SBR QUESTION BANK

Question
PRACTICE QUESTION: P2

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.

 Employees contribute 6% of their salaries to the plan.

 Macaljoy contributes, currently, the same amount to the plan for the benefit of the
employees.
 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:

$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.

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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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
1. 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. (8 marks)
2. Shows the accounting treatment for the two Macaljoy pension plans for the year ended 31
October 20X7 under IAS 19 Employee benefits (revised 2011). (7 marks)

QUESTION:
SBR Exam Alert – [Specimen 1 Q1: (a) (iii)] - IQ
(Assignment)

Kutchen has decided to restructure one of its business segments. The plan was agreed by the
board of directors on 1 October 20X6 and affects employees in two locations.
In the first location, half of the factory units have been closed by 31 December 20X6 and the
affected employees’ pension benefits have been frozen. Any new employees will not be
eligible to join the defined benefit plan.
After the restructuring, the present value of the defined benefit obligation in this location is
$8 million.
The following table relates to location 1.
Location 1 – $m
Value before restructuring:
Present value of defined benefit
obligation (10)
Fair value of plan assets 7
Net pension liability (3)
In the second location, all activities have been discontinued. It has been agreed that
employees will receive a payment of $4 million in exchange for the pension liability of $2·4
million in the unfunded pension scheme.
Kutchen estimates that the costs of the above restructuring excluding pension costs will be
$6 million.
Kutchen has not accounted for the effects of the restructuring in its financial statements
because it is planning a rights issue and does not wish to depress the share price. Therefore
there has been no formal announcement of the restructuring.

Required:
Discuss, with suitable workings, how the pension scheme (IAS 19) should be dealt with
after the restructuring of the business segment and whether a provision for restructuring
(IAS 37) should have been made in the financial statement for the year ended 31
December 20X6.

(7marks)

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 SBR QUESTION BANK
QUESTION:
SBR Exam Alert IQ: March 2020 (Question 4b)
(Assignment)

Background
The directors of Ecoma Co consider environmental, social and governance issues to be
extremely important in a wide range of areas, including new product development, reputation
building and overall corporate strategy. The company is taking a proactive approach to
managing sustainability and is actively seeking opportunities to invest in sustainable projects
and embed them in their business practices. The company’s financial year end is 30 September
20X5.

Head office
Ecoma Co is committed to a plan to move its head office to a building which has an energy
efficient green roof that acts as a natural temperature controller. The move from the current
head office, which is leased, will take place at the company’s year end of 30 September 20X5.
The new green roof building requires less maintenance than a conventional building and
produces oxygen which offsets Ecoma Co’s CO2 emissions. The directors of Ecoma Co believe
that the green roof building will save the company $2 million per annum over the useful life of
the building. However, over the next two years, it anticipates that the disruption of the move
will cause the company to make a loss of $10 million per annum. The company wishes to make
a provision of $16 million which comprises the loss to be incurred over the next two years net
of the saving created by the green roof.

Meanwhile, the company will have to vacate its currently leased head office building. At 30
September 20X5, the lease has two years to run at a rental of $600,000 per annum payable in
advance on 1 October each year. If the lease is cancelled, the full rental is payable on
cancellation. The head-lease permits sub-letting and Ecoma Co has sub-let the building for one
year from 1 October 20X5 at a rental of $400,000 per annum payable in advance. Ecoma Co
estimates that there is a 40% probability that it will be able to extend the sub-lease at the same
rental for a second year.

The costs of moving to the green building are estimated at $1 million and the costs of
terminating the lease in two years’ time are negligible. The pre-tax discount rate is 5%.

Defined Benefit Pension Scheme

Ecoma Co is worried that the poor remuneration package offered to employees is putting the
company at risk of reputational damage. Consequently, Ecoma Co changed its pension scheme
on 30 September 20X5 to include all of its staff. The benefits accrue from the date of their
employment but only vest after two years additional service from 30 September 20X5. The net
pension obligation at 30 September 20X5 of $78 million has been updated to include this
change. During the year, benefits of $6 million were paid under the scheme and Ecoma Co

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 SBR QUESTION BANK
contributed $10 million to the scheme. These payments had been recorded in the financial
statements. The following information relates to the pension scheme:
$m
Net pension obligation at 30 September 20X5 78
Net pension obligation at 30 September 20X4 59
Service cost for year 18
Past service cost relating to scheme amendment at 30 September 20X5 9
Discount rate at 30 September 20X4 5·5%
Discount rate at 30 September 20X5 5·9%

Required:

(i) Discuss how the $16 million provision associated with Ecoma Co’s move to a new
head office and the sub-let of its old head office should be accounted for in
accordance with IAS® 37 Provisions, Contingent Liabilities and Contingent Assets.
(6 marks)
(ii) Advise Ecoma Co on the principles of accounting for the pension scheme, including
calculations, for the year to 30 September 20X5. (7 marks)

(iii) Calculate the impact which the above adjustments in (b)(i) and (ii) will have on profit
before tax of $25 million for the year ended 30 September 20X5. Ignore any
potential tax implications. (2 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion. (2 marks)

(25 marks)

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