UNIT 5

AUDIT OF EMPLOYEE BENEFITS

Estimated Time: 3.0 HOURS

Discussion Questions:
1. Define the following terms:
a. Short-term employee benefits
b. Post-employment benefits
c. Other long term employee benefits
d. Termination benefits
2. Discuss the recognition and measurement of the items in no. 1.
3. Discuss the disclosure requirements of the items in no. 1.

Problem 5-1: Vacation Leaves

An enterprise has 100 employees, who are each entitled to 2 days of paid vacation
leave for each month. Unused vacation leave may be carried forward for one
calendar year. Vacation leave is taken first out of any balance brought forward from
previous year and then out of the current years entitlement (a FIFO basis).
i.
ii.
iii.
iv.
v.

At December 31, 2015, the average unused entitlement is 10 days per

employee.
At December 31, 2015, the enterprise appropriately reported a liability of
P130,000.
Fringe benefits represent 30% of total wages.
On January 5, 2016, the wage rate increased by 2%.
During the year 2016, employees availed an average 23 days of entitlement.

Required:
1. How much should be recognized a liability as of December 31, 2016?
2. How much should be recognized as expense for 2016?
Problem 5-2: Defined Benefit Plan
On January 1, 2016, an entity has the following balances in its records with respect to
a defined benefit plan:
Fair value of plan assets
P5,000,000
Projected benefit obligation
4,000,000
During the year, the accountant determined that current service cost is P1,000,000
and that past service cost (with a remaining vesting period of five years) is P550,000.
Appropriate settlement rate to be applied is 10%. Expected rate of return on assets is
11%. Actual return on the plan assets amounted to P600,000. The entity funds
P1,500,000 into the plan at the end of the year. No benefits were paid during the year.

Required:
1. How much should be reported as benefits expense for the year?
2. How much is the remeasurement gain (loss) for the year?
3. How much is the fair value of plan assets as of December 31, 2016?
4. How much is the projected benefits obligation as of December 31, 2016?
5. How much should be presented in the December 31, 2016 statement of financial
position?
6. Assuming an asset ceiling of P300,000 on January 1, 2016 and an asset ceiling
of P500,000 on December 31, 2016, re-compute requirements 1 to 5.

Auditing Practice II
Workbook

Third Term, AY 2015-2016

Page 1-1

Problem 5-3: Defined Benefit Plan

Chay Sir, Inc. (CSI) offers a non-contributory defined benefit plan to its 700
employees. Following are the relevant information:
Fair value of plan assets
Projected benefits obligation
Benefits paid to retirees
Contributions

2015
P5,264,500
5,585,500

2016
P1,500,000
1,200,000

The settlement rate is 8% and 9% on January 1, 2015 and January 1, 2016,

respectively and actual return on plan assets is 10% and 11% for 2015 and 2016,
respectively. Current service cost for 2016 was P410,000. On January 1, 2016, CSI
changed its plan to grant retroactive credit for prior year services rendered by its
employees prior to the amendment. This amendment increased unrecognized past
service cost by P395,000 at that date. Actuarial loss on PBO amounted to P11,900 in
2016.

Required:
1. How much is the benefits expense for 2016?
2. How much is the remeasurement gain (loss) for 2016?
3. How much is the projected benefit obligation as of December 31, 2016?
4. How much is the fair value of plan assets as of December 31, 2016?
5. How much should be reported in the December 31, 2016 statement of financial
position?

Problem 5-4: Defined Benefit Plan

The benefit pension plan of Ray Sir, Inc. (RSI) is as follows:
Projected benefit obligation, January 1, 2016
Projected benefit obligation, December 31, 2016
Fair value of plan assets, January 1, 2016
Fair value of plan assets, December 31, 2016
Benefits paid to retirees during 2016
Past service cost
Current service cost
Contributions to the plan during 2016

P1,020,000
1,175,200
890,000
1,003,100
77,000
50,000
70,000
110,000

Required:
1. What is the settlement rate during 2016?
2. What is the actual rate of return on plan asset?

Auditing Practice II
Workbook

Third Term, AY 2015-2016

Page 1-2

Problem 5-5: Defined Benefit Plan

You gathered the following information related to Luna Lovegood Companys defined
benefit plan for the year-ended December 31, 2016:
i. Current service cost of providing benefits for the year ended 2016:
P68,000,000.
ii. Average remaining working life of employees: 10 years.
iii. Benefits paid to retired employees for the year: P48,300,000.
iv. Contributions paid to the fund: P34,500,000.
v. Present value of obligation to provide benefits: P4,560,000,000 at January 1,
2016 and P4,680,200 at December 31, 2016.
vi. Fair value of plan assets: P4,200,000,000 at January 1, 2016 and P4,480,200
at December 31, 2016.
vii. Net cumulative unrecognized losses on PBO at January 1, 2016:
P483,000,000.
viii. Past service cost: P223 million (inclusive of P100 million unamortized balance
on January 1, 2016).
ix. Actual return on plan assets for the year: P294,000,000.
x. Discount rates and expected rates of return on plan assets:

Discount rate
Expected rate of return on plan assets

1/1/2016
5%
7%

1/1/2017
6%
8%

Required: Based on the above and the result of your audit, answer the following:
1. How much is to be recognized on the statement of financial position as of January
1, 2016?
2. How much is the actuarial gain to be recognized in the statement of profit or loss
for the year ended December 31, 2016?
3. How much is the net expense to be recognized on the statement of profit or loss
for the year ended December 31, 2016?
4. How much is the unrecognized actuarial gain as of December 31, 2016?
5. How much is the remeasurement component to be recognized in OCI in 2016?
6. How much is to be recognized on the statement of financial position as of
December 31, 2016?

Auditing Practice II
Workbook

Third Term, AY 2015-2016

Page 1-3