11 Preparation question: Defined benefit plan BPP Note. In this question, proformas are given to you to help you get used to setting out your answer. You may wish to transfer them to a separate sheet, or alternatively to use a separate sheet for your workings. Brutus Co operates a defined benefit pension plan for its employees conditional on a minimum employment period of six years, The present value of the future beneft obligations and the fir value of its plan assets on t January 20X1 were $110 million and $150 milion respectively ‘The pension plan received contributions of $7m and paid pensions to former employees of $10m during the yea. Extracts from the most recent actuary's report show the following: Present value of pension plan obligation at 31 December 20X1 Fair value of plan assets at 31 December 201 Present cost of pensions earned in the period Yleld on high quality corporate bonds at 4 January 20X1 stt6m si4om $ttm 10% (Ont January 20Xt, the rules ofthe pension plan were changed to improve benefits for plan members. The actuary has advised that this wil cost $10 milion. Required Produce the extracts fr the financial statements forthe year ended 31 December 20X11 ‘Assume contributions and benefits were pald on 21 December. ‘Statement of profit or loss and other comprehensive income notes Defined benefit expense recognised in profit or loss Current service cost Past service cost Net interest on the net defined benefit asset Other comprehensive income (items that will not be reclssitid to proftor loss) Remeasurement of defined benefit plans ‘Actuarial gain on defined benefit obligation Return on plan assets (excluding amounts in net interest) ‘Statement of financial position notes Net defined benefit asset recognised inthe statement of financial position 31 December 20x1 $m Present value of pension obligation Fair value of plan assets Net asset $m $m 31 December 20x0 $m BPP(Ghanges in the present value ofthe defined benefit obligation Opening defined benefit obligation Interest on obligation Current service cos Past service cost Benefits paid Gain on remeasurement of obligation(balancing figure) Closing defined benefit obligation (Changes inthe fair value of plan assets Opening fair value of plan assets Interest on plan assets Contributions Benefits paid Loss on remeasurement of assets (balancing figure) Closing fair value of pan assets 12 Macaljoy sm $m 45 mins 12/07, amended| Macaljoy, a publi imited company, isa leading support services company which focuses on the building industry ‘The company would lke advice on how to treat certain items under IAS 19 Employee benefits and IAS 37 Provisions, contingent labilties and contingent assets. The company operates the Macalloy Pension Plan ® which ‘commenced on 1 November 20X6 and the Macaljoy Pension Plan A, which was closed to new entrants from 31 October 20X6, but which was open to future service accrual fr the employees already Inthe scheme. The assets of the schemes are held separately from those ofthe company in funds under the control of trustees. The folowing information relates to the two schemes, Macaljoy Pension Plan A ‘The terms of the plan are as follows. (i) Employees contribute 6% of their salaries tothe plan. (i) Macaljoy contributes, currently, the same amount to the plan forthe benefit of the employees, (ii) On retirement, employees are guaranteed a pension which is based upon the number of years service with the company and their final salary ‘The following details relate to the plan in the year to 31 October 20X7: Present value of obligation at 1 November 20X6 Present value of obligation at 31 October 20X7 Fair value of plan assets at 1 November 20X6 Fair value of plan assets at 31 October 20X7 Current service cost Pension benefits paid ‘Total contributions paid to the scheme for year to 31 October 20X7 Remeasurement gains and losses are recognised In accordance with IAS 19 as revised in 2011 Macaljoy Pension Plan B $m 200 240 190 205 20 19 7 Under the terms of the plan, Macally does not guarantee any return on the contributions pald ito the fund. The ‘company’s legal and constructive obligation is limited tothe amount that is contributed to the fund. The folowing details relate to this scheme: Fair value of plan assets at 1 October 20X7 Contributions paid by company for year to 31 October 20X7 Contributions paid by employees for year to 31 October 20X7 “@ $m 2 10 10 —_‘The interest rate on high quality corporate bonds forthe two plans are 1 November 20X6 31 October 20x7 5% 6% ‘The company would lke advice on how to treat the two pension plans, for the year ended 31 October 20X7, together with an explanation of te diferences between a defined contribution plan and a defined benefit plan Warranties ‘Additionally the company manufactures and sells building equipment on which it gives a standard one year warranty to all customers, The company has extended the warranty to two years for certain major customers and has insured against the cost ofthe second year of the warranty, The warranty has been extended at nl cost to the ‘customer. The claims made under the extended warranty are made i the frst instance against Macaloy and then Macaljay in turn makes a counterclaim against the insurance company. Past experience has shown that 80% of the building equipment will not be subject to warranty claims inthe first year, 15% will have minor detects and 5% will require major repair. Macaljay estimates that in the second year of the warranty, 20% ofthe items sold will have minor detects and 10% will require major repair In the year to 31 October 20%7, the following information is relevant Standard warranty Extended warranty Selling price per unit (units) (units) {both)(s) Sales 2,000 5,000 4,000 Major repair Minor defect $ $ Cost of repair (average) 500 100 ‘Assume that sales of equipment are on 31 October 20X7 and any warranty claims are made on 31 October in the year ofthe claim. Assume a risk adjusted discount rate of 4%. Required Draft a report suitable for presentation to the directors of Macalay which: (@) (Discusses the nature of and differences between a defined contribution plan and a defined benefit plan with spectic reference tothe company's two schemes. (7 marks) (8) Shows the accounting treatment forthe two Macally pension plans forthe yer ended 81 October 20K7 under IAS 19 Employee benefits revised 2011). (7 marks) (2) (Discusses the principles involved in accountng for claims made under the above warranty provision. (G marks) (i) Shows the accounting treatment forthe above waranty provision under IAS 37 Provisions, contingent iltes and contingent assets forte year endee 31 October 207 (@ marks) Appropriateness ofthe format and presentation ofthe report and communication of advice (2 marks) (Total = 25 marks) 13 Savage 45 mins ‘Savage, a public limited company, operates a funded defined benefit plan for its employees. The plan provides a pension of 1% ofthe final salary for each year of service, The cost for the year is determined using the projected unit credit method. This reflects service rendered tothe dates of valuation ofthe plan and incorporates actuarial assumptions primarily regarcing discount rates, which are based on the market yields of high quality corporate bonds. Ey nc BPP‘The directors have provided the following information about the defined benefit plan forthe current year (year ‘ended 31 October 20X8), (2) The actuarial cost of providing benefits in respect of employees’ service forthe year to 31 October 20X5 was ‘$40 million. This isthe present value of the pension benefits earned by the employees inthe year. (0) The pension benefits pad to former employees in the year were $42 milion (c) Savage should have paid contributions tothe fund of $28 million. Because of cash flow problems $8 milion of this amount nad not been paid a the financial yearend of 31 October 20X5, (d) The present value ofthe obligation to provide benefits to current and former employees was $3,000 million at 31 October 20X4 and $3,375 milion at 31 October 20X8. (€) The fair value ofthe plan assets was $2,900 milion at 31 October 20X4 and $3,170 milion (including the contributions awed by Savage) at 31 October 20X5, With effect from 1 November 20X4, the company had amended the plan so thatthe employees were now provided with an increased pension entitlement. The actuaries computed that the present value ofthe cost ofthese benefits at November 20Xé was $125 millon. The interest rate on high quality corporate bonds was as follows from the following 6 31 October 20x4 31 October 20X5 Interest rate 6% T% ‘The company recognises remeasurement gains and losses in ‘other comprehensive income (items that will not be reclassified to profit or loss) in accordance with IAS 19, revised 2011 Required (@) Show the amounts which wil be recognised in the statement of financial position, in profit or loss and in other comprehensive income’ of Savage fr the year ended 31 October 20X5 under IAS 19 Employee ‘benefits (revised 2011), and the movement in the asset and liability in the statement of financial positon. (Your calculations should show the changes in the present value ofthe obligation and the fair value ofthe plan assets during the year. gnore any deferred taxation effects and assume that pension benefits and the contributions pai were sted at 31 October 20X5;) (2 marks) (b) Explain how the non-payment of contributions and the change in the pension benefits should be treated in the financial statements of Savage for the year ended 31 October 20X5. (4 marks) (Total = 25 marks) 14 Smith 45 mins (2) Accounting for defined benefit pension schemes isa complex area of great importance. In some cases, the net pension lability even exceeds the market capitalisation ofthe company. The financial statements of 2 company must provide investors, analysts and companies with clear, reliable and comparable information con. company’s pension obligations and interest on net plan asses/obigatons. Required (i) Discuss the problems associated with IAS 19 Employee benefits prior to its revision in June 2011, regarding the accounting or actuarial gains and losses, setting out the main ertcisms ofthe approach taken under the old version of the standard. (6 marks) (i) Outing the advantages of immediate recognition of such gains and losses (4 marks) Gi) iscuss the other main changes to IAS 19 when twas revised in Je 201, explaining how the revised treatment differed from the previous treatment. (5 marks) (v) Outine the tkely consequences of the revision of AS 19 (Smars) Professional marks will be awarded in part (a) for clarity and quality of discussion. (2 marks) mae) “e(0) Smith operates a defined benefit pension plan for its employees, At 1 Janvary 20X2 the fir value of the pension plan assets was $2,600,000 and the present value ofthe plan lables was $2,900,000. ‘The actuary estimates thatthe current and past service costs forthe year ended 31 December 20X2 is {$450,000 and $90,000 respectively. The past service cost is caused by an increase in pension benefits and takes etfect from 31 December 20X2. The plan liabilities at 1 January and $1 December 20X2 correctly reflect the impact of this increase. ‘The interest rate on high quality corporate bonds forthe year ended 31 December 20X2 was 8%, ‘The pension plan paid $240,000 to retired members on 31 December 20X2, On the same date, Smith paid $730,000 in contributions to the pension plan and ths included $90,000 in respect of past service costs. [At31 December 20X2 the far value ofthe pension plan assets is $3,400,000 and the present value of the plan liabilities is $3,500,000. In accordance with the 2011 revision to IAS 19 Employee benefits, Smith recognises actuarial gains and losses (now called ‘remeasurement gains and losses’) in other comprehensive income in the period in which they occur. Required Calculate the remeasurement gains or losses on pension plan assets and liabilities that will be included in other comprehensive income for the year ended 31 December 20X2. (Round all figures to the nearest, $1000.) (3 marks) (Total = 25 marks) 15 Cohort 40 mins Seen) 's a private limited company and has two 100% owned subsidiaries, Legion and Air, both themselves private limited companies, Cohort acquired Air on 1 January 20X2 for $5 million when the fir value of the net assets was $4 million, and the tax base ofthe net assets was $3.5 milion, The acquisition of Air and Legion was part of a business strategy whereby Cohort would buld up the value’ of the group over a three year period and then list its existing shate capital on the stock exchange (a) The following details relate to the acquisition of Air, which manufactures electronic goods. (i) Air has sold goods worth $3 million to Cohort since acquisition and made a profit of $1 million on the transaction Te inventory of these goods recorded in Cohort’ statement of financial position atthe year end of 31 May 20X2 was $1.8 million, (i) The balance on te retained earnings of ir at acquisition was $2 milion. The directors of Cohert have decided tha, during the three years to the date thatthe Intend to Ist the shares ofthe company they will realise earnings through future dividend payments from te subsidiary amounting to $500,000 per year. Tax is payable on any remittance or dividends and no dividends have been eclared for the current year. (10 marks) (2) Legion was acquired on 1 June 20Xt and isa company which undertakes various projets ranging from debt factoring to investing in property and commodities. The following details relate to Legion for the year ending 31 May 20x2 (i) Legion has a portfolio of readily marketable government securities which are held as current assets. These investments are stated at market vale inte statement of financial poston with any gain or toss taken to profit or los forthe year, These gens and losses are taxed when the investments are sold. Currently the accumulated unrealised gains are $4 milion. (i) Legion has calculated that it requires a specitc allowance of $2 milion against loans in its portato Tax relief is available when the specific loan is written off BPP 911 Preparation question: Defined benefit plan Statement of profit or loss and other comprehensive income notes Detined benefit expense recognised in profit or loss Current service cost Past service cost Net interest on the net defined benefit asset (10% x (110 + 10)) ~(10% x 180), Other comprehensive income (items that wil not be reclessifid to proftor loss) Remeasurement of defined benefit plans ‘Actuarial gain on defined benefit obligation Return on plan assets (excluding amounts in net interest) Statement of financial position notes Net defined beneft asset recognised inthe statement of financial position Present value of pension obligation Fair value of plan assets Net asset (Changes in the present value ofthe defined benefit obligation Opening detined benefit obligation Interest on obligation (10% « (110+ 10) Current service cost Past service cost Benefits paid Gain on remeasurement through OCI (balancing figure) Closing detined benefit obligation (Changes inthe fair value of plan assets Opening fair value of plan assets Interest on plan assets (10% x 180) Contributions Benefits paid Loss on remeasurement through OO! (balancing figure) Closing fair value of plan assets BPP 31 December 20xt $m 116 £140) (4) $m 110 12 1 10 (10) ) 116 $m 150 15 7 (19) (22) 140 $m 1" 10 mi) 18 $m 7 22) @ 31 December 20x0 $m ‘to 150) (40) “12 Macaljoy Text referenci Pensions are covered in Chapter 5; provisions in Chapter 9. Top tips. Part (a)(i) is very straightforward, but make sure you relate your answer to the pension schemes of Macaljy. Similarly in Par (2)(), you need to wie spectically about warranty provision, as well as more generally about provisions. Note that IAS 19 was revised in 2011, Actuarial gains and losses must now be recognised immediately in other comprehensive income (not reclassified to profit or loss). Easy marks. Two marks are avalable for presentation and communication, and would be silly marks to lose. Plus there are marks fr straightforward bockwork tat you can get even i you dont get al the calculations right. Examiner's comments. The question was quite well answered and candidates often produced good quality answers. The examiner was Surprised to see that several candidates confused defined benefit and defined Contribution schemes. Aso at this level, itis important that candidates have an in depth knowledge ofthe dferences between the two schemes rather than jst a genera view ofthe aiferences. Profesional marks were awarded for the structure of the report and consideration of certain fctrs, thats: {a) The intended purpose of the document (b)Isintended users and ther needs | (e) The appropriate typeof document (3) Logical ane appropriate structure/ormat {e) Nature of background information an technical language () Detallrequired (@) Clear, concise and precise presentation Marks (@) Pensions ())_—Explanation 7 (il) Calculation 7 (0) Provisions (1)__—Explanation 6 (i) Calculation 3 ‘Structure of report 2 Maximum B To: The Directors Macalioy Date: 1 November 20X7 ‘Subject: Pension plans and warranty claims ‘The purpose of this report isto explain the aitference between defined benefit and defined contribution pension plans, and to show the accounting treatment of Macaljoy's pension schemes. It also discusses the principles of accounting for warranty claims and shows the accounting treatment of Macaljoy's warranty claims. (@) (Defined contribution plans and defined benefit plans With defined contribution plans, the employer (and possibly, as here, current employees too) pay regular contributions into the plan ofa given or ‘defined’ amount each year. The contributions are invested, andthe size ofthe post-employment benefits paid to former employees depends on how wall or how badly the plans investments perform. Ifthe investments perform well, the plan will be able to afford higher benefits than if he investments performed less wel The B scheme is a defined cont paid With defined benefit plans, the sizeof the post-employment benefits is determined in advance, ie the benefits are ‘defined. The employer (and possibly, as here, current employees too) pay contributions = mae) ution plan. The employer's liability is limited tothe contributions0) BPP int the plan, and the contributions ae invested, The size of the contributions is set at an amount tat ‘expected to earn enough investment returns to meet the obligation to pay the post-employment benefits. If, nowover, it becomes apparent that the assets in the fund are isuticient, the employer willbe required to make addtional contributions into the plan to make up the expected shortal, On the other hand, it the fund's assets appear tobe larger than they need tobe, and in excess of whats required to pay the post-employment benefits, the employer may be allowed to take a ‘contribution holiday’ (i stop paying in contributions fo a while) The main difference between the two types of plans lies in who bears the risk: it the employer bears the risk, even in a small way by guaranteeing or specifying the return, the plan isa defined benefit plan. A defined contribution scheme must give a benefit formula based solely onthe amount ofthe contributions ‘defined beneft scheme may be created even i there is no legal obligation, i an employer has a practice of guaranteeing the benefits payable. ‘The A scheme is a defined benefit scheme. Macally, the employer, quarantees a pension based on the service ives ofthe employees inthe scheme. The company’s lability isnot limited to the amount ofthe contributions. This means that the employer bears the investment risk: ifthe return on the investment isnot sufficient to meet the labilties, the company will ned to make good the difference. ‘Accounting treatment: B scheme No assets or liabilities willbe recognised for this defined contribution scheme, The contributions paid by the company of $10m will be charged to profit or loss, The contributions paid by the ‘employees will be part ofthe wages and salaries cost, ‘Accounting treatment: A scheme The accounting treatment is as follows: ‘Statement of profit or loss and other comprehensive income notes Expense recognised in profit or loss for he year ended 31 October 20X7 sm Current service cost 20.0 Net interest on the net defined benefit ability (10 ~ 9.5) 05 Net expense 205 Other comprehensive income: remeasurement of defined benefit plans (Tor the year ended 31 October 20X7) $m Actuarial oss on defined benefit obiation (230) Return on plan assets (excluding amounts in net interest) 25 Net actuarial loss (5) STATEMENT OF FINANCIAL POSITION NOTES Amounts recognised in statement of iancial position 531 October 1 Novernber 20x7 20x8 $m $m Present value of defined benefit obligation 240 200 Fair value of plan assets (28) (190) Net ibility 5 70 125Change in the present value ofthe defined benefit obligation $m Present value of obligation at 1 November 20x6 200 Interest on obligation: 5% x 200 10 Curent service cost 20 Benefits paid (19) Loss on remeasurement through OC (balancing figure) 8 Present value of obligation at 31 October 20X7 240 Change inthe fair value of plan assets 5 mn Fair value of pan asets att November 20X8 1900 Interest on plan assets: 5% x 190 95 Contributions 170 Benefts paia (130) Gain on rerneasurement through OCI (balancing figure) 218 Fair value of pan assets at 31 October 20X7 250 (0) Warranty provisions w wo Principles. Under (AS 37 Provisions, contingent liabilities and contingent assets, provisions must be recognised in the following circumstances, (1) There is a legal or constructive obligation to transfer benefits as a result of past events (2) tis probably that an outflow of economic resources willbe required to settle the obligation (3) Areasonable estimate of the amount required to set the obligation can be made. Ifthe company can avold expenditure by its future action, no provision should be recognised. A legal or constructive obligation is one created by an obligating event. Constructive obligations arise when an entity is committed to certain expenditures because of a pattern of behaviour which the public would expect to continue. IAS 37 states thatthe amount recognised should be the best estimate of the expenditure required to sotto the obligation atthe ond of the reporting period. The estimate should take the various possible outcomes into account and should be the amount that an entity would rationally pay to settle the obligation atthe reporting date orto transfer itto a third party. Inthe case of warrants, the provision will be made at a probability weighted expected value, taking into account the risks and Uncertainties surrounding the underlying events. ‘The amount ofthe provision should be discounted to present value ifthe time value of money is ‘material using a rsk adjusted rate. If some oral ofthe expenditure is expected to be reimbursed by a third party, the reimbursement should be recognised as a separate asset, but ony i iis virtually certain that the reimbursement wil be received Accounting treatment In Macaljoy's case, the past event giving rise to the obligation is the sale of the product with 2 warranty. A provision for the warranty will be made as follows: 8 Re year 1 warranty 280,000 Re year 2 warranty 350,000 630,000 If material the provisions may be discounted s Re year 1 warranty 269,000 Re year 2 warranty 323,000 592,000 BPPCalculations are shown below. Macaljay may be able to recognise the asset and income from the Insurance claim, but onl ifthe insurance company has validated the claim and receipt is virtually certain. In general contingent assets are not recognised, but disclosed it an inflow of economic benefits is probable. Calculations Year t: waranty Discounted expected value Expected value (4%) $000 $000 80% x Ni ° 15% x 7,000 x $100 105 5% «7,000 » $500 175, 280 $280,00011.04 = $269,000" Year 2: extended warranty Discounted expected value Expected value (4%) 000 $000 70% x Ni ° 20% x 5,000 « $100 100 10% 5,000 x $500 250 350 $350,000/(1.04) = $323,000" ‘Note. These figures are rounded 13 Savage Text re ance. Covered in Chapter § of your text. Top tips. A lot ofthe information is given to you inthe question. You need to know how to present it Easy marks, Part (b),a test of knowledge is a source of easy marks, Examiner's comment. In theory, this question should have had the highest average mark on the paper. In practice it was the poorest answered. The question was on employee benefits. The main problem for candidates is not the ‘accounting process but understanding the terminology and what that means for the accounting process. An article has been prepared for Accounting and Business which explains the revisions to IAS 19, Candidates had to calculate the expense recognised in profit or loss, inthe statoment af financial position and in ather comprehensive income for the employee benefit transactions in the yea. Candidates had very few caleulations to make. Basically the only calculations were the interest cost and the interest onthe plan assets. The remainder of the question simply required candidates to enter the various transactions into the relevant accounts, but because ofthe problem of understanding the nature ofthe items, this proved to bea dificult exercise, Hopefully the article wil help. Part (b) of the question required candidates to explain how the non-payment ofthe contributions and change inthe pension benefits should be treated. Many candidates did not attempt ths part ofthe question which is not a good strategy even though the part only carried four marks. (@) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME NOTES Expense recognised in profit or lass forthe year ended 81 October 20X5 $m Current service cost 40 Net interest on the net defined benefit ability (188~ 174) 4 Past service cost 125 173 eg owe EYOther comprehensive income: remeasurement of defined beneft plans (forthe year ended 31 October 20X5) $m ‘Actuarial oss on defined benefit obligation 4) Return on plan assets (excluding amounts in net interest) 119 6 STATEMENT OF FINANCIAL POSITION NOTE ‘Amounts recognised inthe statement of financial position 31 October 31 October 205 20x4 $m $m Present value of defined benefit ligation 3,375 3,000 Less far value of plan assets (3,170 ~ 8) (3.162) (2.900) Net Fabilty 213 ‘Changes in the present value ofthe defined beneft obligation ‘ jm Present value of obligation at 1 November 20X4 3,000 Past service cost 125 Interest cost (6% « (3,000 + 125)) 188 Current service cost 40 Benefits paid (42) Loss on remeasurement through OC! (balancing figure) _84 Present value of obligation at 31 October 20X5 3375 ‘Note: the past service costs of $125 milion are recognised immediately in proft or loss in accordance with IAS 19. They are also included in opening scheme liabilities for the purpose of calculating intrest. (Changes in the fair value of plan assets sm Fair value of plan assets att November 20X4 2.900 Interest on plan assets (6% x 2,900) 174 Contributions 20 Benefits paid (42) Gain on emeasurement through OCI (balancing figure) tio Fair valve of plan assets at 31 October 20X4 (3,170 — 8) 3162 (0) At31 October 20X5, contributions of $8 million remain unpaid IAS 19 Employee benefits states that plan assets do not include unpaid contributions. However, contributions payable of $8 milion should be disclosed in the notes to the accounts of Savage at 31 October 20XS, This amount is payable to the Trustees. IAS 19 also states that where there ae changes to a defined beneft plan, past service costs should be recognised immediately in profit or loss. Therefore past service costs of $125 milion should be recognised in profit or loss for the year ended 31 October 20XS. 14 Smith Text reference. Employee benefits are covered in Chapt 6. Top tips. In Part a) of tis question you had to ciscuss the requirements of IAS 19 Employ benefits (pir to ts revision in June 2011) as regards accounting for actuarial gains and losses whist setting out the main ertcisms cof the approach taken, Part (a)(ii) required you to consider the advantages of immediate recognition of such gains andiosses, Pat i) required an explanation of the oter changes as a est ofthe revision to IAS 19 in June 2014, Part (b) requires an application ofthe revised IAS 19 | Easy marks, These are available in Part (a) for knowledge of the changes to IAS 19, Part (b) is also fairly straightforward — in fact accounting for employee benefits is much easier than it used to be! Answers BPP@ 0 (iy (i) “@ Problems with the previous version of AS 19 ‘An entity's defined benefit pension scheme can be a significant net asset or lability. The size of some schemes, together wih the complet ofthe accounting, meant that IAS 19 Employee benefts (prior to ts revision in June 2011) came in for eriticism, One area that was particularly problematic was the treatment of actuarial gains and losses. The old IAS 19 treatment did not provide clear, fll and understandable information to users. Specficaly, IAS 19 gave a numberof options for recognition of actuarial gains and losses: immediate recognition through profit or loss, immediate recognition through other comprehensive income and delaying recognition using the so-called corridor method’. This element of choice meant thatthe figure in the staterent of financial position (and profit or loss forthe year) were misleading ‘The main problems with the deterred recognition model were: (1) twas inconsistent the treatment of other assets and liabilities, (2) It meant that the employer was not matching the cost of providing post-employment benefits (as represented by the changes in plan assets and benefit obligations) to the periods in which those changes take place (3) The accounting was complex and required complex records to be kept. (4) The statement of inancil postion fguce could be misleading, or example, the plan might be in surplus and a liability shown in the financial statements or the plan might bein deficit with ‘an asset shown, Immediat fecognition has the following advantages: (1) By eliminating the options it improves consisteney and comparability between accounting periods between different entities. (2) Itgives 2 more falthtu representation ofthe eniy's financial positon. A surplus inthe pension plan will result in an asset being recognised and a deficit ina lability being recognised. (3) The financial statements are easier to understand and more transparent than if deferred recognition Is used (4) The income and expense recognised in profit or loss (or in other comprehensive income) correspond to changes inthe fat value ofthe plan assets or the defined benefit obligation, (6) Itis consistent with the IASB Conceptual Framework for Financial Reporting, which requites that the effects of transactions and other events are recognised when they occur... and recorded ... and reported in the financial statements ofthe periods to which they relate.’ (6) Itis consistent with IAS 8 Accounting policies, changes in accounting estimates and errors (changes in estimates must be included inthe period in which the assets and libilties change a a result) and IAS 37 Provisions, contingent liabilities and contingent assets (changes in long term liabilities must be recognised inthe period in which they occur) Other changes to AS 19 (1) Remeasurements, The revised standard introduced the term ‘remeasurements’ This is made up ofthe actuarial gains and losses on the defined benefit obligation, the difference between ‘actual investment returns and the return implied by the net interest cost and the effect ofthe asset ceiling. Remeasurements are recognised immediately in other comprehensive income and not reclassified to profit or loss. This reduces diversity of presentation that was possible Under the previous version ofthe standard. (2) Net interest cost. The revised standard requires interest to be calculated on both the plan ‘assets and plan obligation atthe same rate andthe net interest to be recognised inthe profit or lass. The rationale fr this isthe view thatthe net defined benefit bilty/(asset) is, ‘equivalent to an amount owed by the company to the plan (or vice versa). The eitference Under the previous version ofthe standard was that an ‘Expected return on assets’ was calculated, based on assumptions about the longterm rates of return on the particular classes of asset held within te plan “Oo) (3) Past service costs. The revised standard requires all past service costs to be recognised in the period of plan amendment. The previous standard made a distinction between past service costs that were vested (al past service costs relating to former employees and those relating to current employees that were not subject to any conaition relating to further service) and those that were not vested (relating to current employees and where the entitlement was subject to further service). Only vested past service costs were recognised in profit o loss, and unvested benefits were deferred, and spread over remaining service lve. Likely consequences ofthe revision to IAS 19 (1) Increased comparability but increased volatility. The new rules on recognition of gains and losses will increase comparability and bring increased transparency tothe statement of financial position. However, companies that have the corridor approach may find thatthe new rules bring increased volatility to the statement of prfit or loss and other comprehensive income (2) Pension funds invested differently. The removal ofthe corridor method may result in ‘changes in the way in which pension fund assets are invested. Pension companies have been able to take risks by investing in equites in the knowledge that gains and losses could be ‘smoothed over the working lives of employees ifthe reporting entity chose to do so. Now that this option is no longer available, they may choose to invest in bonds, which are more stable. (3) Expenses will be more visible. Under the previous version of the standard, the cost of running post-employment plans was accounted for either as a reduction tothe expected return on plan assets or reserved for as an addition to the present value ofthe lables. Under the revised IAS 19, expenses will be split nto those relating to the management of plan assets (charged to other comprehensive income) and those relating to the administration of the scheme (charged to profit or loss). (4) More extensive disclosures will be required particularly relating to risk (6) Change tothe type of assets invested in because ofthe requirement to use the discount rate 38 for liabilities, The replacement of the expected return on lan assets with an intrest eredit based on the ciscount ate wilatfct all companies, asthe nature ofthe assets held in the soneme's investment portlio wil no longer invence the ere to tne prof anc loss account. This may lea toa reduction in investment risk as companies move to asset classes wich tend to provide more stable returns and provide ater coreation wth te scheme’ libiltes, albeit ta righer expected long-erm cost. (6) Gains or loss on plan assets $ Fair value of pan assets at 1.1.20K2 2,600 Interest on plan assets (8% x $2,600,000) 208 Contributions 730 Benefits pic (240) Gain on remeasutement through OCI (balancing figure) 02 Fair value of pan assets at 31.12.20%2 5400 {Gains or loss on obligation $000 Present valve of obligation at 11.2042 2.900 Current service cost 450 Past service cost 90 Interest cost (8% x $2,900,000) 232 Benefits paid (240) Loss on remeasurement through OG! (balancing figure) 68 Present value of obligation at 31.12,20X2 3500 “The net gain on remeasurement that willbe recognised in other comprehensive income is $34,000 ($102,000 - $68,000) BPP 9