FAR - Post-Employement Employee Benefits

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 doesn’t appear in the financial records. It has a counterpart account – fair value of plan assets (FVPA) – which also does not appear in the records

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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:

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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

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 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

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