Postemployment benefits 1. Defined contribution plan

- "Contribution is definite but benefit is indefinite"

a. contribution - expense in the period incurred

Employee benefit expense xx

Cash xx

b. unpaid contribution - accrued

Employee benefit expense xx

Accrued benefit payable xx

c. excess contribution - prepaid

Prepaid benefit expense xx

2. Defined benefit plan Cash xx

- "The benefit is definite but the contribution is indefinite"

- uses actuarial assumptions

- obligation is discounted:

- Defined benefit cost is computed as follows:

a. Service cost

Current service cost xx

Past service cost xx

Gain or loss on settlement xx xx

b. Net interest

Interest expense (IE) on defined benefit liability Employee benefit

(PBO - beg x discount rate) xx expense

Interest income (II) on plan assets ( to be presented

(FVPA - beg x discount rate) (xx) as part of Profit or

Interest expense on the effect of asset ceiling Loss)

(Effect of asset ceiling - beg x discount rate) xx xx

c. Remeasurements

Actuarial (gain) and loss xx Remeasurement

Actual return on plan assets less interest Gain or Loss

income on plan assets xx (presented as part

Any change in the asset ceiling less interest of Other Compre-

expense on the effect of asset ceiling - beg xx xx hensive income)

Defined benefit cost xx

Note 1

Settlement price xx - deducted from FVPA

PV of benefit obligation settled (xx) - deducted from PBO

(Gain) or loss on settlement xx - part of Employee benefit expense

Note 2

PBO - actual xx Actuarial gain - decrease in PBO

PBO - estimated (xx) Actuarial loss - increase in PBO

Actuarial (gain) and loss xx

Note 3 Computation of Defined benefit obligation

- use of projected unit credit method

- 2 applications:

1. Projected benefit obligation (PBO) - base on future compensation level

2. Accumulated benefit obligation (ABO) - base on current compensation level

- PAS 19R implicitly states that the defined benefit obligation is the PBO

PAS 19R Accounting for Employee Benefits (Postemployment Benefits)

Note 4 Computation of ABO/PBO

Annual benefit (agreed % of salary x no. of years worked) xx

x PV factor of ordinary annuity of 1 for expected life expectancy

of covered employees xx

Present value on the date of retirement xx

x PV factor of 1 for the remaining required years of service

before retirement xx

ABO/PBO xx

Note 5 Prepaid/Accrued benefit cost (P/ABC)

Fair value of plan assets (FVPA) xx

Projected benefit obligation (PBO) (xx)

Prepaid/Accrued benefit cost (P/ABC) xx

If FVPA < PBO = Accrued benefit cost

FVPA > PBO = Prepaid benefit cost

- According to PAS 19R, if FVPA >PBO, there is a SURPLUS that should not exceed

with the asset ceiling

- FVPA and PBO will be in memorandum records only and will not appear in the

financial statements

- P/ABC will be presented as noncurrent asset/liability

Note 5 Effect of asset ceiling (considered if there is SURPLUS),amounts are assumed

FVPA - beg xx 4,500,000

PBO - beg xx (4,000,000)

P/ABC -beg xx 500,000

Asset ceiling xx 300,000

Effect of asset ceiling - beg xx 200,000

FVPA - end xx 6,000,000

PBO - end xx (4,800,000)

P/ABC -end xx 1,200,000

Asset ceiling xx 800,000

Effect of asset ceiling - end xx 400,000

Effect of asset ceiling - end xx 400,000

Effect of asset ceiling - beg xx 200,000

Change in the effect of asset ceiling xx 200,000

IE on the effect of asset ceiling - beg (xx) (20,000)

Remeasurement loss or (gain) xx 180,000

assuming discount rate is 10%

Remeasurement loss if there is increase in the effect of asset ceiling

Remeasurement gain if ther is decrease in the effect of asset ceiling

*asset ceiling is the maximum amount of SURPLUS that can be recognized

in the financial statement as P/ABC

Note 6 Journal entry

Employee benefit expense xx

P/ABC (balancing figure, may be debit or credit) xx

Cash (equal to contribution) xx

Remeasurement gain - OCI xx

(debit to remeasurement loss - OCI if loss)

Reconciliation:

P/ABC - beg xx

Debit or credit adjustment (based on the entry above) xx

P/ABC - end xx

Note 7 Transitional provision

PAS 19R shall be applied restrospectively, meaning accounted for as adjustment

of the beginning balance of retained earnings

Journal entry

Retained earnings xx

P/ABC xx

reverse all the debit components used in the computation of P/ABC under the

old standard

Example

Fair value of plan assets 4,000,000

Unamortized past service cost 400,000

Unrecognized actuarial loss 500,000

Projected benefit obligation (6,000,000)

Prepaid/Accrued benefit cost (1,100,000)

Retained earnings 1/1 900,000

P/ABC 900,000

Note 8 Worksheet approach

EBE PBO FVPA Cash (RG)/RL

Beginning balances xx xx

Current service cost xx xx

Interest expense xx xx

Actual return xx xx

Interest income (xx) (xx)

Remeasurement gain or (loss) xx xx(xx)

Contribution xx (xx)

Benefits paid (xx) (xx)

Settlement price xx (xx)

PV of defined benefit obligation (xx) (xx)

(Gain) or loss on settlement xx xx(xx)

Actuarial gain or loss xx(xx) xx(xx)

Change in the effect of asset ceiling xx

IE on the effect of asset ceiling - beg (xx) xx

Remeasurement gain or loss xx xx(xx)

Total / Ending balances xx xx xx xx xx

EBE - Employee benefit expense

RG/RL - Remeasurement gain/ remeasurement loss