Funding Valuation vs Accounting Valuation: What You Contribute, Deduct and Report
If your retirement plan is registered with the BIR, you get two actuarial reports every year. The funding valuation sets how much you contribute and how much you deduct for tax. The accounting valuation under PAS 19 sets what appears in your audited financial statements.
Both reports look at the same employees and the same benefits, yet they give different numbers. That is by design. Below we explain what each report does, how the tax deduction works, and why the figures differ. We then follow one company through a full year.
Two reports, two jobs
| Funding valuation | Accounting valuation (PAS 19) | |
|---|---|---|
| Purpose | How much to contribute to the fund | What to report in the audited financial statements |
| Basis for | Contributions and tax deductions | Retirement expense and liability |
| Interest rate used | Based on the actual performance of your fund | Discount rate based on market yields |
| When prepared | Usually at the start of the year | At year end |
What the funding valuation shows
A retirement plan registered with the BIR as a tax qualified plan under Republic Act 4917 has a tax exempt trust fund. The funding valuation tells you how much to put into that fund. It shows two main amounts.
Annual normal cost. This is the cost of the retirement benefit your employees earn for one year of service.
Past service liability. This is the value of the benefits for service your employees have already rendered. The part your fund does not yet cover is the unfunded accrued liability. Contributions above the annual normal cost go toward paying it down.
How your contributions are deducted for tax
Under Section 34(J) of the Tax Code, contributions to a tax qualified plan are deductible in two ways.
- Up to the annual normal cost: 100% deductible in the year you contribute.
- Above the annual normal cost: deducted in equal parts over 10 consecutive years, starting in the year you contribute. This is the part that funds past service.
The two deductions add up. You get the full deduction for the normal cost every year, plus 10% of each past service contribution for 10 years. Revenue Regulations No. 15-2025 kept this treatment. Revenue Memorandum Circular No. 13-2024 also confirms that the tax deduction follows the funding valuation, not the PAS 19 expense.
This is on top of the full deduction for your annual normal cost contribution.
What the accounting valuation shows
Philippine Accounting Standard 19, or PAS 19, sets how retirement benefits appear in your audited financial statements. At year end, the actuary measures two figures.
Retirement liability. This starts from the defined benefit obligation, or DBO. The DBO covers the same thing as the past service liability in the funding report: the value of service already rendered. If you have a retirement fund, the liability is the DBO minus your plan assets. If you have no fund, the DBO itself is the liability. In most cases, companies show a liability.
Retirement expense. In a normal year, this is the current service cost plus net interest. Net interest is the interest on the DBO less the interest income on your plan assets. Changes from updated assumptions, such as a new discount rate, go to other comprehensive income, not to expense.
A past service cost appears only when the plan is amended or curtailed, for example when the benefit formula changes. It shows as a separate line in the PAS 19 report and is recognized in expense in full that year. Do not confuse it with the past service liability in the funding report, which is there every year.
The year end adjustment
During the year, you contribute based on the funding valuation. At year end, your books are adjusted so the expense and liability match the PAS 19 report. For your audited financial statements, the PAS 19 figures prevail.
This adjustment does not change your tax deduction. That stays based on what you actually contributed.
To prepare the PAS 19 report, the actuary needs what happened during the year. That means your contributions, benefits paid, employee movements such as new hires, resignations and retirements, salary changes, and the discount rate at year end.
Why the DBO and the past service liability differ
Both measure the same past service, but they use different interest rates.
The funding valuation uses a rate based on how your fund actually performs, meaning its investment income or return on investment. PAS 19 requires a discount rate based on market yields at year end. In the Philippines, that means government bond yields.
A lower rate means a higher value. So when the discount rate is lower than your fund's return, the DBO is higher than the past service liability.
Worked example: ABC Company
Start of the year: funding valuation
ABC contributes ₱1,500,000 during the year. ₱500,000 covers the annual normal cost, and ₱1,000,000 goes toward past service.
Tax deduction for the year
| Contribution | Amount contributed | Deductible this year |
|---|---|---|
| Annual normal cost | ₱500,000 | ₱500,000 (100%) |
| Past service | ₱1,000,000 | ₱100,000 (10%) |
| Total | ₱1,500,000 | ₱600,000 |
ABC keeps deducting ₱100,000 a year for the next 9 years. If it makes another past service contribution next year, that contribution starts its own 10 year schedule.
Year end: accounting valuation
ABC paid ₱1,500,000 into the fund, but only ₱900,000 is expense. The other ₱600,000 brings the liability down, from ₱5,000,000 at the start of the year to ₱4,400,000.
Notice the DBO of ₱11,000,000 at 5% is higher than the past service liability of ₱10,000,000 at 6%. Same service, different rate.
Four numbers, each correct for its purpose
| Item | Amount | Based on |
|---|---|---|
| Paid into the fund | ₱1,500,000 | Funding valuation |
| Deducted for tax | ₱600,000 | BIR rules on what was contributed |
| Retirement expense | ₱900,000 | PAS 19 |
| Retirement liability | ₱4,400,000 | PAS 19 |
Key takeaways
- The funding valuation drives your contributions and your tax deduction.
- Contributions up to the annual normal cost are fully deductible that year.
- Contributions above it are deducted at 10% a year for 10 years.
- The PAS 19 accounting valuation drives the expense and liability in your audited financial statements.
- The year end adjustment to PAS 19 does not change your tax deduction.
- The DBO and the past service liability differ because they use different interest rates.
Zalamea prepares both the funding valuation and the PAS 19 accounting valuation, with the supporting schedules. The journal entries and disclosures stay with management and your auditor. See our actuarial services, or read our guide on whether your company needs a PAS 19 valuation.
This article is general information, not legal, tax, or accounting advice. The figures in the example are illustrative. Confirm the specifics that apply to your company with your advisor.
Sources: Section 34(J) of the National Internal Revenue Code; Republic Act No. 4917; BIR Revenue Regulations No. 15-2025 (Revised Private Retirement Benefit Plan Regulations); BIR Revenue Memorandum Circular No. 13-2024; Philippine Accounting Standard 19, Employee Benefits.
Frequently asked questions
What is the difference between a funding valuation and a PAS 19 accounting valuation?
The funding valuation tells you how much to contribute to your retirement fund and is the basis for your tax deduction. The PAS 19 accounting valuation measures the retirement expense and liability that appear in your audited financial statements.
Are contributions to a retirement plan tax deductible?
Yes, for a tax qualified plan under RA 4917. Contributions up to the annual normal cost are 100% deductible in the year contributed. Contributions above it are deducted in equal parts over 10 consecutive years.
Is the PAS 19 retirement expense tax deductible?
No. The tax deduction is based on what you actually contributed under the funding valuation, as confirmed by Revenue Memorandum Circular No. 13-2024. The PAS 19 expense is for the audited financial statements only.
Why is the DBO different from the past service liability?
Both measure service already rendered, but they use different interest rates. The funding valuation uses a rate based on your fund's actual return. PAS 19 uses a discount rate based on market yields. A lower rate gives a higher value.
What is past service cost under PAS 19?
It is the change in the DBO caused by a plan amendment or curtailment, such as a change in the benefit formula. It is shown as a separate line and recognized in expense in full in the year it happens.
Talk to a Zalamea specialist
Tell us about your plan and our team will walk you through your funding and accounting valuations.