6

Question 1

What is a liability

Answer 1

Present obligation of entity to transfer an economic resource as a result of past events

Question 2

For a liability to exist what three criteria must be met

Answer 2

Entity has an obligation
Obligation is to transfer an economic resource
Obligation is a present obligation that exists as a result of past events

Question 3

What are executory contracts

Answer 3

Contracts under which neither party has performed any obligations or both parties partially performed their obligations to an equal extent

Question 4

What are provisions

Answer 4

Liability of uncertain timing or amount. Liability may be legal obligation or constructive obligation

Question 5

When is a provision recognised

Answer 5

If it’s probable (more than 50%) that an outflow of cash or other economic resources will be required to settle provision. If an outflow is not probable, item is treated as a contingent liability

Question 6

What are examples of provisions

Answer 6

Warranty obligations, legal or constructive obligations, obligations caused by retailers policy

Question 7

What are contingent liabilities

Answer 7

Possible obligations whose existence will be confirmed by uncertain future events that are not wholly within control of entity

Question 8

Is a contingent liability recognised in statement of financial position

Answer 8

No however, unless possibility of an outflow of economic resources is remote, a contingent liability is disclosed in notes

Question 9

What are contingent assets

Answer 9

Possible assets whose existence will be confirmed by occurrence or non-occurrence of uncertain future events that are not wholly within control of entity. Contingent assets are not recognised but they are disclosed when it’s more likely than not that an inflow of benefits will occur. However when inflow of benefits is virtually certain an asset is recognised in statement of financial position, because asset is no longer considered to be contingent

Question 10

According to 2018 framework, what features may suggest non
recognition of a liability

Answer 10

Existence uncertainty
Low probability of flows
Measurement uncertainty

Question 11

What are current benefits rewarding employees

Answer 11

Salaries and wages
Non cash benefits

Question 12

What are deferred benefits rewarding employees

Answer 12

Short-term – paid holidays, bonuses
Medium term – share options
Long-term – pensions, health insurance for retired workers

Question 13

What is the pension exchange

Answer 13

Employees work today in exchange for promise of pension in future.

Balance sheet impact – employer incurs liability to provide pension payments

Income statement impact– Cost of pension promise must be recognised as expense at time employees working

Question 14

What are unfunded pensions

Answer 14

Sometimes called pay-as-you-go
Pension paid out of employers cash flows when employees retire
Poor security for employees 

Question 15

What are funded pensions

Answer 15

Employer and often employees pay into pension fund – contributions invested
Pension fund pays pension

Question 16

What are the types of pension scheme

Answer 16

Defined contribution and defined benefit 

Question 17

What is defined contribution

Answer 17

Contributions by company based on predefined rates
Pension based on value of accumulated pension fund
Employee bears all risk

Question 18

What is defined benefit

Answer 18

Pension calculated according to benefit formula
Employer liable – might set aside assets in fund. Liability on balance sheet is obligation minus fund

Question 19

What are the key factors in benefit formula

Answer 19

Length of service and pay

Question 20

What is length of service in benefit formula

Answer 20

Pension is given proportion of pay for each year of employment

Question 21

What is pay in benefit formula

Answer 21

Final salary – pension based on pay just before retirement
Career average – pension based on average pay

Question 22

What are the main actuarial assumptions of pensions

Answer 22

Demographic – mortality/life expectancy, employee turnover
Financial – pay increases, return on pension fund assets, discount rate on pension liabilities
Benefits – future changes in benefit formula, discretionary benefits increases

Question 23

What are pension fund assets

Answer 23

Many employers set up pension funds – Assets held separately from company, increase security for employees/pensioners, tax benefits.
Assets of pension fund are used to meet pension liabilities – If assets are greater than liabilities then it’s a surplus, if assets are less than liabilities, then It’s a deficit

Question 24

Is employers liability shown as net

Answer 24

Yes – pension fund assets are deducted, measured at fair value

Question 25

What does it mean if pension assets are greater than pension liabilities

Answer 25

Employer can recognise an asset on balance sheet if there are economic benefits available in form of a refund or reduction of contributions.
If no refund/reduction available, then asset not normally shown on employers balance sheet

Question 26

How are pension liabilities measured

Answer 26

Protected bases used in IFRS – Liabilities based on estimated levels of pay reflecting benefit formula.
Discounting – discount rate should be determined by reference to yield on high quality corporate bonds of currency and term consistent with liabilities

Question 27

What are the elements of total pension cost

Answer 27

Current service cost – operating costs
Interest on net pension liability – finance costs
Remeasurement gains and losses, return on fund assets – other comprehensive income

Question 28

How is the current service cost measured

Answer 28

Increase in present value of defined benefit obligation resulting from employee service in current period.

Calculate projected unit credit attributed to current period.

Measure present value of this using discount rate

Question 29

What are the remeasurement gains and losses

Answer 29

Actual experience is different from assumptions
Assumptions about future may change
Small changes in assumption can lead to big changes in pension assets and liabilities

Question 30

What are the retirement benefits in the UK

Answer 30

No FTSE 100 Company now operates on active defined benefit scheme however, liabilities continue