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Accounting Updates

Revised PAS 19 (PAS 19R) Employee Benefits Technical Summary

The Revised Philippine Accounting Standards (PAS) 19, Employee Benefits (PAS 19R), has became effective or applicable for financial reports beginning on or after January 1, 2013.  This means that all companies with calendar year ending December 31, 2013 shall fully apply the recognition, measurement, presentation and disclosure requirements of this standard must be complied with.  And yes, even the quarterly reports of listed companies should already reflect the changes of this PAS 19R.

Changes introduced by this standard, especially of defined benefit obligation, ranges from removing the “corridor approach” in accounting for actuarial gains and losses to prescribing additional disclosure on the composition of the plan assets, the sensitivity of the defined benefit obligation, maturity analysis and many more!  We will post separately an analysis of the changes this PAS 19R introduced, for the mean time, check out the technical summary which can be your guide to fully understand the concepts.  You can already tell the changes if ever you are familiar with the old PAS 19.

Below is the technical summary of this standard:

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.

The objective of this Standard is to prescribe the accounting and disclosure for employee benefits. The
Standard requires an entity to recognise:

  1. a liability when an employee has provided service in exchange for employee benefits to be paid in the future; and
  2. an expense when the entity consumes the economic benefit arising from service provided by an employee in exchange for employee benefits.

This Standard shall be applied by an employer in accounting for all employee benefits, except those to which PFRS 2 Share-based Payment applies.

Short-term employee benefits

Short-term employee benefits are employee benefits (other than termination benefits) that are expected to be settled wholly before twelve months after the end of the annual reporting period in which the employees render the related service.

When an employee has rendered service to an entity during an accounting period, the entity shall recognise the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service:

  1. as a liability (accrued expense), after deducting any amount already paid. If the amount already paid exceeds the undiscounted amount of the benefits, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.
  2. as an expense, unless another PFRS requires or permits the inclusion of the benefits in the cost of an asset (see, for example, PAS 2, Inventories and PAS 16, Property, Plant and Equipment).

Post-employment benefits

Post-employment benefits are employee benefits (other than termination benefits and short-term employee benefits) that are payable after the completion of employment. Post-employment benefit plans are formal or  informal arrangements under which an entity provides post-employment benefits for one or more employees.  Post-employment benefit plans are classified as either defined contribution plans or defined benefit plans, depending on the economic substance of the plan as derived from its principal terms and conditions.

Post-employment benefits: defined contribution plans

Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Under defined contribution plans the entity’s legal or constructive obligation is limited to the amount that it agrees to contribute to the fund. Thus, the amount of the post-employment benefits received by the employee is determined by the amount of contributions paid by an entity (and perhaps also the employee) to a post-employment benefit plan or to an insurance company, together with investment returns arising from the contributions. In consequence, actuarial risk (that benefits will be less than expected) and investment risk (that assets invested will be insufficient to meet expected benefits) fall, in substance, on the employee.

When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined contribution plan in exchange for that service:

  1. as a liability (accrued expense), after deducting any contribution already paid. If the contribution already paid exceeds the contribution due for service before the end of the reporting period, an entity shall recognise that excess as an asset (prepaid expense) to the extent that the prepayment will lead to, for example, a reduction in future payments or a cash refund.
  2. as an expense, unless another IFRS requires or permits the inclusion of the contribution in the cost of an asset (see, for example, IAS 2 Inventories and IAS 16 Property, Plant and Equipment).

Post-employment benefits: defined benefit plans

Defined benefit plans are post-employment benefit plans other than defined contribution plans. Under defined benefit plans:

  1. the entity’s obligation is to provide the agreed benefits to current and former employees; and
  2. actuarial risk (that benefits will cost more than expected) and investment risk fall, in substance, on the entity. If actuarial or investment experience are worse than expected, the entity’s obligation may be increased.

Accounting by an entity for defined benefit plans involves the following steps:

(a) determining the deficit or surplus. This involves:

  • using an actuarial technique, the projected unit credit method, to make a reliable estimate of the ultimate cost to the entity of the benefit that employees have earned in return for their service in the current and prior periods. This requires an entity to determine how much benefit is attributable to the current and prior periods and to make estimates (actuarial assumptions) about demographic variables (such as employee turnover and mortality) and financial variables (such as future increases in salaries and medical costs) that will affect the cost of the benefit;
  • discounting that benefit in order to determine the present value of the defined benefit obligation and the current service cost;
  • deducting the fair value of any plan assets from the present value of the defined benefit obligation;

(b) determining the amount of and the net defined benefit liability (asset) as the amount of the deficit or
surplus determined in (a), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling.

(c) determining amounts to be recognised in profit and loss:

  • current service cost.
  • any past service cost and gain or loss on settlement.
  • net interest on the net defined benefit liability (asset).

(d) determining the remeasurements of the net defined benefit liability (asset), to be recognised in other comprehensive income, comprising:

  • actuarial gains and losses;
  • return on plan assets, excluding amounts included in net interest on the net defined benefit liability (asset); and any change in the effect of the asset ceiling, excluding amounts included in net interest on the net defined benefit liability (asset).

Where an entity has more than one defined benefit plan, the entity applies these procedures for each material plan separately.

Other long-term employee benefits

Other long-term employee benefits are all employee benefits other than short-term employee benefits, postemployment benefits and termination benefits.

The Standard requires a simplified method of accounting for other long-term employee benefits. Unlike the accounting required for post-employment benefits, this method does not recognise remeasurements in other comprehensive income.

Termination benefits 

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

  • an entity’s decision to terminate an employee’s employment before the normal retirement date; or
  • an employee’s decision to accept an offer of benefits in exchange for the termination of employment.

An entity shall recognise a liability and expense for termination benefits at the earlier of the following dates:

  • when the entity can no longer withdraw the offer of those benefits; and
  • when the entity recognises costs for a restructuring that is within the scope of PAS 37 and involves the payment of termination benefits.

This extract has been prepared by IFRS Foundation staff and has not been approved by the IASB.  For the requirements reference must be made to International Financial Reporting Standards.

Tell us what you think! 🙂

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About leecpa

Orlando Calundan is a Certified Public Accountant. He has exposures in audit of financial statements of entities in various industries such as real estate, food (quick service restaurants), manufacturing, service organizations and BPOs, automotive, holding/investment companies and more. He also has exposure on internal audit engagements. http://calundan.co

Discussion

13 thoughts on “Revised PAS 19 (PAS 19R) Employee Benefits Technical Summary

  1. Hi Mr. Calundan, I would like to ask you regarding the effect of the PAS 19 revised.
    How will this affect the beginning balance of the RE?As per PAS 19R, the defined benefit obligation only composes now of plan asset and dbo, correct? what will happen to the unamortized, say, actuarial gains in beg. of 2012? And since in beg. of 2012, the unamortized actuarial gain reduced the defined benefit obligation, the said unamortized will now be reclassified to RE, net of tax, correct?, which will increase the obligation as per required by PAS19R. However, if you increase the RE by net of tax, and the defined benefit obligation by gross, where will you charge the tax difference? will this form part of your deferred tax?

    Posted by ryan | January 28, 2014, 5:21 am
    • H Sir Ryan,

      This is a change in accounting policy and per PAS 8, it should be accounted retrospectively. You have to restate the earliest period presented and you have to go back as far as practicable to apply the new standard.

      With regards to the actuarial gain that is existing in the old standard, the new standard says that remeasurements are now to be recognized under other comprehensive income (OCI). Now, will it be practicable on the part of the company to identify the amounts of actuarial gains or losses which were previously subjected to corridor approach amortization which is required by the current standard to be charged to OCI? You need to go back to you previous actuarial reports to dig this further.

      To the extent practicable, you should charge all those remeasurements to OCI or if really not practicable, to RE, and yes, net of tax if your current tax structure this expense is deductible.

      Let’s go back to your scenario where you sai, you have an unamortized actuarial gain. If you recognize this in the OCI, isn’t your liability will decrease rather than increase? But yes, it would affect your DTA, if you recognized any in the prior periods.

      Posted by leecpa | February 2, 2014, 1:24 pm
  2. Hi Sir Ryan,

    Is this PAS19R applicable for SME’s?

    Thank you.

    Posted by KARL | March 28, 2014, 8:56 am
  3. Or rather, Mr Calundan I should say. 🙂

    Posted by KARL | March 28, 2014, 9:00 am
    • Hi Sir Orlando,

      You said that the PAS 19 revised is not applicable to SME’s, what are we going to do with the “Corridor Approach”?
      Thank you.

      Posted by Grace | April 3, 2014, 3:11 pm
      • Yes, it’s not applicable to SMEs as another standard covers SME. You can check section 28 of PFRS for SMEs. There is no corridor approach on accounting for pension in SME. But, unlike in PAS 19R, which you are required to recognize it at OCI, in SMEs, you have the option to recognize all actuarial gains and losses to P&L or OCI. But no corridor.

        Posted by leecpa | April 3, 2014, 3:20 pm
  4. Hi sir,

    I have a question regarding the journal entries on retirement expense. If a certain company does not have any defined benefit plan to its employees and it just uses its cash as payout to separated or retired employees, what would be the journal entries for recording? I am hoping for a positive response. Thank you in advance.

    Posted by kim | October 29, 2014, 9:21 am
  5. Good day Sir,

    I would like to ask if its okay:

    1. to partially recognize employee benefits for SMEs?
    2. not to recognize employee benefits for SMEs at all?

    I am hoping for an immediate response. Thank you and more power!

    Posted by Michael | January 19, 2015, 9:44 am
    • It all depends on how material the information to the users of the financial statements (e.g. Stockholders, regulators).. 🙂

      Posted by leecpa | January 19, 2015, 9:52 am
      • thank you sir.

        you’re of a great help. 🙂

        Posted by Michael | January 20, 2015, 12:50 am
      • I’m sorry sir, but regarding to question #1 about partial recognition of employee benefit for sme?

        is it allowed, I thought we should recognize it in the current reporting period? when the employee are entitled to receive such benefit as a result of service rendered.

        Posted by Michael | January 20, 2015, 12:54 am

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