• If the assets exceed the obligation, there is a surplus and an asset is reported in the statement

of financial position.
Sh.
CPA ADVANCED LEVEL Present value of plan obligation X
ADVANCED FINANCIAL REPORTING & ANALYSIS Less: Fair value of plan asset (X)
Closing net liability/(asset) X/(X)
EMPLOYEE BENEFITS – IAS 19 At each reporting date, an entity accounts for the change in its defined benefit pension scheme
Employee benefits refers to all forms of consideration given by an entity in exchange for service deficit (or surplus).
rendered by employees or for the termination of employment. The remeasurement gain/loss on the defined benefit obligation over a reporting period is
Types of employee benefits determined as follows:
1. Post-employment benefits: These are employee benefits which are payable after the Sh.
completion of employment. For example pension. Present value of plan obligation brought forward X
2. Short-term employee benefits: These are employee benefits (other than termination benefits) Interest costs X
that are expected to be settled wholly before 12 months after the end of the annual reporting Service costs X
period in which the employees render the related service. Examples include wages, salaries, Less: benefits paid (X)
paid annual leave, paid sick leave, bonuses, housing, cars and social security contributions Expected plan obligation at year end X
among others. Remeasurement gain/(loss) (bal. fig.) X/(x)
3. Termination benefits: these are employee benefits which arise when the employment is Actual plan obligation carried forward X
terminated either as a result of an entity’s decision to terminate an employee’s employment Note: interest cost is computed by applying the discount rate at the start of the year to the present
before the normal retirement date or an employee’s decision to accept an offer of benefits for value of the obligation at the beginning of the period.
the termination of the employment. The remeasurement gain/loss on the defined benefit plan asset over a reporting period is
4. Other long-term employee benefits: these are all employee benefits other than short-term determined as follows:
employee benefits, post-employment benefits and termination benefits. It comprises long- Sh.
service leave or awards, long-term disability benefits and other long-service benefits. Fair value of plan asset brought forward X
POST-EMPLOYMENT BENEFITS PLAN (PENSION PLAN) Expected return X
There are 2 types of pension plans: Contributions paid X
1. Defined contribution plans: these are benefit plans where an entity pays fixed contributions Less: benefits paid (X)
into a separate entity and will have no legal or constructive obligation to pay further Expected plan asset at year end X
contributions if the fund does not hold sufficient assets to pay all employee benefits relating Remeasurement gain/(loss) (bal. fig.) X/(x)
to their service. Actual plan asset carried forward X
2. Defined benefit plans: these are post-employment plans that are not defined contribution Note: expected return is computed by applying the discount/yield rate at the start of the year to
plans. the fair value of the plan asset brought forward.
Accounting for defined contribution plans The remeasurement gain/loss on net pension liability for a particular period is computed as
The entity should charge the agreed pension contribution to profit or loss as an employment follows:
expense in each period. Sh.
However, an accrual or prepayment may arise if the cash paid is not equal to the value of the Net obligation brought forward X
contribution due for the period. This is disclosed in the statement of financial position. Net interest component X
ACCOUNTING FOR DEFINED BENEFIT PLANS Current service cost X
The statement of financial position Past service cost X
Under a defined benefit plan, an entity has an obligation to its employees. The entity has a long- Gain on curtailment (X)
term liability that must be measured at present value. Less: Contribution paid (X)
The entity also makes regular contributions into the pension plan. These contributions will be Expected net obligation at year end X
invested and the investments will generate returns. Therefore, the entity also has a plan asset held Remeasurement gain/(loss) (bal. fig.) X/(x)
within the pension plan which must be measured at fair value. Actual net obligation carried forward X
On the statement of financial position, the entity offsets its pension obligation and its plan assets Note: The remeasurement gain/(loss) on the plan obligation and asset is charged or credited to
and reports the net position. other comprehensive income for the year and identified as an item that will not be reclassified to
• If the obligation exceeds the assets, there is a plan deficit and a liability is reported in the profit or loss in future periods.
statement of financial position. The remeasurement gain/(loss) on plan obligation and asset may arise due to:

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1. The actuary’s calculation of the value of the plan obligation and assets is based on Present value of obligations at year end 2,500 3,200 3,550
assumptions, such as life expectancy and final salaries, these may have changed from one year Market value of plan assets at year end 2,400 2,850 3,300
to the next.
2. The actual return on plan assets is different from the amount taken to profit or loss as part of Required:
the net interest component. For each of the years ended 31 December 2020, 2021 and 2022, determine:
The statement of profit or loss (i) Re-measurement gains/losses on the plan assets and obligations. (6 marks)
The pension cost charged or credited to profit or loss is computed as follows:
(ii) Extract of statement of income and other comprehensive income for each of the three years
Sh.
Interest cost X ended 31 December 2022. (3 marks)
Service costs X (iii) Plan assets/(obligations) to appear in the statement of financial position (3 marks)
Expected return (X)
Pension cost X QUESTION TWO
Service cost is charged to profit or loss and comprises of the following three components: The following information relates to Wastaafu Retirement Benefits Scheme, a defined benefit plan,
• Current service cost: this is the increase in the present value of the obligation arising from for the year ended 31 December 2020, 2021 and 2022:
employee service in the current period.
• Past service cost: this is the change in the present value of the obligation for employee service Year
in prior periods resulting from a plan amendment or curtailment. 2020 2021 2022
• Any gain or loss on settlement
Discount rate on 1 January 10% 9% 8%
Past service costs arise when there has been an improvement in the benefits to be provided under
the plan or when there has been a curtailment. Expected rate of return on plan assets on 1 January 12% 11.1% 10.3%
A curtailment is a significant reduction in the number of employees covered by a pension plan. This Current service cost (Sh. Million) 130 210 150
may be caused by redundancy. In case of a curtailment, the asset and liability at re-measured to Benefits paid (Sh. Million) 150 180 190
fair value and any change is taken to profit or loss. Contributions to the scheme (sh. Million) 90 100 110
Past service costs are recognised at the earlier of: Present value of plan obligations as at 31 December (Sh. Million) 1,140 1,200 1,300
• When the plan amendment or curtailment occurs; Fair value of plan assets as at 31 December (Sh. Million) 1,090 1,100 1,110
• When the entity recognises related restructuring costs or termination benefit.
Additional information:
A settlement occurs when an entity enters into a transaction to eliminate the obligation for part or
1. As at 1 January 2020, the present value of plan obligations was Sh.1,100 million and fair value
all of the benefits under a plan. For example, an employee may leave the entity for a new job
elsewhere and a payment is made from that pension plan to the pension plan operated by the new of plan assets was Sh. 1,000 million.
employer. 2. During 2021, there was an improvement in employee benefits under the plan. This resulted in
The gain or loss on settlement is the difference between the fair value of the plan assets paid out an increase in the present value of the defined benefit obligation by an additional Sh.10
and the reduction in the present value of the defined benefit obligation. The gain or loss forms part million as at 31 December 2021.
of the service cost component. 3. Assume all transactions occurred at the year end.
QUESTION ONE
Required:
The following information relates to Uzee Pension Scheme, a post-employment defined benefit
(i) Statement of profit or loss and other comprehensive income extracts for each of the three
compensation scheme.
years ended 31 December 2020, 2021 and 2022.
1. All transaction occur at the end of the financial year.
(ii) Net pension asset/obligation to appear in the statement of financial position at 31 December
2. Discount rate: 8% (each year).
2020, 2021 and 2022.
3. Present value of obligations as at 1 January 2020: Sh. 2,400,000.
QUESTION THREE
4. Fair value of plan assets as at 1 January 2020: Sh. 2,250,000 The following information relates to Busara Retirement Benefits Scheme, a defined benefit plan, for
5. The following figures are relevant: the year ended 31 December 2020 and 2021:
Year ended 31 December: 2020 2021
2020 2021 2022 Discount rate on 1 January 10% 9%
Sh.’000’ Sh.’000’ Sh.’000’ Expected rate of return on plan assets on 1 January 12% 10.5%
Current service cost 280 290 300
Current service cost (Sh. Million) 200 180
Benefits paid out 240 270 310
Benefits paid (Sh. Million) 140 160
Contributions paid by entity 230 240 250

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Contributions to the scheme (sh. Million) 100 120 (7 marks)
Present value of plan obligations as at 31 December (Sh. Million) 1,600 1,800 (iii) Calculate the pension obligation or plan assets to appear in the statement of financial position
Fair value of plan assets as at 31 December (Sh. Million) 1,300 1,650 as at 31 December 2020, 2021 and 2022. (3 marks)
Additional information: [TOTAL: 20 MARKS]
1. As at 1 January 2020, the fair value of the plant assets was Sh.1,200 million and the present
value of plan obligations was Sh. 1,450 million. THE ‘ASSET CEILING’ TEST
Most defined benefit pension plans are in deficit (i.e., the obligation exceeds the plan assets)
2. Assume all transactions occurred at the beginning of the year.
although some defined benefit pension plans show a surplus. If a company has an overall pension
Required:
asset on its statement of financial position, the asset can only be recognised up to the level of the
For each of the years ended 31 December 2020, and 2021, prepare the extract of the financial
asset ceiling. The asset ceiling is the present value of any future cash savings of not having to
statements
contribute to the scheme as it is in surplus.
As per IAS 19, if a defined benefit plan is in surplus, the surplus must be measured at the lower of:
QUESTION FIVE
• the net reported asset; or
a) Briefly explain the following terms in the context of IAS 19 – Employee Benefits:
• the present value of any refunds/reduction of future contributions available from the pension
(i) Current service cost (2 mark)
plan.
(ii) Experienced adjustment (2 mark)
This is known as applying the ‘asset ceiling’. It means that a surplus can only be recognised to the
b) The following data related to the post-employment defined benefit compensation scheme of
extent that it will be recoverable in the form of refunds or reduced contributions in future. This
ABC ltd.
ensures that an asset is only recognised if it has the potential to bring economic benefits to the
Year ended 31 December 2020 2021 2022
reporting entity. Any impairment loss is charged immediately to other comprehensive income.
Discount rate/Expected rate of return 10% 10% 10%
QUESTION SIX
Sh.000 Sh.000 Sh.000
The following information relates to a defined benefit plan:
Current service cost 1,400 1,500 1,500
Sh. ‘000’
Benefits paid out 1,200 1,400 1,500
Fair value of plan asset 9,500
Contributions paid by the entity 1,100 1,200 1,200
Present value of pension liability 8,000
Present value of obligation at year end 13,000 16,500 17,000
Present value of future refunds and reductions in future contributions 700
Fair value of plan assets at year end 12,500 14,500 16,100
Required:
Additional information:
Determine the value of the asset that should be recognised in the financial statements.
1. As at 1 January 2020, the market value of the plan assets and present value of plan obligations
QUESTION SEVEN
were both Sh. 10 million The following information relates to the defined benefit plan operated by Arc ltd for the year ended
2. On 31 December 2021, a division of the company was sold. As a result of this, a large number of 30 June 2022.
the employees of that division opted to transfer their accumulated pension entitlement to their Sh. ‘million’
new employer’s plan. Assets with a fair value of Sh.480,000 were transferred to the other Fair value of plan assets (at 30 June 2021) 2,600
company’s plan and the actuary has calculated that the reduction in ABC ltd’s defined benefit Present value of plan obligation (at 30 June 2021) 2,000
liability is Sh.500,000. The year-end valuations in the table above were carried out before this Current service cost for the year 100
Benefits paid in the year 80
transfer was recorded.
Contributions paid into the scheme 90
3. On 31 December 2022, a decision was taken to make a one-off additional payment to former Fair value of plan assets (at 30 June 2022) 3,100
employees currently receiving pensions from the plan. This was announced to the former Present value of plan obligation (at 30 June 2022) 2,400
employees before the year end. This payment was not allowed for in the original terms of the Additional information:
scheme. The actuarial valuation of the obligation in the table above includes the additional 1. The discount rate for the defined benefit obligation is 10%.
liability of Sh.400,000 relating to this additional payment. 2. Arc ltd has identified that the asset ceiling at 30 June 2021 and 30 June 2022, based upon the
present value of future refunds from the plan and/or reductions in future contributions
4. Assume all transactions occur at the end of the year.
amounts to Sh.200 million at 30 June 2021 and 30 June 2022.
Required:
Required:
(i) Calculate the remeasurement gain/(loss) on the plan assets and pension obligations for each
Explain, with supporting calculations, the accounting treatment of the pension scheme for the year
of the year ended 31 December 2020, 2021 and 2022. (6 marks) ended 30 June 2022.
(ii) The amounts to be recognized in the statement of income and the statement of
comprehensive income for each of the year ended 31 December 2020, 2021 and 2022.

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DISCLOSURE REQUIREMENTS PRACTICE QUESTION TWO
As per IAS 19 an entity should disclose the following in relation to defined benefit plans: Zion ltd operates a defined benefit pension plan for its employees. The company has a 31 December
1. Significant actuarial assumptions used to determine the net defined benefit obligations or year end. The following details relate to the plan.
assets. Sh. ‘000’
2. A general description of the type of plan operated. Present value of obligation at 1 January 2021 84,000
3. A reconciliation of the assets and liabilities recognised in the statement of financial position Market value of plan assets at 1 January 2021 80,000
4. The charge to total comprehensive income for the year, separated into the appropriate 2021 2022
components. Sh. ‘000’ Sh. ‘000’
5. Analysis of the remeasurement component to identify returns on plan assets, together with Current service cost 5,000 5,720
actuarial gains and losses arising on the net plan obligations. Benefits paid out 3,948 4,400
6. Sensitivity analysis and narrative description of how the defined benefit plan may affect the Contributions paid by entity 4,000 4,400
nature, timing and uncertainty of the entity’s future cash flows. Present value of obligation at end of the year 96,000 81,600
CRITICISMS OF IAS 19 Market value of plan assets at end of the year 86,000 72,800
The following are some of the perceived problems with IAS 19: Yield on corporate bonds at start of the year 8% 9%
1. Classification: some types of pension plans cannot be easily classified as ‘defined benefit’ or Additional information:
‘defined contribution’. 1. During 2021, the benefits available under the plan were improved. The resulting increase in
2. Volatility: the fair values of defined benefit plan assets may be volatile or difficult to measure the present value of the defined benefit obligation was Sh.4 million as at 31 December 2021.
reliably. 2. Contributions were paid into the plan and benefits were paid out of the plan on the final day
3. Short-term: IAS 19 requires defined benefit plan assets to be valued at fair value. However, of each accounting period.
most pension scheme assets and liabilities are held for long term. 3. On 31 December 2022, Zion ltd divested of part of its business, and as part of the sale
4. Complexity: the treatment of defined benefit pension costs in the statement of profit or loss agreement, transferred the relevant part of its pension fund to the buyer. The present value of
and other comprehensive income is complex and may not be easily understood by users of the the defined benefit obligation transferred was Sh.22.8 million and the fair value of the plan
financial statements. It has been argued that all the components of the pension costs are so assets transferred was Sh.21.6 million. Zion ltd also made a cash payment of Sh.800,000 to the
interrelated that it does not make sense to present them separately. buyer in respect of the plan.
5. Conceptual framework: the requirement to reflect future salary increases and unvested Required:
benefits when measuring the defined benefit obligation seems to be at odds with the (i.) Compute the remeasurement gain/(loss) on the plan assets and pension obligations for each
Conceptual Framework’s definition of a liability because there is no current obligation to pay of the year ended 31 December 2021 and 2022 (9 marks)
these. (ii.) Show the amounts to be recognised in the financial statements in each of the years 2021 and
2022 in respect of the plan. (6 marks)
PRACTICE QUESTIONS
PRACTICE QUESTION ONE PRACTICE QUESTION THREE
Penny ltd has a defined benefit pension plan for its employees and it prepares its financial TC ltd has a defined benefit plan and prepares financial statements to 31 December each year. The
statements to 30 June. The following information relates to the pension plan for the year ended 30 following information is relevant for the year ended 31 December 2022:
June 2022: 1. The net pension obligation at 31 December 2022 was Sh.220 million. At 31 December 2021,
1. On 1 July 2021, the plan assets and obligations amounted to Sh.36 million and Sh.43 million the net obligation was Sh.192 million, comprising the present value of the plan obligation
respectively. stated at Sh.400 million, and plan assets stated at fair value of Sh.208 million.
2. Contributions to the plan during the year amounted to Sh.5.5 million. The contributions were 2. The discount rate relevant to the net obligation was 6.25% and the actual return on plan
paid on 1 July 2021. assets for the year was Sh.16 million.
3. Benefits paid to former employees amount to Sh.3.3 million. These were paid on 1 July 2021. 3. The current service cost was Sh.48 million.
4. The yield on high quality corporate bonds was 8% at 1 July 2021. 4. At 31 December 2022, TC ltd granted additional benefits to those currently receiving benefits
5. On 30 June 2022, five staff were made redundant and an extra Sh.580,000 was added to the that are due to vest over the next four years and which have a present value of Sh.16 million.
value of their pensions. These were not allowed for in the original actuarial assumptions.
6. Current service costs as provided by the actuary are Sh.2.75 million. 5. During the year ended 31 December 2022, the company made pension contributions of Sh.32
7. At 30 June 2022, the actuary valued the plan liabilities at Sh.46.4 million and the plan assets at million into the scheme.
Sh.42.15 million. 6. The scheme paid pension benefits in the year amounting to Sh.12 million.
Required: Required:
Using the above information, prepare extracts from the statement of financial position and the Compute the pension cost to charge to statement of profit or loss and the re-measurement
statement of profit or loss and other comprehensive income for the year ended 30 June 2022. gain/loss on the pension scheme for the year to 31 December 2022 (8 marks)
(10 marks)