Employee Benefits

(Intermediate Accounting 2) LECTURE AID 2018 ZEUS VERNON B. MILLAN

Chapter 28 Employee Benefits (Part 2) Related standards: PAS 19 Employee Benefits PAS 26 Accounting and Reporting by Retirement Benefit Plans Learning Competencies

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State the accounting procedures for defined benefit

plans.

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Compute for the net defined benefit liability (asset).

• •

State the components of the defined benefit cost. Describe the accounting for other long-term employee benefits and termination benefits. INTERMEDIATE ACCTG 2 (by: MILLAN)

Accounting for Defined benefit plan

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Accounting for defined benefit plans is complex because actuarial assumptions are required to measure the obligation and the expense and there is a possibility of actuarial gains and losses.

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Obligations are measured on a discounted basis.

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Accounting procedures for defined benefit plans Step #1: Determine the deficit or surplus

(Deficit) Surplus = FVPA – PV of DBO Step #2: Determine the Net defined benefit liability (asset)

 If there is a deficit, the deficit is the Net defined benefit liability.  If there is a surplus, the Net defined benefit asset is the lower of the surplus and the asset ceiling.

The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. INTERMEDIATE ACCTG 2 (by: MILLAN)

Step #3: Determine the defined benefit cost

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Definition of terms 1. Current service cost - is the increase in the present value of a defined benefit obligation resulting from employee service in the current period. 2. Past service cost - is the change in the present value of the

defined benefit obligation resulting from a plan amendment or curtailment. 3. Gain or loss on settlement – the difference between the

present value of the defined benefit obligation and the settlement price. INTERMEDIATE ACCTG 2 (by: MILLAN)

Definition of terms (Continuation) 4. Interest cost on the defined benefit obligation – is the

increase during a period in the present value of a defined benefit obligation which arises because the benefits are one period closer to settlement.

5. 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. INTERMEDIATE ACCTG 2 (by: MILLAN)

Actuarial assumptions •

Actuarial assumptions are an entity’s best estimates of the variables that will determine the ultimate cost of providing post-employment benefits.

1. Demographic assumptions about the future characteristics of employees who

are eligible for benefits. Demographic assumptions deal with matters such as: a.

mortality, both during and after employment

b.

rates of employee turnover, disability and early retirement

c.

the proportion of plan members with dependents who will be eligible for

benefits d.

claim rates under medical plans

2. Financial assumptions, dealing with items such as: a.

the discount rate

b.

future salary and benefit levels

c.

future medical costs, if any, including cost of administering claims and payments

d.

the expected rate of return on plan assets INTERMEDIATE ACCTG 2 (by: MILLAN)

Actuarial assumption – Discount rate •

The rate used to discount post-employment benefit obligations shall be determined by reference to market yields at the end of the reporting period on high quality corporate bonds.

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In countries where there is no deep market in such bonds, the market yields at the end of the reporting period on government bonds shall be used.

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Present value of defined benefit obligation

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Fair value of plan assets

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Plan assets Plan assets comprise:

1.

Assets held by a long-term employee benefit fund – are assets (other than non-transferable financial instruments issued by the reporting entity) that are legally separate from the employer and exist solely to pay employee benefits and are not available to

the employer’s own creditors even in case of bankruptcy.

2.

Qualifying insurance policy – the proceeds of the policy can only be used to pay employee benefits and are not available to the

employer’s own creditors even in case of bankruptcy.

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Other long-term employee benefits

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Other long-term employee benefits are employee benefits (other than post-employment benefits and termination benefits) that are due to be settled beyond 12 months after the end of the period in which the employees render the related service.

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Other long-term employee benefits are accounted for using the procedures applicable for a defined benefit plan. However, all of the components of the net benefit cost are recognized in profit or loss. INTERMEDIATE ACCTG 2 (by: MILLAN)

Termination benefits Termination benefits are employee benefits provided in exchange for the termination of an employee’s employment as a result of either:

1.

an entity’s decision to terminate an employee’s employment before the normal retirement date; or

2.

an employee’s decision to accept an entity’s offer of benefits in exchange for the termination of employment. INTERMEDIATE ACCTG 2 (by: MILLAN)

Measurement Termination benefits are initially and subsequently recognized in accordance with the nature of the employee benefit.

a.

If the termination benefits are payable within 12 months, the entity shall account for the termination benefits similarly with short-term employee benefits.

b.

If the termination benefits are payable beyond 12 months, the entity shall account for the termination benefits similarly with other long-term benefits.

c.

If the termination benefits are, in substance, enhancement to postemployment benefits, the entity shall account for the benefits as post-employment benefits. INTERMEDIATE ACCTG 2 (by: MILLAN)

APPLICATION OF CONCEPTS PROBLEM 2: FOR CLASSROOM DISCUSSION

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 QUESTIONS????  REACTIONS!!!!!

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END INTERMEDIATE ACCTG 2 (by: MILLAN)