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.