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PAS 19, PAS 20, PAS 23, and PAS 24

EMPLOYEE BENEFITS
Philippine Accounting Standards 19 (PAS 19)
• It is derived from its international counterpart, the IAS 19 Employee Benefits.
• Its main objective is to prescribe the accounting and disclosure requirement of employee benefits. It
requires an entity to recognize the following:
o A liability when an employee has provided service in exchange for employee benefits to be
paid in the future; and
o An expense when the entity consumes the economic benefit arising from service provided by
an employee in exchange for employee benefits.

Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment.
Employee benefits include the following:
a. Short-term employee benefits - These are benefits expected to be settled wholly before 12 months
after the end of the annual reporting period in which the employee renders the related service.
b. Post-employment benefits - These are benefits other than termination and short-term employee
benefits due after the completion of employment. Below are examples of post-employment benefits:
i. retirement benefits (e.g., pensions and lump sum payments on retirement); and
ii. other post-employment benefits (e.g., post-employment life insurance and post-employment
medical care).
c. Other long-term employee benefits - These are benefits other than short-term employee benefits,
post-employment benefits, and termination benefits given by the company to its employees for a
specific purpose.
d. Termination benefits - These are benefits given in exchange for termination of an employee’s
employment as a result of either:
» A company’s decision to terminate the 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.

Short-Term Employee Benefits

These include the following items payable within 12 months after the reporting period:
» wages, salaries, and social security contributions;
» paid annual leave and paid sick leave;
» profit-sharing and bonuses; and
» non-monetary benefits (e.g., medical care, housing, cars, and free or subsidized goods or services for
current employees).
The expense to be recognized should be the undiscounted amount for short-term employee benefits expected
to be settled for employee’s service for a particular accounting period.

The entry to recognize defined contribution plan is as follows:

Expenses (for employee benefits) or Cost of another asset XXX
Liability or cash (if paid) XXX

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Post-Employment Benefits
The following are the two (2) basic types of post-employment benefits:

1. Defined contribution plans - These 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.

The employer shall account defined contribution plan as an expense to profit or loss. When contributions
are not expected to be settled wholly before 12 months after the reporting period, they shall be
discounted.

The entry to recognize defined contribution plan is as follows:

Expenses (for employee benefits) or Cost of another asset XXX
Liability or cash (if paid) XXX

2. Defined benefit plans - These are post-employment benefit plans other than defined contribution plans.
Under this plan, the employer is obliged to pay specified amount of benefits based on the plan established,
and all investment and actuarial risk thus fall on the entity.

Accounting for defined benefit plan is probably one of the most complex issues in IFRS because it involves
incorporating actuarial assumptions into measurement of the obligation and the expenses. Therefore,
actuarial gain and losses arise. Also, obligations are measured on a discounted basis, because they might
be settled many years after the employees render the related services. Refer to the illustration below
(International Financial Reporting Standards, 2018):

Figure 1. IAS 19 Defined Benefit Plan

Source: https://www.ifrsbox.com/ias-19-employee-benefits

To account for defined benefit plans, the employer shall perform the following steps (International Financial
Reporting Standards, 2018):

STEP 1. Determine deficit or surplus Deficit or surplus – Also known as ‘net defined benefit liability or
asset,’ is the difference between the present value of defined
benefit obligation (DBO) and fair value of plan assets at the end of
the reporting period.

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The present value (PV) of a defined benefit obligation is the present

value, without deducting any plan assets, of expected future
payments required to settle the obligation resulting from employee
service in the current and prior periods.

Plan assets comprise the following:

a. assets held by a long-term employee benefit fund; and
b. qualifying insurance policies.

In order to determine the deficit or surplus, the entity must:

1. Estimate the ultimate cost of a benefit. It must use
projected unit credit method to estimate how much the
employees have earned for their work in the current and
prior periods, to attribute the benefit to the periods of
service, and to incorporate estimates about demographic
and financial variables into calculations;
2. Discount the benefit in order to determine the present
value of the defined benefit obligation and the current
service cost; and
3. Deduct the fair value of any plan assets from the present
value of the defined benefit obligation.
STEP 2. Determine the amount in IAS 19 requires companies to present the defined benefit plan as
the statement of financial one (1) single amount in the statement of financial position – the
position net defined benefit liability (asset). This amount is basically deficit
or surplus calculated in Step 1, but adjusted for the effect of asset
ceiling.

Asset ceiling is the present value of any economic benefits available

in the form of refunds from the plan or reductions in the future
contributions to the plan.
STEP 3. Determine the amount in The entity shall present the following defined benefit costs to profit
the profit or loss or loss:
• Current service cost - This is the increase in the present value of
the defined benefit obligation resulting from employee service
in the current period;
• Any past service cost - This is the change in the present value of
the defined benefit obligation for employee’s service in prior
periods, resulting from a plan amendment or a curtailment;
• Any gain or loss on settlement; and
• Net interest on the net defined benefit liability (asset) – This is
the change in the net defined benefit liability (asset) during the
period due to passage of time.
STEP 4. Determine remeasurements The entity shall present the following remeasurements to other
in other comprehensive comprehensive income:
income • Actuarial gains and losses – These are the changes in present
value of the defined benefit obligation resulting from

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experience adjustments or the effects of changes in actuarial

assumptions;
• Return on plan assets, excluding the amounts included in net
interest on the net defined benefit liability (asset); and
• Any change in the effect of the asset ceiling.

Multi-employer plans - These are defined contribution plans (other than state plans) or defined benefit
plans (other than state plans) that:
a. pool the assets contributed by various entities that are not under common control; and
b. use those assets to provide benefits to employees of more than one (1) entity, on the basis that
contribution and benefit levels are determined without regard to the identity of the entity that
employs the employees.

Other Long-Term Benefits

It comprises the following items (if expected to be settled more than 12 months after the end of the period in
which the employee renders the related service):
• long-term paid absences such as long-service or sabbatical leave;
• jubilee or other long-service benefits;
• long-term disability benefits;
• profit-sharing and bonuses; and
• deferred remuneration.

The steps used in measuring defined benefit plan are also used in accounting for other long-term benefits. The
only difference is all items such as service costs are presented in profit or loss and nothing goes to other
comprehensive income.

Termination Benefits
These are benefits which are totally different from the three (3) previously discussed employee benefits. It is
distinct in a way that it is not given in exchange for the service of the employee but as an exchange for the
termination of employment.

The company should recognize the liability and expense for termination benefits at the earlier of:
• when the company can no longer withdraw the offer of those benefits (either the termination plan
exists or employee accepts the offer of benefits); and
• when the company recognizes cost for a restructuring (IAS 37) and involves the payment of
termination benefits.
Recognizing termination benefits depends its exclusive terms:
• If the termination benefits are expected to be settled wholly or before 12 months after the end of the
reporting period, then the requirement for short-term employee benefits should be applied; and
• If the termination benefits are not expected to be settled wholly before 12 months after the end of
the reporting period, then the requirement for other long-term employee benefits is applicable.

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GOVERNMENT GRANTS
Philippine Accounting Standards 20 (PAS 20)
• It is derived from its international counterpart, the IAS 20 Accounting for Government Grant and
Disclosure of Government Assistance.
• Its main objective is to prescribe accounting for and disclosure of government grants (whether
monetary or non-monetary) and government assistance.

Government grants - These are assistance from the government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating activities of the
entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon
them and transactions with government which cannot be distinguished from the normal trading transactions
of the entity.

Two (2) Types of Government Grant

1. Grants related to assets - These are government grants that require an entity qualifying for them to
purchase, construct, or otherwise acquire long-term assets. Subsidiary conditions may also be attached
restricting the type or location of the assets or the periods during which they are to be acquired or held.
2. Grants related to income - These are government grants related for expenditures for past cost incurred
or current/future costs.

Government grants, including non-monetary grants at fair value, shall not be recognized until there is
reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
b. the grants will be received.

Government grants shall be recognized in profit or loss on a systematic basis over the periods in which the
entity recognizes as expenses the related costs for which the grants are intended to compensate.

A government grant that becomes receivable as compensation for expenses or losses already incurred or for
the purpose of giving immediate financial support to the entity with no future related costs shall be recognized
in profit or loss of the period in which it becomes receivable.

Presentation
Government grants related to assets, including non-monetary grants at fair value, shall be presented in the
statement of financial position either by setting up the grant as deferred income or by deducting the grant in
arriving at the carrying amount of the asset.

Grants related to income are presented as part of profit or loss, either separately or under a general heading
such as ‘other income.’ Alternatively, they are deducted in reporting the related expense.

A government grant that becomes repayable shall be accounted for as a change in accounting estimate (see
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors). Repayment of a grant related to
income shall be applied first against any unamortized deferred credit recognized in respect of the grant. To
the extent that the repayment exceeds any such deferred credit, or when no deferred credit exists, the
repayment shall be recognized immediately in profit or loss.

Repayment of a grant related to an asset shall be recognized by increasing the carrying amount of the asset or
reducing the deferred income balance by the amount repayable. The cumulative additional depreciation that

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would have been recognized in profit or loss to date in the absence of the grant shall be recognized
immediately in profit or loss.

Government Assistance
It is an action by the government designed to provide an economic benefit specific to an entity or range of
entities qualifying under certain criteria. Government assistance for the purpose of this standard does not
include benefits provided only indirectly through action affecting general trading conditions, such as the
provision of infrastructure in development areas or the imposition of trading constraints on competitors.

The following matters shall be disclosed:

a. the accounting policy adopted for government grants, including the methods of presentation adopted
in the financial statements;
b. the nature and extent of government grants recognized in the financial statements and an indication
of other forms of government assistance from which the entity has directly benefited; and
c. unfulfilled conditions and other contingencies attaching to government assistance that has been
recognized.

BORROWING COSTS
Philippine Accounting Standards 23 (PAS 23)
• It is derived from its international counterpart, the IAS 23 Borrowing Costs.
• The core principle of this standard is to capitalize borrowing cost if it is directly attributable to
acquisition, construction, or production of a qualifying asset.

Borrowing costs - These are interest and other costs that an entity incurs in connection with the borrowing of
funds.
Qualifying asset - This is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.

Recognition and Measurement

An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction, or
production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing
costs as an expense in the period in which it incurs them.

To the extent that an entity borrows funds specifically for the purpose of obtaining a qualifying asset, the
entity shall determine the amount of borrowing costs eligible for capitalization as the actual borrowing costs
incurred on that borrowing during the period less any investment income on the temporary investment of
those borrowings.

To the extent that an entity borrows funds generally and uses them for the purpose of obtaining a qualifying
asset, the entity shall determine the amount of borrowing costs eligible for capitalization by applying a
capitalization rate to the expenditures on that asset.

Capitalization rate is the weighted average of the borrowing costs applicable to the borrowings of the entity
that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining
a qualifying asset. The amount of borrowing costs that an entity capitalizes during a period shall not exceed
the amount of borrowing costs it incurred during that period. To simplify the concept, refer to the following
illustration.

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Figure 2. Capitalization of borrowing costs

Source: https://www.ifrsbox.com/capitalize-borrowing-costs-ias-23

An entity shall begin capitalizing borrowing costs as part of the cost of a qualifying asset on the
commencement date.

The commencement date for capitalization is the date when the entity first meets all of the following
conditions:
a. It incurs expenditures for the asset;
b. It incurs borrowing costs; and
c. It undertakes activities that are necessary to prepare the asset for its intended use or sale.

An entity shall suspend capitalization of borrowing costs during extended periods in which it suspends active
development of a qualifying asset.

An entity shall cease capitalizing borrowing costs when substantially all the activities necessary to prepare the
qualifying asset for its intended use or sale are complete.

When an entity completes the construction of a qualifying asset in parts and each part is capable of being used
while construction continues on other parts, the entity shall cease capitalizing borrowing costs when it
completes substantially all the activities necessary to prepare that part for its intended use or sale.

Disclosures
An entity shall disclose:
a. the amount of borrowing costs capitalized during the period; and
b. the capitalization rate used to determine the amount of borrowing costs eligible for capitalization.

RELATED PARTY DISCLOSURES

Philippine Accounting Standards 24 (PAS 24)
• It is derived from its international counterpart, the IAS 24 Related Party Disclosures.
• This standard identifies related parties and the required disclosures in regards to those parties,
including the compensation of the key management personnel.

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Definition and Concepts

A related party is a person or entity that is related to the entity that is preparing its financial statements (In
this standard, it is referred to as the ‘reporting entity.’).
a. A person or a close member of that person’s family is related to a reporting entity if that person (Deloitte
Global Services Limited, 2017):
i. has control or joint control of the reporting entity;
ii. has significant influence over the reporting entity; or
iii. is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
b. An entity is related to a reporting entity if any of the following conditions applies (Deloitte Global Services
Limited, 2017):
i. The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary, and fellow subsidiary is related to the others).
ii. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a
member of a group of which the other entity is a member).
iii. Both entities are joint ventures of the same third party.
iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
v. The entity is a post-employment benefit plan for the benefit of employees of either the reporting
entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the
sponsoring employers are also related to the reporting entity.
vi. The entity is controlled or jointly controlled by a person identified in (a).
vii. A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
viii. The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.

A related party transaction is a transfer of resources, services, or obligations between a reporting entity and
a related party, regardless of whether a price is charged (Deloitte Global Services Limited, 2017).

Close members of the family of a person are those family members who may be expected to influence, or be
influenced by, that person in their dealings with the entity and include:
a. that person’s children and spouse or domestic partner;
b. children of that person’s spouse or domestic partner; and
c. dependents of that person or that person’s spouse or domestic partner.

Compensation includes all employee benefits (as defined in IAS 19 Employee Benefits), including employee
benefits to which IFRS 2 Share-based Payment applies. Employee benefits are all forms of consideration paid,
payable, or provided by the entity, or on behalf of the entity, in exchange for services rendered to the entity.
It also includes such consideration paid on behalf of a parent of the entity in respect of the entity.

Key management personnel are those persons having authority and responsibility for planning, directing, and
controlling the activities of the entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity.

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Disclosures
Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there have been
transactions between them. An entity shall disclose the name of its parent and, if different, the ultimate
controlling party. If neither the entity’s parent nor the ultimate controlling party produces consolidated
financial statements available for public use, the name of the next most senior parent that does so shall also
be disclosed.

An entity shall disclose key management personnel compensation in total and for each of the following
categories:
a. short-term employee benefits;
b. post-employment benefits;
c. other long-term benefits;
d. termination benefits; and
e. share-based payment.

If an entity has had related party transactions during the periods covered by the financial statements, it shall
disclose the nature of the related party relationship as well as information about those transactions and
outstanding balances, including commitments, necessary for users to understand the potential effect of the
relationship on the financial statements. At a minimum, disclosures shall include:
a. the amount of the transactions;
b. the amount of outstanding balances, including commitments, and:
i. their terms and conditions, including whether they are secured, and the nature of the
consideration to be provided in settlement; and
ii. details of any guarantees given or received;
c. provisions for doubtful debts related to the amount of outstanding balances; and
d. the expense recognized during the period in respect of bad or doubtful debts due from related parties.

Amounts incurred by the entity for the provision of key management personnel services that are provided by
a separate management entity shall be disclosed.

The disclosures required shall be made separately for each of the following categories:
a. the parent;
b. entities with joint control of, or significant influence over, the entity;
c. subsidiaries;
d. associates;
e. joint ventures in which the entity is a joint venture;
f. key management personnel of the entity or its parent; and
g. other related parties.

Items of a similar nature may be disclosed in aggregate except when separate disclosure is necessary for an
understanding of the effects of related party transactions on the financial statements of the entity.

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References
International Financial Accounting Standards Foundation. (2001, April). IAS 20 accounting for government grants and
disclosure of government assistance. Retrieved on November 5, 2018,from https://www.ifrs.org:
https://www.ifrs.org/issued-standards/list-of-standards/ias-20-accounting-for-government-grants-and-
disclosure-of-government-assistance
International Financial Reporting Standards Foundation. (2001, April). IAS 23 borrowing costs. Retrieved on November 5,
2018 from https://www.ifrs.org: https://www.ifrs.org/issued-standards/list-of-standards/ias-23-borrowing-
costs/
International Financial Reporting Standards Foundation. (2001, April). IAS 24 related party disclosure. Retrieved on
November 5, 2018, from https://www.ifrs.org: https://www.ifrs.org/issued-standards/list-of-standards/ias-24-
related-party-disclosures
International Financial Reporting Standards Foundation. (2013, November). IAS 19 employee benefits. Retrieved on
November 5, 2018, https://www.ifrs.org: http://eifrs.ifrs.org/eifrs/bnstandards/en/IAS19.pdf

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