6 Flashcards
What is a liability
Present obligation of entity to transfer an economic resource as a result of past events
For a liability to exist what three criteria must be met
Entity has an obligation
Obligation is to transfer an economic resource
Obligation is a present obligation that exists as a result of past events
What are executory contracts
Contracts under which neither party has performed any obligations or both parties partially performed their obligations to an equal extent
What are provisions
Liability of uncertain timing or amount. Liability may be legal obligation or constructive obligation
When is a provision recognised
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
What are examples of provisions
Warranty obligations, legal or constructive obligations, obligations caused by retailers policy
What are contingent liabilities
Possible obligations whose existence will be confirmed by uncertain future events that are not wholly within control of entity
Is a contingent liability recognised in statement of financial position
No however, unless possibility of an outflow of economic resources is remote, a contingent liability is disclosed in notes
What are contingent assets
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
According to 2018 framework, what features may suggest non
recognition of a liability
Existence uncertainty
Low probability of flows
Measurement uncertainty
What are current benefits rewarding employees
Salaries and wages
Non cash benefits
What are deferred benefits rewarding employees
Short-term – paid holidays, bonuses
Medium term – share options
Long-term – pensions, health insurance for retired workers
What is the pension exchange
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
What are unfunded pensions
Sometimes called pay-as-you-go
Pension paid out of employers cash flows when employees retire
Poor security for employees 
What are funded pensions
Employer and often employees pay into pension fund – contributions invested
Pension fund pays pension
What are the types of pension scheme
Defined contribution and defined benefit 
What is defined contribution
Contributions by company based on predefined rates
Pension based on value of accumulated pension fund
Employee bears all risk
What is defined benefit
Pension calculated according to benefit formula
Employer liable – might set aside assets in fund. Liability on balance sheet is obligation minus fund
What are the key factors in benefit formula
Length of service and pay
What is length of service in benefit formula
Pension is given proportion of pay for each year of employment
What is pay in benefit formula
Final salary – pension based on pay just before retirement
Career average – pension based on average pay
What are the main actuarial assumptions of pensions
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
What are pension fund assets
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
Is employers liability shown as net
Yes – pension fund assets are deducted, measured at fair value
What does it mean if pension assets are greater than pension liabilities
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
How are pension liabilities measured
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
What are the elements of total pension cost
Current service cost – operating costs
Interest on net pension liability – finance costs
Remeasurement gains and losses, return on fund assets – other comprehensive income
How is the current service cost measured
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
What are the remeasurement gains and losses
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
What are the retirement benefits in the UK
No FTSE 100 Company now operates on active defined benefit scheme however, liabilities continue
