THE CPA BOARD EXAMS OUTLINES

by John Mahatma G. Agripa, CPA

FINANCIAL ACCOUNTING AND REPORTING

POST-EMPLOYMENT

EMPLOYEE
BENEFITS
Based on lectures by Tom Siy, CPA and Christian Aris Valix, CPA
(CPAR)

DEFINITIONS

Employee benefits are all considerations given by the employer for

employee services, which may be short-term (salaries, bonuses,
fringe benefits), compensated advances, and post-employment
benefits
Post-employment benefits includes pensions and life insurance.
Depending on scheme, the benefits may be contributory or
noncontributory (whether the employee will contribute to the fund
of the benefit), funded or non-funded (whether the funds are
maintained by a separate entity or not)
The benefits may take two forms of plan. A defined contribution
plan sets fixed payments into the fund but the retirement benefits
are uncertain. The employee risks any shortfalls to the funds.
Accounting for such fund is undiscounted and is simple
On the other hand, a defined benefit plan sets fixed benefits but
uncertain contributions. The employer has to make due of any
shortfalls in the fund. The liability is accounted with a
projected/defined benefit obligation the present value of all
benefits accrued as of date, based on future/highest salary levels

ACCOUNTING FOR
DEFINED BENEFIT PLAN

The liability for defined benefit plans are determined through the
projected unit credit method/accrued benefit method. The
standard recognized that it makes use of actuaries, but does not
require entities to do so
The liability projected benefit obligation (PBO) is recorded only
in memorandum records, and thus doesnt appear in the financial
records. It has a counterpart account fair value of plan assets
(FVPA) which also does not appear in the records

The year-end balance of the aforementioned accounts can be

calculated as follows:
PBO, beginning
ADD: Current service cost
ADD: Past service cost
ADD: Interest expense on PBO, beginning
DEDUCT: Present value of PBO settled
ADD/DEDUCT: Actuarial gains (deduct) or losses (add)
DEDUCT: Benefits paid
Projected benefit obligation (PBO), ending

xx
xx
xx
xx
xx
xx
xx
xx

FVPA, beginning
ADD: Contributions made during the year
ADD: Interest income/expected return on plan assets
ADD/DEDUCT: Remeasurement gains (deduct) or losses (add)
on plan assets
DEDUCT: Benefits paid
DEDUCT: Settlement price
Fair value of plan assets (FVPA), ending

xx
xx
xx
xx
xx
xx
xx

The difference of PBO and FVPA is called the prepaid/accured

benefit cost, an account that appears on the financial statements.
If FVPA is greater, this non-current account has a debit (prepaid)
balance

EMPLOYEE BENEFIT EXPENSE

Unlike PBO and FVPA, this account appears as a line item in the
statement of comprehensive income, computed as follows:
Current service cost
ADD: Past service cost
ADD/DEDUCT: Settlement gains (deduct) or losses (add)
ADD: Interest expense on PBO, beginning
DEDUCT: Interest income on FVPA, beginning
ADD: Interest expense on the effect of asset ceiling, beginning
Employee benefit expense

xx
xx
xx
xx
xx
xx
xx

Current service cost refers to the increase in the balance of the

projected benefit obligation as accrued from services rendered
during the year. Past service costs relate to benefits for services
already rendered which has since been revised from a change of
a plan. Together with settlement gains or losses (gain:

settlement price less present value of PBO settled), these three

are collectively called the service cost for the period
Both interest income and interest expense on the beginning
balances of PBO and FVPA are calculated using the same
settlement discount rate. This applies to all formulas which
includes the interest income and expense

ACTUARIAL GAINS AND LOSSES

These are the decreases and increases, respectively, of the PBO

due to changes in actuarial assumptions, such as employee life
expectancy, salary rates and age of retirement factors used in
the calculation of the PBO
The changes are recorded in the financial statements as a direct
adjustment to prepaid/accrued benefit cost account since
both PBO and FVPA, as mentioned, does not appear in the
financial statements
They are also recorded as a component of other comprehensive
income as a remeasurement gain or loss

REMEASUREMENT GAINS/LOSSES

Remeasurement gains/losses from defined benefit plans are

recorded as a component of other comprehensive income. Other
than actuarial gains and losses, there are two other items of this
account as follows:
Actuarial losses
DEDUCT: Actuarial gains
ADD: Remeasurement loss on plan asets
DEDUCT: Remeasurement gains on plan assets
ADD: Remeasurement loss on the effect of asset ceiling
(net of interest expense on effect of asset ceiling, beg)
DEDUCT: Remeasurement gains on the effect of asset ceiling
(net of interest expense on effect of asset ceiling, beg)
Remeasurement losses (gains)

xx
xx
xx
xx
xx
xx
xx

 There is a remeasurement gain on plan assets when actual

returns are greater than the interest income on FVPA, beginning.
Actual return can be computed as follows:
FVPA, ending
DEDUCT: FVPA, beginning

xx
xx

Contributions made
DEDUCT: Benefits paid

xx
xx

xx

Actual return on plan assets

xx
xx

THE ASSET CEILING

Asset ceiling is defined as the present value of benefits

available for refunding from the plan, a figure which is derived
from actuarial computation. As a rule, the debit balance of
prepaid/accrued benefit cost (i.e., FVPA > PBO) must not
exceed this ceiling. Any excess is referred to as the effect of
asset ceiling
Since the debit balance must not exceed the asset ceiling, the
amount that can be reported on the financial statement must
not exceed the asset ceiling
When the balance of the effect of asset ceiling increases during
the period, there is remeasurement loss on the effect of asset
ceiling. Remember that this must be net of any interest expense
the effect of asset ceiling, beginning