8/19/2023

SCOPE
This Standard shall be applied by an employer in
accounting for all employee benefits, except
CPA SESSION. those to which IFRS 2 Share-based Payment
applies.

Topic: IAS 19-Employee benefits.

Compiled by Godson Leonard Compiled by Godson Leonard

Definitions of employee benefits Definitions of employee benefits

Employee benefits
• Are all forms of consideration given by an entity in exchange
for service rendered by employees or for the termination of
employment.
Short-term employee benefits
• Are employee benefits (other than termination benefits) that
are expected to be settled wholly before twelve months after
the end of the annual reporting period in which the
employees render the related service.
Post-employment benefits
• Are employee benefits (other than termination benefits and
short-term employee benefits) that are payable after the
completion of employment.
Other long-term employee benefits
• Are all employee benefits other than short-term employee
benefits, post-employment benefits and termination benefits.
Termination benefits
• Are employee benefits provided in exchange for the
termination of an employee’s employment as a result of
either:
a) an entity’s decision to terminate an employee’s
employment before the normal retirement date; or
b) an employee’s decision to accept an offer of benefits in
exchange for the termination of employment.

Compiled by Godson Leonard Compiled by Godson Leonard

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Definitions relating to classification of plans
Post-employment benefit plans
• Are formal or informal arrangements under which an entity
provides post-employment benefits for one or more employees.
Defined contribution plans
• Are post-employment benefit plans under which an entity pays
fixed contributions into a separate entity (a fund) and will have no
legal or constructive obligation to pay further contributions if the
fund does not hold sufficient assets to pay all employee benefits
relating to employee service in the current and prior periods.
Defined benefit plans
• Are post-employment benefit plans other than defined contribution
plans.
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Definitions relating to defined benefit cost
Service cost comprises:
• Current service cost , which is the increase in the
present value of the defined benefit obligation
resulting from employee service in the current period;
• Past service cost , which is the change in the present
value of the defined benefit obligation for employee
service in prior periods, resulting from a plan
amendment (the introduction or withdrawal of, or
changes to, a defined benefit plan) or a curtailment (a
significant reduction by the entity in the number of
employees covered by a plan);
Compiled by Godson Leonard
8/19/2023
Definitions relating to classification of plans
Multi-employer plans
• Are defined contribution plans (other than state plans) or
defined benefit plans (other than state plans) that:
a) pool the assets contributed by various entities that are not
under common control; and
b) use those assets to provide benefits to employees of more
than one entity, on the basis that contribution and benefit
levels are determined without regard to the identity of the
entity that employs the employees.
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Definitions relating to defined benefit cost
• Any gain or loss on settlement
A settlement is a transaction that eliminates all further
legal or constructive obligations for part or all of the
benefits provided under a defined benefit plan, other
than a payment of benefits to, or on behalf of, employees
that is set out in the terms of the plan and included in the
actuarial assumptions.
Net interest on the net defined benefit liability (asset)
is the change during the period in the net defined benefit
liability (asset) that arises from the passage of time.
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Definitions relating to defined benefit cost
Re-measurements of the net defined benefit
liability (asset) comprise:
• Actuarial gains and losses;
• The return on plan assets, excluding amounts
included in net interest on the net defined
benefit liability (asset); and
• Any change in the effect of the asset ceiling,
excluding amounts included in net interest on
the net defined benefit liability (asset).
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Recognition and measurement short-term employee benefits.
When an employee has rendered service to an entity
during an accounting period, the entity shall recognise the
undiscounted amount of short-term employee benefits
expected to be paid in exchange for that service:
a) As a liability (accrued expense), after deducting any
amount already paid.
b) If the amount already paid exceeds the undiscounted
amount of the benefits, an entity shall recognise that
excess as an asset (prepaid expense) to the extent that
the prepayment will lead to, for example, a reduction in
future payments or a cash refund.
c) As an expense, unless another IFRS requires or permits
the inclusion of the benefits in the cost of an asset (see,
for example, IAS 2 Inventories and IAS 16 Property,
Plant and Equipment ).
Compiled by Godson Leonard
8/19/2023
Definitions relating to defined benefit cost
Actuarial gains and losses are changes in the
present value of the defined benefit obligation
resulting from:
• Experience adjustments (the effects of
differences between the previous actuarial
assumptions and what has actually occurred);
and
• The effects of changes in actuarial
assumptions.
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Recognition and measurement……
Short-term paid absences
An entity shall recognise the expected cost of
short-term employee benefits in the form of
paid absences as follows:
a) In the case of accumulating paid absences,
when the employees render service that
increases their entitlement to future paid
absences.
b) In the case of non-accumulating paid
absences, when the absences occur.
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Recognition and measurement……
EXAMPLE 1
An entity has 100 employees, who are each entitled to five working days of
paid sick leave for each year. Unused sick leave may be carried forward for
one calendar year. Sick leave is taken first out of the current year’s
entitlement and then out of any balance brought forward from the previous
year (a LIFO basis). At 31 December 20X1 the average unused entitlement is
two days per employee. The entity expects, on the basis of experience that is
expected to continue, that 92 employees will take no more than five days of
paid sick leave in 20X2 and that the remaining eight employees will take an
average of six and a half days each.
Solution
• The entity expects that it will pay an additional twelve days of sick pay as
a result of the unused entitlement that has accumulated at 31 December
20X1 (one and a half days each, for eight employees). Therefore, the entity
recognises a liability equal to twelve days of sick pay.
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Recognition and measurement……..
EXAMPLE 2
A profit-sharing plan requires an entity to pay a
specified proportion of its profit for the year to
employees who serve throughout the year. If no
employees leave during the year, the total profit-
sharing payments for the year will be 3 per cent of
profit. The entity estimates that staff turnover will
reduce the payments to 2.5 per cent of profit.
Solution
• The entity recognises a liability and an expense of
2.5 per cent of profit.
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8/19/2023
Recognition and measurement……..
Profit-sharing and bonus plans
An entity shall recognise the expected cost of profit-
sharing and bonus payments under paragraph 11
when, and only when:
a) the entity has a present legal or constructive
obligation to make such payments as a result of
past events; and
b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when,
the entity has no realistic alternative but to make the
payments.
Compiled by Godson Leonard
Disclosure
Although this Standard does not require specific disclosures
about short-term employee benefits, other IFRSs may require
disclosures. For example, IAS 24 requires disclosures about
employee benefits for key management personnel. IAS 1
Presentation of Financial Statements requires disclosure of
employee benefits expense.
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Defined contribution plans.
Recognition and measurement:
When an employee has rendered service to an entity
during a period, the entity shall recognise the
contribution payable to a defined contribution plan in
exchange for that service:
a) As a liability (accrued expense), after deducting any
contribution already paid. If the contribution already
paid exceeds the contribution due for service before
the end of the reporting period, an entity shall
recognise that excess as an asset (prepaid expense) to
the extent that the prepayment will lead to, for
example, a reduction in future payments or a cash
refund.
b) As an expense, unless another IFRS requires or
permits the inclusion of the contribution in the cost of
an asset (see, for example, IAS 2 and IAS 16).
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Defined contribution plans.
EXAMPLE 3
An entity makes contributions to the pension fund
of employees at a rate of 5% of gross salary. The
contributions made are $10,000 per month for
convenience with the balance being contributed in
the first month of the following accounting year.
The wages and salaries for 20X6 are $2.7m.
Required:
Calculate the pension expense for 20X6, and the
accrual/ prepayment at the end of the year.
Compiled by Godson Leonard
8/19/2023
Defined contribution plans.
• When contributions to a defined contribution plan are not
expected to be settled wholly before twelve months after the
end of the annual reporting period in which the employees
render the related service, they shall be discounted by
reference to market yields at the end of the reporting period
on high quality corporate bonds.
• Disclosure An entity shall disclose the amount recognised as
an expense for defined contribution plans.
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Defined Benefit plans.
Recognition and measurement
Accounting by an entity for defined benefit plans involves the following
steps:
a) Determining the deficit or surplus. This involves:
– using an actuarial technique, the projected unit credit method,
to make a reliable estimate of the ultimate cost to the entity of
the benefit that employees have earned in return for their
service in the current and prior periods
– discounting that benefit in order to determine the present value
of the defined benefit obligation and the current service cost
– deducting the fair value of any plan assets from the present
value of the defined benefit obligation.
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Defined Benefit plans.
EXAMPLE 4
A lump sum benefit is payable on termination of service
and equal to 1 per cent of final salary for each year of
service. The salary in year 1 is TZS 1,000,000 and is
assumed to increase at 7 per cent (compound) each year.
The discount rate used is 10 per cent per year.
Required
Show how the obligation builds up for an employee who
is expected to leave at the end of year 5, assuming that
there are no changes in actuarial assumptions.
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Defined Benefit plans.
• The number of employees in HACO in white collar and blue collar jobs is
100 and 500 respectively.
• The salaries of white collar jobs in year 1 is tshs.6 millions and is assumed
to increase at 9% (compound) each year and those of blue collar
employees in year 1 is Tshs.0.5 million and assumed to increase at 5%
(compound) each year.
• Based on HACO historical data,5% of employees are expected to leave at
the end of year 5.
• The discount rate is 10%.
• Assuming there are no changes in actuarial assumptions and non
employee left the entity at earlier or later date.
REQUIRED:
i. Determine the present value of the benefit obligation of HACO in year
5.
ii. Show how benefit obligation of HACO accumulates over the year 5.
Compiled by Godson Leonard
8/19/2023
Defined Benefit plans.
EXAMPLE 5
Linda who has been recently employed as a secretary would like to
know on employee benefits. She has read on the internet that there
four main categories of employee benefits according to International
Accounting Standards (IAS) 19 employee benefits.
REQUIRED:
a) With examples, explain to her the main categories of employees
benefits according to (IAS) 19 Employee benefit.
b) Evaluate why accounting for a defined benefit plan is much more
difficult than accounting for defined contribution plan.
c) HACO company pays a lump sum benefit to its employees on
termination of service which is 1% of final salary for each year of
service. The following information should be considered:
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Defined Benefit plans.
b) Determining the amount of the net defined benefit
liability (asset) as the amount of the deficit or surplus
determined in (a), adjusted for any effect of limiting a net
defined benefit asset to the asset ceiling.
c) Determining amounts to be recognised in profit or loss:
(i) current service cost
(ii) any past service cost and gain or loss on settlement
(iii) net interest on the net defined benefit liability (asset)
Compiled by Godson Leonard
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Defined Benefit plans.

Defined Benefit plans. EXAMPLE 6.
The following information is provided in relation to a defined benefit plan
operated by Celine. All transactions are assumed to occur at the reporting date
d) Determining the remeasurements of the net of the relevant year. At 1 January 20X4, the present value of the obligation was
$140 million and the fair value of the plan assets amounted to $80 million.
defined benefit liability (asset), to be recognised in
20X4 20X5
other comprehensive income, comprising:
Discount rate at start of year 4% 3%
(i) actuarial gains and losses; Current and past service cost ($m) 30 32
(ii) return on plan assets, excluding amounts Benefits paid ($m) 20 22
included in net interest on the net defined Contributions into plan ($m) 25 30
benefit liability (asset); and Present value of obligation at 31 December ($m) 200 230
(iii) any change in the effect of the asset ceiling, Fair value of plan assets at 31 December ($m) 120 140
excluding amounts included in net interest on Required:
Reconcile the movement for the year in the plan asset and obligation;
the net defined benefit liability (asset). determine the amounts to be taken to profit or loss and other comprehensive
income for the year, togetherCompiled
withbythe net plan obligation or asset at 31
Compiled by Godson Leonard Godson Leonard
December 20X4 and 20X5.

Defined Benefit plans. Defined Benefit plans.

Recognition of Past service cost EXAMPLE 7.
• Past service cost is the change in the present value of the defined benefit An entity operates a pension plan that provides a pension of 2% of
obligation resulting from a plan amendment or curtailment. final salary for each year of service. The benefits become vested
• If employees have the right to receive benefits under the plan immediately, after five years of service. On 1 January 20X5, the entity improves
the benefits are said to be ‘vested’ and the cost must be recognised the pension to 2.5% of final salary, for each year of service starting
immediately. from 1 January 20X1. At the date of the improvement, the present
• If employees become entitled to benefits only at some later date, the value of the additional benefits for service from 1 January 20X1 to 1
benefits become vested at that later date, with the costs still recognised January 20X5, is as follows:
immediately $000
An entity shall recognise past service cost as an expense at the earlier of the Employees with more than five years’ service at 1.1.X5 150
following date
Employees with less than five years’ service at 1.1.X5 120
a) when the plan amendment or curtailment occurs; and
(average period until vesting: three years)
b) when the entity recognises related restructuring costs (see IAS 37) or –––––
termination benefits. 270
–––––
Required
Explain how the additional benefits are accounted for in the financial statements
Compiled by Godson Leonard of the entity. Compiled by Godson Leonard

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Defined Benefit plans.

Defined Benefit plans.
ANSWER
• The entity recognises all $270,000 immediately as an increase
in the defined benefit obligation following the amendment to
the plan on 1 January 20X5. This will form part of the service
cost component. Whether or not the benefits have vested by
the reporting date is not relevant to their recognition as an
expense in the financial statements.
CURTAILMENT AND SETTLEMENT
• A settlement is a transaction that eliminates all further legal or
constructive obligations for part or all of the benefits provided
under a defined benefit plan.
• A curtailment is a significant reduction in the number of
employees covered by a pension plan. This may be a
consequence of employees being made redundant.
• For example, an employee leaves the entity for a new job
elsewhere, and a payment is made on behalf of the employee
into the defined benefit plan of the new employer.
• The gain or loss arising on a curtailment or settlement should be
recognised when the curtailment or settlement occurs.
• The gain or loss comprises the difference between the fair value
of the plan assets paid out and the reduction in the present
value of the defined benefit obligation.

Compiled by Godson Leonard Compiled by Godson Leonard

Defined Benefit plans. Defined Benefit plans.

EXAMPLE 8 The obligation is to be reduced by 10% × $600,000 = $60,000, with
no change in the fair value of the assets as they remain in the plan.
AB decides to close a business segment. The segment’s employees will The reduction in the obligation represents a gain on curtailment
be made redundant and will earn no further pension benefits after being which should be included as part of the service cost component
made redundant. Their plan assets will remain in the scheme so that the and taken to profit or loss for the year.
employees will be paid a pension when they reach retirement age (i.e. The net position of the plan following curtailment will be:
this is a curtailment without settlement). Before On After
Before the curtailment, the scheme assets had a fair value of $500,000, curtailment
and the defined benefit obligation had a present value of $600,000. It is $000 $000 $000
estimated that the curtailment will reduce the present value of the Present value of obligation 600 (60 540
future obligation by 10%, which reflects the fact that employees will Fair value of plan assets (500) – (500)
have fewer years of work and service with AB before retirement, and ––––– ––––– –––––
therefore be entitled to a smaller pension than previously estimated or
Net obligation in SFP 100 (60) 40
accounted for.
––––– ––––– –––––
Required: The gain on curtailment is $60,000 and this will be included as part
What is net gain or loss on curtailment and how will this be treated in of the service cost component in profit or loss for the year
the financial statements? Compiled by Godson Leonard Compiled by Godson Leonard

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Defined Benefit plans. Defined Benefit plans.

THE ASSET CEILING Example 9
• Sometimes the deduction of plan assets from the pension
obligation results in a negative amount: i.e. an asset. The f ollowing information relates to a def ined benef it
• IAS 19 states that pension plan assets (surpluses) are plan:
measured at the lower of: $000
– The amount calculated as normal; or Fair value of plan assets 950
– The total of the present value of any economic benefits
available in the form of refunds from the plan or Present value of pension liability 800
reductions in future contributions to the plan. Present value of future refunds and reductions in future
• Applying the ‘asset ceiling’ means that a surplus can only contributions 70
be recognised to the extent that it will be recoverable in Required
the form of refunds or reduced contributions in future
What is the value of the asset that recognised in the
financial statements?

Compiled by Godson Leonard Compiled by Godson Leonard

Defined Benefit plans. Defined Benefit plans.

EXAMPLE 10
TC has a defined benefit pension plan and prepares financial statements to 31
March each year. The following information is relevant for the year ended 31
March 20X3:
• The net pension obligation at 31 March 20X3 was $55 million. At 31 March
20X2, the net obligation was $48 million, comprising the present value of
the plan obligation stated at $100 million, together with plan assets stated
at fair value of $52 million.
• The discount rate relevant to the net obligation was 6.25% and the actual
return on plan assets for the year was $4 million.
• The current service cost was $12 million.
• At 31 March 20X3, TC granted additional benefits to those currently
receiving benefits that are due to vest over the next four years and which
have a present value of $4 million at that date. They were not allowed for in
the original actuarial assumptions.
• During the year, TC made pension contributions of $8 million into the
scheme and the scheme paid pension benefits in the year amounting to $3
million.
Required:
Explain the accounting treatment of the TC pension scheme for the year to 31 March
20X3, together with supporting calculations
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EXAMPLE 11
Savage, a public limited company, operates a funded defined benefit plan for
its employees. The plan provides a pension of 1% of the final salary for each
year of service. The cost for the year is determined using the projected unit
credit method. This reflects service rendered to the dates of valuation of the
plan and incorporates actuarial assumptions primarily regarding discount
rates, which are based on the market yields of high quality corporate bonds.
The directors have provided the following information about the defined
benefit plan for the current year (year ended 31 October 20X5).
• The actuarial cost of providing benefits in respect of employees' service
for the year to 31 October 20X5 was $40 million. This is the present value
of the pension benefits earned by the employees in the year.
• The pension benefits paid to former employees in the year were $42
million.
• Savage should have paid contributions to the fund of $28 million. Because
of cash flow problems $8 million of this amount had not been paid at the
financial year end of 31 October 20X5.
• The present value of the obligation to provide benefits to current and
former employees was $3,000 million at 31 October 20X4 and $3,375
million at 31 October 20X5.
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Defined Benefit plans.
• The fair value of the plan assets was $2,900 million at 31 October
20X4 and $3,170 million (including the contributions owed by Savage)
at 31 October 20X5.
• With effect from 1 November 20X4, the company had amended the
plan so that the employees were now provided with an increased
pension entitlement. The actuaries computed that the present value
of the cost of these benefits at 1 November 20X4 was $125 million.
The interest rate on high quality corporate bonds was as follows from
the following dates:
31 October 20X4 31 October 20X5
Interest rate 6% 7%
• 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.
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Disclosure
An entity shall disclose information that:
a) Explains the characteristics of its defined benefit plans
and risks associated with them; An entity shall
disclose:
i. The nature of the benefits provided by the plan (eg final
salary defined benefit plan or contribution-based plan
with guarantee).
ii. A description of the regulatory framework in which the
plan operates, for example the level of any minimum
funding requirements, and any effect of the regulatory
framework on the plan, such as the asset ceiling.
iii. A description of any other entity’s responsibilities for the
governance of the plan, for example responsibilities of
trustees or of board members of the plan.
Compiled by Godson Leonard
8/19/2023
Defined Benefit plans.
Required
Show the amounts which will be recognised in the
statement of financial position, in profit or loss and in
other comprehensive income' of Savage for 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 position. (Your
calculations should show the changes in the present value
of the obligation and the fair value of the plan assets
during the year. Ignore any deferred taxation effects and
assume that pension benefits and the contributions paid
were settled at 31 October 20X5.)
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Disclosure
b) Identifies and explains the amounts in its financial statements
arising from its defined benefit plans. An entity shall provide a
reconciliation from the opening balance to the closing balance
for each of the following, if applicable:
• the net defined benefit liability (asset), showing separate
reconciliations for:
i. plan assets.
ii. the present value of the defined benefit obligation.
iii. the effect of the asset ceiling.
• any reimbursement rights. An entity shall also describe the
relationship between any reimbursement right and the
related obligation
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Disclosure
c) Describes how its defined benefit plans may affect the amount,
timing and uncertainty of the entity’s future cash. An entity shall
disclose:
i. A sensitivity analysis for each significant actuarial assumption as of
the end of the reporting period, showing how the defined benefit
obligation would have been affected by changes in the relevant
actuarial assumption that were reasonably possible at that date.
ii. The methods and assumptions used in preparing the sensitivity
analyses required by (i) and the limitations of those methods.
iii. changes from the previous period in the methods and
assumptions used in preparing the sensitivity analyses, and the
reasons for such changes.
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Review Questions
The following details relate to the plan in the year to 31 October 20X7:
$m
Present value of obligation at 1 November 20X6 200
Present value of obligation at 31 October 20X7 240
Fair value of plan assets at 1 November 20X6 190
Fair value of plan assets at 31 October 20X7 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to 31 October 20X7 17
Remeasurement gains and losses are recognised in accordance with
IAS 19 as revised in 2011.
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8/19/2023
Review Questions
QUESTION ONE
Macaljoy, a public limited company, is a leading support services company
which focuses on the building industry. The company would like advice on
how to treat certain items under IAS 19 Employee benefits . The company
operates the Macaljoy Pension Plan B 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 for the
employees already in the scheme. The assets of the schemes are held
separately from those of the company in funds under the control of trustees.
The following 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 to the plan.
(ii) Macaljoy contributes, currently, the same amount to the plan for the
benefit of the employees.
(iii) On retirement, employees are guaranteed a pension which is based upon
the number of years service with the company and their final salary.
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Review Questions
Macaljoy Pension Plan B
Under the terms of the plan, Macaljoy does not guarantee any
return on the contributions paid into the fund. The company’s legal
and constructive obligation is limited to the amount that is
contributed to the fund. The following details relate to this scheme:
$m
Fair value of plan assets at 31 October 20X7 21
Contributions paid by company for year to 31 October 20X7 10
Contributions paid by employees for year to 31 October 20X7 10
The interest rate on high quality corporate bonds for the two plans
are:
1 November 20X6 31 October 20X7
5% 6%
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Review Questions
The company would like advice on how to treat the two
pension plans, for the year ended 31 October 20X7,
together with an explanation of the differences between
a defined contribution plan and a defined benefit plan.
Required
Draft a report suitable for presentation to the directors
of Macaljoy which:
(a) (i) Discusses the nature of and differences between a
defined contribution plan and a defined benefit plan
with specific reference to the company’s two schemes.
(ii) Shows the accounting treatment for the two
Macaljoy pension plans for the year ended 31 October
20X7 under IAS 19 Employee benefits (revised 2011).
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Review Questions
d) The present value of the obligation to provide benefits to current
and former employees was $3,000 million at 31 October 20X4 and
$3,375 million at 31 October 20X5.
e) The fair value of the plan assets was $2,900 million at 31 October
20X4 and $3,170 million (including the contributions owed by
Savage) at 31 October 20X5.
With effect from 1 November 20X4, the company had amended the
plan so that the employees were now provided with an increased
pension entitlement. The actuaries computed that the present value
of the cost of these benefits at 1 November 20X4 was $125 million.
The interest rate on high quality corporate bonds was as follows from
the following dates:
31 October 20X4 31 October 20X5
Interest rate 6% 7%
Compiled by Godson Leonard
8/19/2023
Review Questions
QUESTION TWO
Savage, a public limited company, operates a funded defined benefit plan for
its employees. The plan provides a pension of 1% of the final salary for each
year of service. The cost for the year is determined using the projected unit
credit method. This reflects service rendered to the dates of valuation of the
plan and incorporates actuarial assumptions primarily regarding discount
rates, which are based on the market yields of high quality corporate bonds.
The directors have provided the following information about the defined
benefit plan for the current year (year ended 31 October 20X5).
a) The actuarial cost of providing benefits in respect of employees' service
for the year to 31 October 20X5 was $40 million. This is the present value
of the pension benefits earned by the employees in the year.
b) The pension benefits paid to former employees in the year were $42
million.
c) Savage should have paid contributions to the fund of $28 million. Because
of cash flow problems $8 million of this amount had not been paid at the
financial year end of 31 October 20X5.
Compiled by Godson Leonard
Review Questions
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 will be recognised in the statement of
financial position, in profit or loss and in other comprehensive income'
of Savage for 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 position. (Your calculations should show the
changes in the present value of the obligation and the fair value of the
plan assets during the year. Ignore any deferred taxation effects and
assume that pension benefits and the contributions paid were settled
at 31 October 20X5.)
For the sake of simplicity and clarity, all transactions are assumed to
occur at the year end.
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Review Questions Review Questions

QUESTION THREE a) At the end of 2013, a division of the company was sold. As a result of
The following data applies to the post employment defined benefit this, a large number of the employees of that division opted to transfer
compensation scheme of BCD Co. Discount rate: 10% (each year) their accumulated pension entitlement to their new employer’s plan.
Present value of obligation at start of 2012: $1m Assets with a fair value of $48,000 were transferred to the other
Market value of plan assets at start of 2012: $1m company’s plan and the actuary has calculated that the reduction in
BCD’s defined benefit liability is $50,000. The year-end valuations in the
The following figures are relevant. table above were carried out before this transfer was recorded.
2012 2013 2014 b) At the end of 2014, a decision was taken to make a one-off additional
$'000 $'000 $'000 payment to former employees currently receiving pensions from the
Current service cost 140 150 150 plan. This was announced to the former employees before the year end.
Benefits paid out 120 140 150 This payment was not allowed for in the original terms of the scheme.
The actuarial valuation of the obligation in the table above includes the
Contributions paid by entity 110 120 120 additional liability of $40,000 relating to this additional payment.
Present value of obligation at year end 1,200 1,650 1,700
Fair value of plan assets at year end 1,250 1,450 1,610 Required.
Additional information: Show how the reporting entity should account for this defined benefit plan in
each of years 2012, 2013 and 2014.

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Review Questions Review Questions

QUESTION FOUR f) NPV of the pension obligation at:
1.1.2013 – $45 million
Radost, a public limited company, has a defined benefit pension plan for
31.12.2013 – $44 million (as given by the actuary, after adjusting for
its staff. Staff are eligible for an annual pension between the date of their the plan amendment)
retirement and the date of their death equal to: g) Fair value of the plan assets, as valued by the actuary:
Annual pension = Final salary per year x years' service. 1.1.2013 – $52 million
50 31.12.2013 – $64.17 million
You are given the following data relating to the year ended 31 December Required
2013: I. Produce the notes to the statement of financial position and statement
a) Yield on high quality corporate bonds: 10% pa. of profit or loss and other comprehensive income in accordance with IAS
19.
b) Contributions paid by Radost to pension plan: $12 million. II. Explain why the pension plan assets are recognised in the financial
c) Pensions paid to former employees:$8 million. statements of Radost, even though they are held in a separate legal trust
d) Current service cost was $3.75 million for Radost's employees.
Notes: Work to the nearest $1,000 throughout; and You should assume
e) After consultation with employees, an amendment was agreed to the contributions and benefits were paid on the last day of the year.
terms of the plan, reducing the benefits payable. The amendment
takes effect from 31 December 2013 and the actuary has calculated
that the resulting reduction in the pension obligation is $6 million.
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Review Questions
QUESTION FIVE
Delta prepares its financial statements to 30 September each year. The
financial statements for the year ended 30 September 2017 are shortly to be
authorised for issue. The following event is relevant to these financial
statements:
Delta operates a defined benefit retirement benefits plan on behalf of current
and former employees. Delta receives advice from actuaries regarding
contribution levels and overall liabilities of the plan to pay benefits. On 1
October 2016, the actuaries advised that the present value of the defined
benefit obligation was $60 million. On the same date, the fair value of the
assets of the defined benefit plan was $52 million. On 1 October 2016, the
annual market yield on high quality corporate bonds was 5%.
During the year ended 30 September 2017, Delta made contributions of $7
million into the plan and the plan paid out benefits of $4.2 million to retired
members. You can assume that both these payments were made on 30
September 2017.
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Review Questions
On 30 September 2017, the actuaries advised that the present
value of the defined benefit obligation was $68 million. On the
same date, the fair value of the assets of the defined benefit
plan were $56 million.
Required
Explain and show how the event would be reported in the
financial statements of Delta for the year ended 30 September
2017.
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8/19/2023
Review Questions
The actuaries advised that the current service cost for the year ended
30 September 2017 was $6.2 million. On 31 August 2017, the rules of
the plan were amended with retrospective effect. These amendments
meant that the present value of the defined benefit obligation was
increased by $1.5 million from that date.
During the year ended 30 September 2017, Delta was in negotiation
with employee representatives regarding planned redundancies. The
negotiations were completed shortly before the year end and
redundancy packages were agreed. The impact of these redundancies
was to reduce the present value of the defined benefit obligation by $8
million. Before 30 September 2017, Delta made payments of $7.5
million to the employees affected by the redundancies in
compensation for the curtailment of their benefits. These payments
were made out of the assets of the retirement benefits plan.
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Review Questions
QUESTION SIX
On 1 July 20X3 Mickleover started a defined benefit pension scheme for its
employees and immediately contributed $4m cash into the scheme. The
actuary has stated that the net obligation was $0.4m as at 30 June 20X4. The
interest rate for good quality corporate bonds was 10% at 1 July 20X3 but 12%
by 30 June 20X4. The actual return on the plan assets was 11%. The increased
cost from the employee’s service in the year was $4.2m which can be
assumed to accrue at the year end.
On 30 June 20X4 Mickleover paid $0.3m in settlement of a defined benefit
obligation with a present value of $0.2m. This related to staff that were to be
made redundant although, as at 30 June 20X4, they still had an average
remaining employment term of one month. The redundancies were not
foreseen at the start of the year.
Required:
Discuss the correct accounting treatment of the above transaction in the
financial statements of Mickleover for the year ended 30 June 20X4.
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Review Questions
The following information relates to the defined benefit plan
operated by Arc for the year ended 30 June 20X4:
Review Questions
$m
Arc has identified that the asset ceiling at 30 June 20X3 and 30
FV of plan assets b/fwd at 30 June 20X3 2,600 June 20X4, based upon the present value of future refunds from
PV of obligation b/fwd at 30 June 20X3 2,000 the plan and/or reductions in future contributions amounts to
Current service cost for the year 100 $200m at 30 June 20X3 and 30 June 20X4.
Benefits paid in the year 80 Required:
Contributions into plan 90 Explain, with supporting calculations, the accounting treatment
of the pension scheme for the year ended 30 June 20X4
FV of plan assets at 30 June 20X4 3,100
PV of plan obligation at 30 June 20X4 2,400

Discount rate for the defined benefit obligation – 10%

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