on
related party disclosures

Disclosures- defined benefit plan

a. Characteristics of the defined benefit plan and risks associated with the plan, forexample, the nature
of benefits provided and any minimum funding.
b Reconciliations forthe fair value of plan assets, the present value of the defined benefit obligation and

C. Censrate shouing of eurrent service cost, past service cost, interest

or income and
expense
remeasurements the reconciliations.
in
d. Disaggregation of the fair value of plan assets into classes that distinguish the nature and risks of
assets, subdividing the plan assets into those that have a quoted market price and those that do not
nave a quoted ianifcant actuarial assumption showing the effect on the defined
e.
benefit obligation for any change in the relevant actuarial assumption.
Description of any funding arrangement and funding policy
q Expected contribution to the plan for the next annual reporting period.
h Maturity profile of the defined benefit obligation.