Chapter 17 Intacc Post Employment Benefit

Components of Defined Benefit Cost
PAS 19, paragraph 120, provides that an entity shall recognize the following
components of defined benefit cost.
1. Service cost which comprises:
a) Current service cost

b) Past service cost
c) Any gain or loss on settlement
2. Net interest which comprises:

a) Interest expense on defined benefit obligation
b) Interest expense on plan assets

c) Interest expense on effect of asset ceiling
3.Remeasurements which comprises:
a) Remeasurement of plan assets
b) Remeasurement of projected benefit obligation

c) Remeasurement of the effect of assert ceiling
The service cost and net interest are included in profit or loss as component
of employee benefit expense.
All of the remeasurements are fully recognized though other comprehensive

income and are not recycled or reclassified subsequently to profit or loss.
However, Paragraph 12 provides that remeasurements may be transferred

within equity or reclassified to retained earnings.
Accordingly, the defined benefit cost is partly profit or loss representing
service cost and net interest, and partly other comprehensive income
representing the remeasurements.
The measurement of defined benefit cost is usually made by an actuary, the

mathematical expert best qualified to do the job.
PAS 19R encourages but does not require an entity to involve a qualified
actuary in the measurement of a defined benefit obligation.
Actuarial Valuation Method
• The projected unit credit method, sometimes known as the accrued
benefit method, shall be used in determining the present value of the
defined benefit obligation and the related current service cost.
• This method sees each period of service as giving rise to an additional unit
of benefit entitlement and measures each unit separately to build up the
final obligation.
Illustration- Projected unit credit method
An employer pays lump sum to employees when they retire. The lump sum is
equal to 5% of their salary in the final year of service, for every year of
service. The following data pertain to a certain employee:
a). The employee is expected to work for 5 years (actuarial assumption)

b). The salary is expected to rise by 8% per annum (actuarial assumption)
c). The salary in 2020 is P200,000 per annum
d). The discount rate is 10% per annum

The first issue to be settled is the final salary of the employee in 2024. In this
case, the “future value of 1” factor is necessary.
The future value of 1 at 8% fro 4 years subsequent to 2020 is 1.3605. Thus, the
final salary is P200,000 multiplied by 1.3605 or P272,100.
Therefore, the benefit each year is 5% of 272,100 or 13,605 or a total of P68,025

for 5 years.
2020 20212 2022 2023 2014

Prior years 0 13,605 27,210 40,815 54,420
Current year 13,605 13,605 13,605 13,605 13,605
13,605 27,210 40,815 54,420 68,025
Note that the future benefit builds up to P68,025 over the 5 years, at the end
of which the employee is expected to leave and the benefit is paid.
But the next issue is how much current service cost shall be recognized each
year?
The “current service cost is equal to the present value of the future benefit
using the 10% discount rate. In this case the present value of 1 factor is
necessary.
The mathematical table shows the present value of 1 at 10% as follows:
Period Present value of 1

1 .909
2 .826
3 .751
4 .683
The annual benefit is discounted from the end of 2024, which is the year of
retirement.
Thus, the 2020 benefit is 4 years away from 2024 and discounted for 4
periods, the 2021 benefit is 3 years away from 2024 and discounted for 3
periods, and so on.
Present Value of the Future Benefits

(a) (b) (axb)
Benefit PV Factor Present Value
2020 13,605 .683 9,292

2021 13,605 .751 10,217
2022 13,605 .826 11,238
2023 13,605 .909 12,367
2024 13,605 1.00 13,605
68,025 56,719
Projected Benefit Obligation
The projected benefit obligation at the end of each year is determined as follows:
Date Current Interest Present value

service cost expense
Dec. 31, 2020 9,292 - 9,292
Dec. 31, 2021 10,217 930 20,439
Dec. 31, 2023 11,238 2,044 33,721
Dec. 31, 2023 12,367 3,372 49,460
Dec. 31, 2024 13,605 4,960 68,605
Accordingly, the total employee benefit expense to be reported each year is
as follows:
Current service Interest expense Total

cost
2020 9,292 - 9,292
2021 10,217 930 11,147
2022 11,238 2,044 13,282
2023 12,367 3,372 15,739
2024 13,605 4,960 18,565
56,719 11,306 68,025
Current Service Cost
Current service cost is the increase in the present value of the defined benefit
obligation resulting from employee service in the current period.
Otherwise stated, current service cost is the cost to an entity under a defined
benefit plan for service rendered by employees in the current year.
This component of the benefit expense understandably increases expense

and defined benefit obligation.
Net Interest
Net interest on defined benefit liability or asset is the change in the defined
benefit obligation, plan assets and effect of asset ceiling as a result of
passage of time.
The net interest can be viewed as comprising three elements, namely:

a). Interest expense on defined benefit liability
This is computed by multiplying the defined benefit obligation at the
beginning of the reporting period by the discount rate.
b). Interest income
This is computed by multiplying the fair value of plan assets at the
beginning of the reporting period by the same discount rate.
c). Interest expense on effect of asset ceiling
This is computed by multiplying the effect of the asset ceiling at the
beginning of the reporting period by the same discount rate.
Illustration
At the beginning of the current year, the records showed the following:
Fair value of plan asset 4,000,000

Defined benefit obligation 5,000,000
Discount rate 12%
Expected return on plan assets 10%
The net interest is determined as follows:
Interest expense on defined benefit

obligation 600,000
(12% x 5,000,000)
Interest income on plan assets 480,000
(12% x 4,000,00)
Net interest expense 120.000
Note that the expected return of 10% on plan assets is ignored completely.
The discount rate of 12% is used in computing both interest expense and
interest income.
The net interest expense of P120,000 is included in the computation of total

employee benefit expense.
The interest expense of P600,000 is included in the computation of the

defined benefit obligation at year-end in the memorandum record of the
trustee.
the interest income of P480,000 is included in the computation of the fair

value of plan assets at year end in the memorandum record of the
trustee.
17-3
2020
Dec. 31 Employee benefit expense 350,000
Prepaid benefit expense 50,000
Cash 400,000
17-11 answer D
2020 (300,000 x .826) 247,800
2021 (300,000 x .909) 272,700
2022 (300,000 x 1.000) 300,000
Total current service cost 820,500
Date Current service cost Interest cost Present value
Dec. 31, 2020 247,800 - 247,800
Dec. 31, 2021 272,700 24,780 545,280
Dec. 31, 2022 300,000 54,720 900,000

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Components of Defined Benefit Cost

a) Current service cost

c) Any gain or loss on settlement

2. Net interest which comprises:

b) Interest expense on plan assets

b) Remeasurement of projected benefit obligation

All of the remeasurements are fully recognized though other comprehensive

However, Paragraph 12 provides that remeasurements may be transferred

The measurement of defined benefit cost is usually made by an actuary, the

a). The employee is expected to work for 5 years (actuarial assumption)

c). The salary in 2020 is P200,000 per annum

d). The discount rate is 10% per annum

Therefore, the benefit each year is 5% of 272,100 or 13,605 or a total of P68,025

2020 20212 2022 2023 2014

The mathematical table shows the present value of 1 at 10% as follows:

Period Present value of 1

Present Value of the Future Benefits

2020 13,605 .683 9,292

Date Current Interest Present value

Current service Interest expense Total

This component of the benefit expense understandably increases expense

The net interest can be viewed as comprising three elements, namely:

Fair value of plan asset 4,000,000

The net interest is determined as follows:

Interest expense on defined benefit

The net interest expense of P120,000 is included in the computation of total

The interest expense of P600,000 is included in the computation of the

the interest income of P480,000 is included in the computation of the fair

2021 (300,000 x .909) 272,700

2022 (300,000 x 1.000) 300,000

Total current service cost 820,500

Date Current service cost Interest cost Present value

Dec. 31, 2020 247,800 - 247,800

Dec. 31, 2021 272,700 24,780 545,280

Dec. 31, 2022 300,000 54,720 900,000

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