ACCA DipIFR question papers and answers on IAS 19 from June 2014

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 events are relevant to these financial statements:

(a)  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.

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.

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.

On 30 September 2017, Delta will report a net pension liability in the statement of financial position.

The amount of the liability will be 12,000 (68,000 – 56,000).

For the year ended 30 September 2017, Delta will report the current service cost as an operating cost in the statement of profit or loss. The amount reported will be 6,200. The same treatment applies to the past service cost of 1,500.

For the year ended 30 September 2017, Delta will report a finance cost in profit or loss based on the net pension liability at the start of the year of 8,000 (60,000 – 52,000). The amount of the finance cost will be 400 (8,000 x 5%).

The redundancy programme represents the partial settlement of the curtailment of a defined benefit obligation. The gain on settlement of 500 (8,000 – 7,500) will be reported in the statement of profit or loss.

Other movements in the net pension liability will be reported as remeasurement gains or losses in other comprehensive income.

As already stated, where explanations are required, marks will be specifically awarded for such explanations and full marks will not be obtained if the explanations are not provided, even where the accounting treatment provided is correct. This was particularly an issue in part (a) of question 2. A significant minority of candidates simply computed the re-measurement loss arising on the actuarial valuation of the plan without any explanations whatsoever of the accounting treatment of the constituent elements of the reconciliation. The computation of the re-measurement loss was often correct but such candidates only scored around half marks by not displaying the knowledge they apparently possessed in the form of supporting explanations.

ACCA Past question papers Dec 2023 (16 marks)

Question

Delta, a listed entity, prepares financial statements to 30 September each year. You are a trainee accountant employed by Delta and report to the finance director (FD) of Delta. One of your key responsibilities is to prepare the first draft of Delta’s published financial statements. You have recently received an email from the FD regarding the financial statements for the year ended 30 September 20X9.

The following exhibits, available on the left-hand side of the screen, provide information relevant to the question:

Email Attachment

Delta  operates  a  defined  benefit  pension  plan  and  all  employees  are  eligible  to  join  the  plan.  Delta  pays  contributions  into  the  plan  and  the  managers  of   the  plan  pay  benefits  to  retired  employees at the end of  each financial year.

I have been provided with the following information relating to the defined benefit pension plan. You can assume that all these numbers are accurate: $m

Present value of  obligations at 30 September 20X8  : 60

Present value of  obligations at 30 September 20X9  : 67

Fair value of  plan assets at 30 September 20X8  : 54

Fair value of  plan assets at 30 September 20X9  : 58

Amounts related to year ended 30 September 20X9:

• Contributions paid into plan 11
• Current service cost 12·5
• Benefits paid 7

The statement of  financial position at 30 September 20X8 showed a net defined benefit liability  of  $6 million ($60 million – $54 million). I do not believe the net liability should be in the financial statements of  Delta at all – it is a net liability of  the defined benefit pension plan, not of  Delta.

Therefore, in computing the draft profit of  $42 million, I have used $6 million of  the $11 million contributions  paid  by  Delta  to  debit  the  liability  and  charged  the  remaining  $5  million  of   contributions  as  an  operating  cost  in  the  statement  of   profit  or  loss  and  other  comprehensive  income. You can ignore the amounts paid out to retired employees completely – the plan pays these out, not Delta. Other than my accounting for these contributions, nothing should appear in the financial statements of  Delta.

You  may  have  noticed  that  there  is  a  note  on  the  file  of   information  relating  to  the  pension  plan which states that the annual rate of  return on high quality corporate bonds has been 8% throughout the year ended 30 September 20X9. You can ignore this though; you do not need this information to carry out my instructions.

(10 marks)

Requirement

Using the information in exhibit, explain and show how the transactions described there should be accounted for in the financial statements of Delta for the year ended 30 September 20X9.

Answer

The relevant standard is IAS 19 – Employee Benefits. IAS 19 states that in the case of a defined benefit retirement plan, the contributing company should recognise the net defined benefit obligation/asset (pension liability less pension asset) in its own statement of financial position. Therefore the treatment of this amount in the statement of financial position at 30 September 20X8 is correct but will need to be updated to reflect the position at 30 September 20X9 and cannot be ignored per the FD’s suggestion. The net defined benefit obligation will be $9 million ($67 million – $58 million).

IAS 19 states that the current service cost (the increase in the defined benefit pension liability as a result of service in the current reporting period) should be recognised as an operating expense in the statement of profit or loss for the year. In the case of Delta, this expense is $12·5 million and not the $5m presently charged to PL.

IAS 19 further requires that an interest charge on the net pension liability be shown as a finance cost in the statement of profit or loss. This charge should be based upon the opening net defined benefit liability using the rate of return on high quality corporate bonds at the start of the reporting period.

In this case, the finance cost for the year ended 30 September 20X9 will be $480,000 ($6 million x 8%).

The contributions payable by Delta to the defined benefit plan will be invested by the plan managers as plan assets and in effect reduce the closing amount of the net defined benefit liability. It cannot be used simply to reduce the liability as suggested by the FD or indeed expensed to profit or loss.

The benefits paid to retired plan members will reduce both the overall defined benefit liability and the assets of the plan, so will have no impact on the overall financial position of the net defined benefit obligation shown on Delta’s statement of financial position.

Any difference between the opening and closing net liability and the impact of the transactions already described will be treated as an actuarial gain or loss. Any such gain or loss will be recognised in other comprehensive income.

In this case the actuarial loss will be $1·02 million (W1).

Examiners Feedback

Candidates who had good understanding of IAS 19 Employee Benefits attempted this

question well and managed to score high marks.

Areas that were addressed well were:

• Overall presentation of the numerical workings, often through use of the spreadsheet response area.

• Appreciating that Delta should recognise the net defined obligation / asset (pension liability less pension asset).

• Stating that the current service cost would lead to an increase in the defined benefit pension liability with corresponding entry being reflected as an operating expense in the statement of profit or loss for the year.

• Computing the interest charge is based on the net pension liability (opening net pension liability x % rate of return on high quality corporate bonds) which would be shown as a finance cost in the statement of profit or loss. Candidates who calculated the interest charge on the pension assets and liability separately were awarded similar marks.

• Computing the actuarial gain or loss as a reconciling item. 

Relatively common errors that were apparent were:

• Incorrectly stating that contributions payable by Delta would be reflected in the statement of profit or loss.

• Showing benefits paid to retired plan members as a reduction to either plan assets or plan liabilities, rather than as a self-cancelling item in the computation of actuarial gain or loss.

• Knowledge dumping on generic theory of defined benefit plan as well as comparing this to a defined contribution plan.