PAS 19R Accounting for Employee Benefits (Postemployment Benefits)

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
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