Question

Information on the defined benefit plan of Entity A as of December 31, 2018 is as follows:

• Fair value of plan assets P 800,000
• Present value of the defined benefit obligation P1,000,000
How much is (are) presented in Entity A's December 31, 2018 statement of financial position in relation to its post-employment benefits plan?
a. P800,000 in noncurrent assets and P1M in noncurrent liabilities
b. P200,000 net defined benefit asset in noncurrent assets
c. P200,000 net defined benefit liability in noncurrent liabilities
d. P1M in noncurrent liabilities

Answer 1

Entity A's December 31, 2018 statement of financial position will show a P200,000 net defined benefit liability in noncurrent liabilities, reflecting the shortfall in plan assets compared to the obligation. Option C

Step-by-step explanation:

The information provided indicates that Entity A has a defined benefit pension plan with a present value of the defined benefit obligation of P1,000,000 and fair value of plan assets of P800,000. In accordance with financial reporting standards, the net position of the plan should be reported in the statement of financial position.

A net defined benefit liability occurs when the present value of the defined benefit obligation is greater than the fair value of plan assets. In this case, the difference is P1,000,000 (obligation) - P800,000 (assets) = P200,000 net defined benefit liability.

Therefore, the correct answer is option c: P200,000 net defined benefit liability in noncurrent liabilities which reflects the shortfall in funding the pension obligations. This amount would be presented as a liability since it represents the amount that the entity is expected to pay in the future beyond the assets set aside in the plan. Option C