IAS 19 - Employee Benefits

Question 1

4.Columbia

Answer 1

• Defined Benefit Pension Scheme Surplus:
  
  • IAS 19 requires surplus to be measured as the lower of the surplus in the plan and the present value of economic benefits in the form of refunds from the plan or reductions in future contributions (asset ceiling).
  • At 1 January 20X5, scheme surplus is $60 million, but asset ceiling is only $20 million, restricting the pension asset to $20 million.
  • Adjusted interest income for the year is $1 million (5% × $20 million).
• Summary of Pension Scheme Surplus at 31 December 20X5:
  
  • Net plan assets after ceiling adjustment: $12 million.
  • Remeasurement loss of $7 million ($54 million - $47 million) is noted.
  • Despite scheme surplus valuation of $47 million, it’s restated to $25 million due to the asset ceiling.
  • Net gain of $13 million ($25 million - $12 million) is recognized in other comprehensive income.
• Inclusion in Financial Statements:
  
  • Pension scheme asset should be included at $25 million (lower of $25 million and $47 million).

Question 2

5. Sugar

Answer 2

• Treatment of Defined Benefit Pension Scheme in Consolidated Cash Flows:
  
  • Only contributions paid into the scheme should be recorded in the consolidated statement of cash flows.
  • Contributions to defined benefit schemes typically fall under operating activities.
  • Sugar Co didn’t make contributions during the year, resulting in no cash flows for the year ended 30 June 20X8.
  • $2 million benefits paid out of the scheme are considered outflows from the pension scheme itself, not Sugar Co.
• Impact of Defined Benefit Pension Scheme on Consolidated Cash Flows:
  
  • Despite no contributions, the scheme affects consolidated cash flows.
  • In the indirect method, adjust for non-cash items affecting operating profit.
  • Service cost component should be added back to group profits.
  • Finance costs should be adjusted by adding back the net interest component to group profits.
  • Remeasurement component doesn’t affect cash flows or operating profit.
• Defined Contribution Pension Scheme:
  
  • Expense of $0.4 million should be added back to group profits.
  • Contributions actually paid ($0.3 million) reflect a cash outflow in operating activities.
  • Accrual of $0.1 million isn’t included in cash flow as it represents outstanding contributions.

Question 3

Non-Pension Benefit

40.Handfood

Answer 3

• Nature of the Benefit:
  
  • The benefit in question is not a pension but an “other long-term benefit” for current employees.
  • It won’t be settled within 12 months of the reporting period, hence it’s categorized as a long-term obligation.
• Accounting Treatment for Other Long-Term Benefits:
  
  • Similar to defined benefit pension schemes but with differences in recognizing remeasurement components.
  • Handfood Co incorrectly recognizes this amount in other comprehensive income.
  • Handfood Co should recognize a liability for its obligations related to the additional employee benefit.
  • Measure the benefit liability at the present value of obligations at the reporting date.
  • Recognize service costs, net interest, and remeasurements in profit or loss.
• Recognition of Current Service Cost:
  
  • Handfood Co should recognize a current service cost expense of $7,700 in profit or loss.
  • Calculation:
    
    • Expected final salary: $1.1 million × (1.03)^4 = $1,238,000
    • Benefit for the current year: 1% × $1.238 million = $12,400
    • Adjusted benefit for the current year: 75% × $12,400 = $9,300
    • Current service cost: (($9,300 × 0.823) discounted at 5% over 4 years) = $7,700

Question 4

40.Handfood

Answer 4

• Effect of Changes in Assumptions:
  
  • An increase in employees’ salaries above 3% per annum and a decrease in the probability of employees leaving the company both increase the additional benefit liability.
  • These changes would increase the benefit liability (discounted) at 31 December 20X3.
  • Consequently, the current service cost for the year in profit or loss would increase because the benefit payable on 1 January 20X7 and the number of employees to whom the benefit will be payable have increased.
• Interest Calculation:
  
  • Interest, calculated on the opening balance of the benefit obligation, remains unaffected by changes in assumptions.
  • It will be charged to profit or loss at $385 ($7,700 × 5%).
• Actuarial Gains or Losses:
  
  • Changes in assumptions lead to actuarial gains or losses.
  • In this case, an actuarial loss arises due to the increase in benefits payable and the obligation, resulting from changes in assumptions.
  • This actuarial loss will be charged to profit or loss.

Question 5

42.Ecoma

Answer 5

• Remeasurement of Plan Assets and Obligations:
  
  • At each financial year end, the plan assets and the defined benefit obligation are remeasured.
  • The obligation is measured at present value, while the assets are measured at fair value.
• Components of Pension Expense:
  
  • Pension expense in profit or loss includes the net interest component and service costs.
  • Net interest is computed by multiplying the opening net defined benefit liability by the discount rate at the start of the annual reporting period.
  • Service costs consist of current service costs and past-service costs resulting from plan amendments. Past-service costs should be recognized as an expense when the plan amendment occurs or when related restructuring costs or termination benefits are recognized, regardless of vesting requirements.
• Recognition of Past Service Costs:
  
  • Past-service costs of $9 million will be recognized at 30 September 20X5.
• Remeasurement Gains and Losses:
  
  • Remeasurement gains and losses are recognized in other comprehensive income (OCI).
  • These gains and losses cannot be reclassified to profit or loss.
• Change in Net Pension Obligation:
  
  • The net pension obligation for the period reflects changes as per the table provided.
  • The statement of profit or loss will be charged with the net interest component of $3.2 million and the total service cost of $27 million ($18 million + $9 million).
  • Benefits paid do not affect the net obligation, as both plan assets and obligations decrease by $6 million.
  • OCI will be credited with the $1.2 million remeasurement gain, which cannot be reclassified to profit or loss.