 Hello, and welcome to the session. This is Professor Farhad and the session we're going to be looking at IAS 19, which cover employee benefits. This topic is covered an international accounting course, the CPA exam far section as well as the ACCA exam. If you haven't connected with me only then please connect with me. I would like to know my viewers and that's you. YouTube is where you would need to subscribe. I have 1500 plus accounting, auditing and tax lectures. If you haven't subscribed to my YouTube, please subscribe. If you like my recordings, please like them, click on the like button, share them, put them in the playlist. If you're benefiting, if you're listening to me now, it means you're benefiting from my lecture, share the wealth, let other people benefit as well, share the recording. This is my Instagram account. Please follow me. I'm trying to grow my Instagram. This is my Facebook account and this is my website. On my website, there's a donation button if you'd like to support the channel by all means you can donate. Also on my website I do have constantly offers and right now Becker CPA, the gold standard in CPA preparation is giving $1,000 off of the Becker bundle, which will have unlimited access to all four parts of the exam and you will have it as long as you need it. Although you may not be studying now for the exam, it's no harm to buy it. Have it with you as a supplemental material for your college education. Let's talk about IAS employee benefits. IAS employee benefit is the single standard that cover all employee compensation and benefit all of them other than other than shared based compensation. We're going to look at shared based compensation such as employee stock purchase plan, employee stock option plan and a separate recording which are covered under IFRS 2. So in this session, we only focus on the employee benefit. We don't look at shared based compensation. So IAS 19 provide guidance with respect to four type of employee benefits and those are sure to employee benefit such as compensated absences and bonuses, post-employment benefits and this is what we're going to be spending most of the time pension medical benefits and other post-employment benefit, other long-term employment benefits such as the third compensation and disability benefit and termination benefit which includes severance pay, early retirement, if you are let go. Now for this recording, we're going to be spending most of the time under post-employment benefit because once we explain post-employment benefit, it's the most involved in the sense it explain other benefits. Okay, so that's why we're going to be spending more time on item number two which is post-employment benefits specifically pension because once you understand pension, you'll be able to understand medical benefit. You'll be able to understand other long-term employee benefit. You'll be able to understand the concept of termination benefit. So let's start again. If you listen to my recording, once I have a list one through four, I'm going to go over the list each one of them separately starting one of four. One of four is short-term employee benefit. This topic in a sense it's easy basically the employer recognizes an expense and a liability at the time the employee provide the service. Simply put, if you earn your vacation time, as you earn your vacation time, we would record your vacation time. As you earn your bonus, we would record your bonus. So any benefit you are earning at the company, we would recognize it as it goes, as it goes along. And this is basically based on the matching principle. If you have earned it, it's an expense for the company. So the amount recognized is undiscounted because usually the amount is for this period. So it's not a long period. We're not discounting anything. If you earned it this month, we don't discount it. We just record the expense now at gross amount. Compensated absences. Compensated absences for short-term compensated absences such as sick pay or vacation pay. An amount is accrued when services are provided only if the compensated absence accumulate over time and can be carried to future period. What does that mean? Let me give you an example real quick. If you work for a company and your company would say for every month, every month you work, we'll give you one day of vacation. Just let's assume that's the case. So those are all month. So as soon as you work month one, the first month, let's assume you earn per day $300 per day. So once you have worked that full month, what should happen? The company should debit, assuming what? Assuming that they have to pay you that vacation day. They have to debit vacation expense 300 and they have to credit some sort of a liability. I'm going to call it vacation liability for illustration purposes, but it doesn't have to be vacation liability. It could be just salary liability 300. So simply put, as you earn your vacation after you have worked that month, you have earned one day of vacation, you're getting paid $300. We debit an expense, credit a liability. That's assuming that your vacation time is accumulated and vested. It means they have to pay you whether you take them or not. And they can be credit for future period. In case the vacation pay is not accumulating absences and expense and liability are recognized when the absence occur. Let's assume they don't accumulate. Simply put, once you take vacation, it would record that expense as a vacation. Okay, that's for compensation, compensated absences. Profit sharing and bonus plan. What are profit sharing and bonus plan? What happened as the company makes profit, they're going to pay their employees maybe 10%, 5% of the profit. So this is what profit or bonus plan. An expense and a liability is accrued only if the following conditions are met. Simply put, once those conditions are met, we're going to debit, let's call it bonus expense. We're going to debit bonus expense for some amount and credit bonus liability for that amount. When do we do so? When the company has either present legal, legal means by contract or constructive. They have promised their employee they're going to pay them a bonus to make such payment as a result of past event. Past event means based on the profit based on that physical year. The amount can be reliably estimated. They may not know exactly what their profit is, but they can guess it. Even if a company has no legal obligation to pay the bonus, if the company have a constructive obligation, if they've been paying bonuses every year, well, guess what? They're going to be paying bonuses to do so. So it has no realistic alternative but to pay the bonus. So once those conditions are met, the company will have to record the bonus. So those are for short term employee benefit, pretty straightforward. We debit an expense and we credit a liability. Once we have an expense or once we have an accrued liability, whether you want to call it an expense or an accrued liability, it doesn't matter because you're going to always debit an expense and credit a liability, whether it's for vacation liability, whether it's for vacation or bonus or any other or sick pay or whatever the expense is. It's an expense and a liability. Whether you want to call it an accrued expense or an accrued liability, that's your call. I'll keep it up to you. Two or four post employment benefits. That's the second topic that that's the major topic we're going to be spending most of the time here is I and this is where IAS 19 cover this topic. This topic just FYI before we start, if you want to really learn about pension in detail like two hours worth of pension, go to my intermediate accounting chapter. Oh God, I'm gonna have to guess chapter 20, either chapter 20 or chapter 21. I don't remember working from memory, but I have a full pension, full pension explanation. Okay, let's go ahead and start with pension. The first thing we need to know about pension is to differentiate between two post employment benefits. Sorry, I didn't mean to say pension. I meant to say two post employment benefit. One of them is pension and the other one is not. And those are the fine contribution plan and the fine benefit plan. The fine benefit plan is the traditional pension. The fine contribution plan is the 401k. So the first thing you want to understand is the difference between a pension and a 401k 401k is called contribution plan. The fine benefit plan is called the pension plan. The difference between them is who carries the risk? Who carries the risk? Well, and the contribution plan, the employee carries the risk of the investment and I'll explain this in a moment and a defined benefit plan, the employer, your company carries the risk carries the risk of the investment. Okay, so the company's responsibility under the contribution plan stops very early. So let's start with a defined contribution plan, get it out of the way. Okay, so what is a defined contribution plan? It's simple and straightforward. An employer accrues an expense and a liability at this at the time the employer renders the service for the amount the employer is obligated to contribute for the plan. So if you work for the company, they might say every year, we're going to give you we're going to pay into an account. I don't know $10,000 just so we're going to put $10,000 on your B. Let's make it $12,000. Just four. Okay, just make it divisible by 12. So what happened is this every month, every month that you work, the company will debit, I'm just going to call it 401k expense, although you can call it many different things, you can debit 401k expense $1,000 credit 401k, assuming you haven't paid it yet, liability $1,000. Then when you pay the liability, you debit 401k liability $1,000. And you credit cash $1,000 when you actually pay it. So this is this is it. This is the defined contribution plan for a particular company for a particular company, they have to pay $1,000 per month. And this is how this is how it goes. We're done. That's it. Then when we pay the liability, we reduce the liability. And that's the company's responsibility. Now, the responsibility they gave you $12,000. And they say you do whatever you want with it. It's not you do whatever you want with it. They give you options, investment options. And you choose the investment options that you would like to based on your risk tolerance based on your plan based on other things. And that's that. That's that. Okay. Now, now we need to talk about the fine benefit plan. And when we talk about the fine benefit plan, this is where we use the term. This is where we use the term pension. So when you talk about the fine pension plan, we're talking about the traditional pension. Maybe you heard the term pension before. This is what we're talking about here. Okay, so accounting for the fine pension plan and other defined post benefit employment. So notice it's pension plan and other defined post benefit employment because they kind of they're the same. They're basically the same. And they're very similar to us gap. In other words, if you want to learn more about them, if you want to learn more about them, I if you want to learn more about them, go to my intermediate accounting, go to my intermediate accounting. Okay, but we're going to cover as much as possible here. So two major issues and accounting for the fine pension. So we always have to worry about two things when we're dealing with the fine benefit plan, as well as a long term employee benefit, two things. Here are the two things. First, we have to know the net benefit liability or asset to be reported on the balance sheet. So we have to report a number on the balance sheet. That number could be an asset or that number could be a liability. When when is it an asset? When is it a liability? We'll talk about this shortly. That's one topic we have to worry about. The second topic is we have to determine the defined benefit cost I should have put an expense. We have to determine the expense to be recognized an income for that period, or sometimes it's some of it recognize another comprehensive income. So we have to know we have to know how much we're going to be recording as an expense, either on the income statement, or how much we're going to be recording another comprehensive income. So we're going to be breaking those two components in a moment, starting with net benefit, either liability or an asset. Well, how do we determine whether it's a benefit, it's a liability or an asset. The amount recognize on the employer balance sheet is calculated as follow what we're going to take. Okay, there we go. Present value of something we call the fine benefit obligation. Under us gap, we call it PBO, the projected benefit obligation same concept exact same concept. And it's it is, we can all call it PV PBO. Okay, here we call it PV DBO. Okay, so okay, so us gap, they call it PV projected benefit PBO. So notice IFRS use the US gap us P it doesn't matter same concept. So we're going to be computing the present value of the of the defined benefit obligation. How are we going to come up with this? I'm going to explain this in a moment. So this is how much we are responsible for this is how much we are responsible for. So what is the present value of the defined benefit obligation? Maybe I should explain this what does this topic represent this number whatever this number is, let's assume it's going to make up a number $10 million. Just I'm just made I just made up this number and just to explain it to you $10 million mean if our employees retire today, and the company closes this moment, and the company closes, we are responsible for paying $10 million based on the projected based on the defined benefit country, defined benefit obligation. This is what we are responsible for. Then we're going to compare this number to the fair value of plant asset. Now this is what we are responsible for. This is the liability, right? This is what we are responsible for. Now obviously, the company is going to put some money away in an account. Okay, with an investment company with a bank company, it doesn't matter someplace, that's going to be called the fair value of plant asset. So what they do is, well, the company is responsible for paying this obligation. So they're going to be putting money away in an account. Just call it an account somewhere with an investment company. And let's assume in that account, right now, they only have $8 million, the fair value of the money invested there and stocks and bond and real estate, the value of that account is only $8 million. Well, we are responsible for 10. We only put away $8 million. Guess what? We have a liability net defined benefit liability. Why? Because we have less assets than our obligation. If we change this example, and we said in the account, we have $12 million. Then guess what? Then we have a net benefit asset. Why? Because we have more assets to cover our liability. And this is the first thing is where does the net benefit, net benefit liability or asset comes from? It's the difference. What you're responsible to pay and how much money did you put away? If you put more money than what you are responsible for, it means the fair, it doesn't only have to be money, the fair value of the plant asset, I say money because it's easy for you to understand $12 million. That $12 million could be stocks, bond and the value could go up and down. Okay, real estate anything. Okay, it's assets. It's assets. Okay. Now we need to talk a little bit more about the present value of the defined benefit obligation. So how do we come up with this $10 million? Okay, let's talk a little bit more about that. The PV DBO is based on assumptions related to variables, many variables. This is some of the variables employee turnover, life expectancy and future salary level. What does that mean? Good news as accountant, we don't have to worry about how we come up with the liability. The liability usually is given to us. This is what the actuarial people compute for us. So when you work for a company, okay, so you work for the company for, you know, let's assume those are, you know, 20 years, you work for the company for 20 years. Okay, then the company after 20 years, you are going to retire. Then the company will have to say, I'm going to have to pay you future for future years. Well, guess what? Do they know how long you're going to live? What's your life expectancy? You may live five years, you may live 15 years, you may live 20 years. Okay, so one thing is the defined benefit, that the present value of the defined benefit obligation is based on your life expectancy, which is we don't know. Okay, also you are working now and you are making $80,000 a year. In the future, you're going to be making maybe $130,000 a year. Well, that's also going to influence how much they're going to pay you when you retire. So it all depends on your future life expectancy, future salary and employee turnover. Some employees, they might work for three years and they might quit. Well, if they quit, they may not, we may put some money away for them. Then when they quit, if it doesn't invest, then they lose their money. In some employees, they work 10 years, then they leave. We thought they're going to work for 20 years, they only work 10 and a half, we have to pay them for 10 years. Simply put, there are many factors that go into the present value, the fine benefit obligation. Again, the good news is that number will be given to you usually. Okay, it will be given to you. Then what we do, we discount this, it's called present value. Obviously, we discount this benefit, okay, based on some yield, based on some return, usually high quality corporate bond or whatever they use, it doesn't matter. So we have to discount all these obligations to the present. That's why we call the present value of the fine benefit obligation. So you're giving some number in the future that you're responsible for, discounted at the present value, and that's your current liability. Okay, when PVD, DVO, when you're defined benefit obligation is greater than your future, than your fair value, not future value, fair value, plan asset, you have a deficit, which means you have a liability. I showed you this earlier, you have 10 million in liabilities, 8 million in assets, guess what, you have a deficit. When on the other side, your fair value of the plant asset is greater than your liability, here you have, guess what, you have an asset, here you have an asset, and we talked about this, or we call it surplus. In other words, you're in good shape, you have enough money put away to cover your obligation if all your, if all the employees retire today. Okay, so however, how much do we report, we report the amount of the net benefit asset recognized is limited to the lower of the surplus, 2 million, or the asset ceiling. So we have to choose between those, not and or the asset ceiling. Now how do we define the asset ceiling? Don't worry about the asset ceiling, it's the present value of any economic benefit available in the form of refunds from the plan, or reduction in future contribution of the plan. Simply put, you would say how much is the surplus, and how much is the asset ceiling. The asset ceiling is, if the plan, if we paid off everyone, how much, if we paid off everyone, what's going to go back to the company? The lower of these two will be reported as an asset, the lower of these two. So the surplus up there is 2 million, and the asset ceiling is a million, we report the 1 million, the lower of the two. Okay, now just FYI, for US GAAP, this is called the difference between the PV, PBO, and the fair value of the plant asset is called the funded status. We either have an asset or a liability, the same concept. Okay, however, we don't have the ceiling thing. US GAAP is easy. If you have more assets than liability, you would report the net as an asset. You don't have to compute about the asset ceiling. Okay, let's take a look at a just presentation, and I'll work an example in the next session, work couple examples about this topic. So the present value of your defined benefit obligation is 10,000, your fair value is 10,800, you have a surplus of 800, but your asset ceiling is 525. It means in the future, you expect to compute less to the plan of 525. Therefore, you would report 525 as the asset. Now under US GAAP, there's no 525, you would report the 800 as asset. So basically, US GAAP is more liberal, more liberal. They allow you to report the higher asset number if it's higher. Okay, more about the defined benefit cost. No, not more, no. So we talked about the asset side. So let me go back. What we covered so far, what we covered is the net benefit liability or asset, how we come up with this. I told you the second topic we have to worry about is the net benefit cost or expense. How do we compute that expense every year from year to year on the income statement? Okay, so let's talk about this. Then the defined benefit cost or expense is reported in the income statement is comprised of four component. Okay, again, once there is a list, I'm going to go over this list. Three of these components are included in their income. And the fourth component is included in other comprehensive income. So first, I'm going to show you the three components that are included in their income. Then we'll talk about the component that's included in other comprehensive income. The three components are current service cost. What is current service cost? Well, as you work every year for the company, as you work one additional year, the company might be responsible for additional $20,000. For every year you work, they are responsible for $20,000. So guess what? Every year that you work, they have to debit an expense, pension expense of $20,000, credit some sort of a liability of $20,000. We call this the current service cost. So that's part of it. That's just part one. There's three parts of expense. This is part one. Okay, the next part is past service cost and gains in losses on settlement. So first, let's talk about past service cost. Okay, what is past service cost? We'll talk about gains and losses on settlement in a moment. Okay, let's assume you work for a company. You started with the company, what's today's year? Today's year is 2019. You started to work for this company for 2019. This is a small company. They just started. So you work 2019, 2020, 2021, 2022, and 2023. By year 2023, this company grew and now they really have money and they want to have a pension plan for their employees. In 2023, they decided to start a pension plan. Okay, now you've been working there since 2019. Well, guess what? If they want to do a pension plan, they have to give you credit for all these years. Why? Because you've been working for the company all these years. You've been working for the company for all these years. Therefore, let's assume for every year you work for the company, you cost the company or you cost, I mean, they're going to compensate you for 25,000. Simply put, for every year you work, they're going to have to put away for you, for your future pension, 25,000 times five, that's equaled 125,000. So this is the past service cost. Since they started the plan and they have to compensate you for prior years. Okay, another explanation for the past service cost, let's assume every year they put, they started a pension plan every year and they were granting you 25,000, 25,000. I always say one you because one employee, but think about 100 or thousands or many employees. Just use one employee as an example. So remember, we said they started the plan immediately and they were giving you 25,000. Now sometime what they would do, the company is making a lot of money in year 2023, they want to go back and give you five additional thousand for every year. Okay, and that's past service cost. So how do we treat past service cost? Past service cost is also part of the expense under IFRS. Simply put, all past service cost, let me erase this. Oops, let me erase this. All past service cost, I lost my eraser. Okay, that's fine. All past service cost to be recognized in net income in the period in which the benefit plan is changed. So as soon as they change the benefit plan, everything is reported and in the income statement, regardless of the status of the employee benefiting from the change, regardless of your status, whether you are a new employee or old employee, everything is recorded in expense. This is different. If you go to my US gap, that's different than US gap, a new US gap prior service cost, we call this not past, they call it prior, which is just terminology. What happened under US gap, again, go to my intermediate accounting to my pension chapter under prior service cost. First, they put it in OCI, then it gets amortized into expense. So rather than hitting the income statement, 125,000 all at once, they may put it in OCI first. Then from OCI, they will expense maybe, you know, 25,000 for the next five years. This way it had the expense in pieces, rather than hitting the expense all at once. So notice there's a difference of how prior or past service cost is treated. I ignore gains and losses on settlement. We'll see them later. Another component of the expense that goes on the income statement is net interest on the net benefit liability, liability, not asset because usually you have the net, well, the net interest, well, let's put it this way. It could be a plus net interest could be a plus net interest could be a minus whether we have a liability or an asset. If we have a liability, it's an expense. If we have an asset, we have revenue. How does it work? Remember, we have on the balance sheet present value of the defined benefit obligation. This is a liability. And this liability is reported at, I know I keep saying this, hopefully you appreciate this, it's reported at present value. What does that mean? It means it's reported at present value. It means present value has interest component. So every year because it's a liability, we have to record the interest expense. Okay. Now sometime we have more assets than liability and the assets are generating interest income. Therefore, we net them. We net the interest income with the interest expense. Okay. So how do we first find the interest expense and the interest income? We multiply the net benefit liability by the same discount rate used to measure the present value of the DBO. As a result, the net interest on the DBA is the difference between the interest expense and the interest income. So we have income coming from the assets, interest expense coming from the from the liability. We net them out. Okay. If we have more liabilities or more interest costs, then we have net interest expense. If we have more interest income than interest expense, we have an interest income. So simply put, this item could be a plus. This item could be a minus. Think of it mostly minus because you're going to have more interest expense than liability, more interest expense than interest revenue. Okay. But it could be either or just FYI. So those are the three component of expense. Again, I'm going to keep saying expense, not say income here because usually it's an expense. So those are the three component or three component of the defined benefit costs in the US. We call it pension expense, pension expense. Okay. Now let's look at an example real quick. On January 1st, year seven, Eagle Company amended its defined benefit pension plan to increase the amount of benefit to be paid. What does it mean amended? It means they changed their plan. Okay. Usually when they change it, they're going to pay their employees more. Okay. The benefit vest after five years of service and Eagle has no retirees. It doesn't matter. They amended it. At the date of the plan amendment, the increase in PV DBO attributed to active employees is 18,000. So as a result of this increase, we have to add to the PV DBO 18,000. Okay. The active employees had an average remaining life of 12 years. It doesn't really matter under IFRS. Under IFRS, the whole 18,000 will hit the expense that year. So now we're saying we told our employee law we're going to put an additional 18,000 dollar away for you because you were working for us and now we're making more money. We're going to go back and give you more money for your pension. We're going to be, we're going to be very generous. This is under IFRS. Under US GAAP, what's going to happen? We're going to take the 18,000, put the 18,000 in OCI, other comprehensive income, then we will expense it over 12 years. So every year we will transfer to the income statement, 1500 of, of interest, of not interest, of prior service cost. So it, it hit the income statement very slowly. Maybe I should give you the entry. It will make more sense. So for 18,000, for you will, for, for IFRS, it's easy. You will debit expense, credit, liability or, you know, the liability is the PV DBO. Okay. Under US GAAP, what you do is you will debit OCI and credit PV DBO. 18,000, 18,000. This, this is an equity account and this is a liability. Notice nothing went on the balance sheet. I'm sorry, nothing, everything went on the balance sheet. Nothing went to the income statement. This is a liability. Then for the next seven years, what's how many years? I'm sorry, the next 12 years, for the next 12 years, every year you will debit an expense and you will credit OCI. So you get it out of OCI 1500, you get it out of OCI, you take it out of OCI and you increase your expense. So you reduce your OCI and increase your expense. So it's a little bit different gap. They want you to expense it slowly. That's all what it is. Remember we said I'm going to skip over gain and losses on settlement because I said, well, let me go back and show you what I skipped here. I said, I'm going to look at past service costs and skip gains and losses on settlement. Now I'm going to talk about gains and losses on settlement. What is that? What is that? It arises when an employer settles a defined benefit plan by making a lump sum cash payment to employees in exchange for the right to receive defined future benefit. The best example to give you is my wife. My wife works with J&J. J&J every once in a while, they tell their employees, look, if you want today, right now, we're going to give you a lump sum, an amount of money. And if you take this lump sum, let's assume, I don't know, I'm just going to make up this number, a million dollars. Yeah, right? Okay. That would be nice. So let's assume they will tell my wife, we'll pay you today a million dollars. But guess what? We're no longer responsible for your pension. So we're going to settle the liability today. We're going to settle the liability today. Why would company do so because pension becomes very expensive for the company? And they will tell their employees and a lot of people say, I will take it today. I need the money now. Okay. And they're hoping that the people will take them will take the settlement today. Okay, why? Because the company have the money now they would like to take care of those employees. And I know my wife, every year they sent her a letter would you be interested in settling your J&J always offered that option? If you if you'd like to have it? Okay. So this is what happened. So now they're settling the employee. A pension plan curtailment, it's basically similar. It arises when there's a material reduction in the number of the employees covered by the plant, such as when a plant close as part of restructuring, or when the future service by the current employee will not longer qualify for a pension benefit, or will qualify only for a reduced benefit. Pension plan curtailment is when they reduce your, you reduce your benefit for some reason, they're closing down, they're doing some restructuring, and they would reduce your benefit. So what happened as a result, you might have gains, or the company might have losses, because of those planned settlement and plan curtailment. Okay. That's that's basically what it is. So the question is, where do we take those plans, plan settlement and plan curtailment? They are recognized in their income and the period in which the settlement or curtailment take place, or when the related restructuring costs are recognized if earlier simply put, they go on the income statement, whether they usually they are an expense for the company. Think about it, they're not going to be taken away stuff from their employees. Usually there are expenses, they are expenses. So those are gains, not expenses losses, they could be gained for the company, it could be losses, usually they are losses, they could be gained sometime, it does, you know, depending on the contract. Okay. But this is what they are. So gains and losses on settlement and plan curtailment goes on the income statement. QSGAP treat gains and losses on planning curtailment and settlement differently, what losses generally being recognized earlier than gains. So if there's any losses, you recognize them immediately. If there's any gain, you will defer them until the plan is adopted. So once you know there's a change in the plan under USGAP and you know there's a loss, you recognize the loss immediately. If there's a gain, you wait until you do go through the gain. Okay. So simply put went all the three components, we cover all three components of their income. So basically all this talking about all the stock is about that we've been that we've been talking about now is about this part right here, right here, just this one here. Okay. How do we compute the oops, sorry, this cost here, the fine benefit cost. Remember, there are four components, four, we covered three out of the four. So we still have one more to go and those three go on the income statement. The fourth component is called remeasurement. And let's talk about remeasurement. This is the fourth component. Let's see, remeasurement remeasurement of net benefit liability or asset. This is the fourth component, fourth component. This component is recognized in OCI. Now what is this component? What is this? What is what is what is remeasurement? What are we doing? Remember when I started talking about pension, I said when there's a pension, someone actually where you will have to go and guess how many, how many, how many years you're going to live after retirement, what's going to be your future salary and other factors. Let's assume people are living longer. Okay. Let's assume people are living longer. Then guess what? We have more cost. We have more expense. So what's going to happen, we're going to remeasure the obligation, we're going to measure the present value of the DBO, and it's going to go up. Why because it's remeasurement now when we remeasure it, that's going to go into OCI. Or let's assume we had 100 employees and we promised them we're going to be paying you, you know, pension, then suddenly 40 of the of our employees left. I don't know why they left. It doesn't matter. Although we're thinking they're going to stay since they left. Now we're only responsible for 60 employees. Guess what? Our present value of our DBO went down. Now we have some sort of a gain that goes into OCI. This is what what we called actuarial gains and losses. Okay. So remeasurement are recognized in OCI and are never recycled to net income. This is IFRS. Okay. Remeasurement consists of actuarial gain and losses, which is estimates that we made, you know, how long people are living, how much are we going to pay in them? This could change. It could change to our favor or against us. It could be also the difference between the actual return on the plan asset and the current period and the interest income component. Net interest, you know, DBA, which is the fair value time is the discount. What does that mean? Something what happened is in some years, remember, we have money put away in a plan asset. And I say money. I say what I said is assets. I say money, that money could be stocks, bonds, so on and so forth. In some year, the stock market could go up substantial, like in the past 12 years, right? So what happened is you have a lot of return. And as a result, your plan asset were remeasured up. Guess what? You have a gain that gain will go into OCI. Okay, this is what called remeasurement. Well, if we go back to 2007, 2008, the opposite thing happened. The stock market dropped substantially. You had a loss. You have more losses in your pension and your plan asset than you have you have a reduction in your OCI. Okay. And any change in the effect of asset ceiling during the period, any change in the asset ceiling? Okay. So, actuarial gains and losses and those changes are based on the difference between past assumption and past experience. So what we thought it's going to happen and what actually happened are two different things, then we make adjustments and that adjustments goes into OCI. Now under US GAAP, under US GAAP, it allows a choice between an immediate recognition in OCI or net income. Under you, as Gabby I tell you, you can go ahead and dump everything into net income if you chose to, or you can put it into OCI. Okay. Actuarial gain and losses in OCI, if they are in OCI then they are recycled to net income through something called the corridor approach or a systematic method to result in faster recycling. So if we have a lot of gains in the stock market in a particular year, well, we will take it to the income statement once it exceeds a certain limit. Again, we don't want to talk about this. I don't want to confuse you but if you're interested, again, go to my intermediate accounting pension chapter but there's a corridor approach. Once our gains or losses exceed a certain corridor that goes into net income. Otherwise, it stays into OCI. Now you might be asking why, just so you know why. Because the way the stock market works, since some years it goes up, some years it goes down, some years it goes up, some years it goes down. So if we average it, there's no reason to put it in. Here we have gains, here we have losses, here we have gains, here we have losses. So the question is why will gain and losses gain and losses if the average is going to go back to average? So that's why we put them in OCI. Well, lately we have a lot of gains in the stock market but that's a different story. So those are basically part two. As I told you, part two will take most of the time in this session and it did indeed take part two most of the time. And let me tell you what we covered so far. So far we covered remember what we said. We have four components. This was short and easy and this is where we spend most of the time. Now we're going to spend few minutes on three and few minutes on item four. Other long term employee benefit and termination benefits. Let's go ahead and cover those and get done with this session. It's a lot of material. I will work couple examples after the session just to kind of get your head wrapped around this. Now the assumption here is you at least you took pension or you're familiar with it. All what I'm showing you is the difference between how IFRS and US GAP treat this. Other post-employment benefit, again, all these benefits are treated similar to the pension like the way we use pension. Same procedure described earlier for pension are equally applicable for other form of post-employment benefit, medical benefit and life insurance. Medical benefit the same thing. When we are responsible for paying the medical costs for our employees after they retire, we don't know how much they're going to live. We don't know what type of medical expense they're going to have. Therefore, we're just going to have to make some guesses. Okay. And we'll do the accounting in the same way. In computing the PVDBO for post- employment medical benefit assumption also must be made record and expect the changes in the cost of medical services. And usually medical services cost always go up. So companies keep on increasing this. US GAP provide considerably more guidance than IS-19 in regard to those assumptions. Okay. As a matter of fact, IFRS says, well, guess what? You could refer to US GAP to identify the appropriate method in determining the expense. So IFRS says because US GAP has more guidance for those post employment benefit. Go ahead and look at US GAP and we'll be okay with that. Other long-term employee benefit, termination benefit, long-term compensated absences, for example, sabbatical leave or after you leave, they're going to pay you money. Long-term disability benefit, you're no longer working, but they have to pay you benefit. Bonuses payable 12 months or more after the end of the period. So they're paying you bonuses 12 months after your employment ends. The third compensation, pay 12 months or more after the end of the period. So basically they have to pay you after your employees. Okay. What's going to happen after your employment period? Liability should be recognized for other long-term benefit equal to the difference between the present value and the fair value if you put any money away. So if you think if you think you're responsible for 300,000 and you have nothing, you have nothing put away, you have a liability of 300,000. If you have 300,000 liability and you put away 200,000 to meet the liability, then you have a liability of a 100,000. Again, the liability is computed based on the present value. Then you compare the present value to how much assets you have in a plan to cover those, to cover those obligations. Basically, this is it for the session. Again, if you feel like, you know, this is, he went very fast or this is not enough exercises is because I'm going to work some exercises. That's one thing. And this is kind of another review. This is just basically a comparison between USGAP and IFRS. If you want to go back and view more YouTube intermediate accounting chapter, I'm not sure if 20 or 21. Okay, I can't think of it. One of them leases, one of them is pension. Anyhow, if you happen to visit my YouTube or my website, please consider donating. If you're studying for your CPA exam, as always, study hard, it's worth it. In the next session, I will take a look at an example or two that deals with specifically pension.