Example 1 - asset ceiling - impact of ceiling

Example 2 - plan assets - transfer of non-financial assets to plan

Company B contributes property to its plan with a carrying amount of 100 and a fair value of 160 in settlement of
contributions due to the fund of 160. Because B has transferred the risks and rewards of ownership to the fund and
the plan assets are not consolidated by B, in our view B should recognise a gain of 60 on the contribution in profit or
loss in the period in which the asset is contributed.

Example 3- reimbursement right or state benefit - state subsidy to plan sponsor

Company M provides post-retirement medical benefits to its employees. The defined benefit obligation at 31
December 2015 is 150, excluding any effects of a state subsidy, and the plan assets are 50. As a result, without the
effect of the state subsidy, M would recognise a net defined benefit liability of 100 (net of plan assets of 50) in the
2015 financial statements.
Question-1

Hillview company’s operating expenses include £405,000 relating to the its defined benefit pension scheme. This
figure represents the contributions paid into the scheme in the year. No other entries have been made relating to
this scheme. The figures included in the draft statement of financial position represent opening balances as at 1
October 20X6:
£ '000
Pension scheme assets 2,160
Pension scheme liabilities (2,530)
(370)
Deferred tax asset 85
(285)

After the year end, a report was obtained from an independent actuary. This gave valuations as at 30 September
20X7 of:
£ '000
Pension scheme assets 2,090
Pension scheme liabilities (2,625)

Other information in the report included:

Current service cost 374
Payment out of scheme relating to employees transferring out 400
Reduction in liability relating to transfers 350
Pensions paid 220

Interest rate on high quality corporate bonds at 1 September 20X7 10%

All receipts and payments into and out of the scheme can be assumed to have occurred on 30 September 20X7.

Hillview's accounting policy is to recognise any gains and losses on remeasurement of the defined benefit asset
or liability (actuarial gains and losses) in accordance with IAS 19, Employee Benefits (revised 2011).

In the tax regime in which Hillview operates, a tax deduction is allowed on payment of pension benefits. No tax
deduction is allowed for contributions made to the scheme. The rate of tax applicable to 20X6, 20X7 and
announced for 20X8 is 23%.

Requirement: Explain how each of the above transactions should be treated in the financial statements for the
year ended 30 September 20X7.

Question: 2

Pension scheme

Maersk Ltd. set up a funded defined benefit pension plan for management-track employees three years ago. The
plan provides a pension based on 1/80th of the final salary for each year worked for the company, subject to a
minimum employment period of eight years.

The following information has been provided by the actuary for the year ended 30 September 20X1:

(a) The present value in terms of future pensions from employee service during the year is £90,000. This has
been determined using the projected unit credit method.

(b) The present value of the obligation to provide benefits to current and former employees has been calculated
as £2.41 million at 30 September 20X1 and the fair value of plan assets was £2.37 million at the same date.

(c) The interest rate on high quality corporate bonds relevant to the year was 5%. The following has been
extracted from the financial records:
(a) The present value of the defined benefit obligation was £2.2 million at 30 September 20X0 and the fair value
of the plan assets was £2.3 million at the same date.

(b) Pensions paid to former employees during the year amounted to £60,000.

(c) Contributions paid into the plan during the year as decided by the actuary were £68,000. With effect from 1
October 20X0, the company amended the plan to increase pension entitlement for employees. The present value
of the improvement in benefits was calculated by the actuary to be approximately £100,000 at 1 October 20X0.
The present value of the plan liability at 30 September 20X1 correctly reflects the impact of this increase.

(d) The company recognises gains and losses on remeasurement of the defined benefit asset or liability (actuarial
gains and losses) in accordance with IAS 19, Employee Benefits (revised 2011).

(e) Pension payments and the contributions into the plan were paid on 30 September 20X1.

Requirement: Explain how each of the above transactions should be treated in the financial statements for the
year ended 30 September 20X1.

Question: 3

Aytace operates a defined benefit pension scheme. Employees are not required to make any contributions into
the scheme. Aytace recognises remeasurement (actuarial) gains and losses immediately through other
comprehensive income in accordance with IAS 19, Employee Benefits (revised 2011).

The scheme assets had a fair value of £12.2 million and £13.5 million at 31 May 20X2 and 31 May 20X3
respectively. Scheme obligations had a present value of £18 million and £19.8 million at 31 May 20X2 and 31
May 20X3 respectively.

At 1 June 20X2 the interest rate on high quality corporate bonds was 6%.

In the year ended 31 May 20X3, employer contributions paid into the scheme were £0.9 million, and pensions
paid by the scheme during the year amounted to £1.1 million. These payments took place on 31 May 20X3. The
service cost for the year ended 31 May 20X3 was £1.2 million.

Aytace decided to improve the pension benefit at 1 June 20X2 for staff who will have worked at least five years
for the company at the date the benefit is claimed. The scheme actuary calculated the additional benefit obligation
in present value terms to be £400,000.

The only entry in the financial statements in respect of the year ended 31 May 20X3 was to recognise in profit or
loss the contributions paid to the scheme by Aytace, with no adjustment to the scheme obligations in the
statement of financial position.

Requirement: Explain how each of the above transactions should be treated in the financial statements for the
year ended 31 May 20X3.

Question: 4

The terms of the pension plan have been summarised by Maykem as follows.

Employees contribute 6% of their salaries to the plan.

Maykem contributes, currently, the same amount as the employees to the plan for the benefit of the employees.
On retirement, employees are guaranteed a pension which is based upon the number of years service with the
company and their final salary.
The following details relate to the plan in the year to 31 May 20X8:
£'000
Present value of obligation at 1 June 20X7 3,600
Present value of obligation at 31 May 20X8 4,320
Fair value of plan assets at 1 June 20X7 3,420
Fair value of plan assets at 31 May 20X8 4,050
Current service cost 360
Pension benefits paid 342
Total contributions paid to the scheme for year to 31 May 20X8 306

Gains and losses on remeasurement (actuarial gains and losses) are recognised in accordance with IAS 19,
Employee Benefits.

The interest rate on high quality corporate bonds at 1 June 20X7 was 5%.

Assume cash contributions are received and pension payments are made at the year end.

Requirement: Explain how each of the above transactions should be treated in the financial statements for the
year ended 31 May 20X8.

Question: 5

Pension schemes

EyeOP contributes to two pension schemes on behalf of its employees: Scheme A and Scheme B. The total
contribution paid to the company's pension schemes of £9.2 million is recognised in administrative expenses.
The breakdown of the contribution and details of the schemes are as follows:

Scheme A Details

EyeOP will make a contribution of £6.4 million to scheme A in the year ending 31 December 20X6.

This scheme is for directors and employees who have worked for more than five years for the company. EyeOP
has a contractual obligation to ensure that its contributions are sufficient to provide a pension to the scheme
members at retirement. The pension is based on an average of the member's final three years' salary. Scheme
A is separately constituted from Scheme B (see below). Scheme A is now closed to new members.

Scheme B Details

EyeOP will make a contribution of £2.8 million to Scheme B in the year ending 31 December 20X6.

This scheme is for employees who are not eligible for Scheme A.

Contributions create, for an employee, a right to a portion of the scheme assets, which can be used to buy an
annuity on retirement. Contributions are fixed at 7% of the annual salary for the employer and 3% for the
employee.

The following information relates to Scheme A as reported in the financial statements for the year ended 31
December 20X5:
£m
Pension scheme assets 22.0
Present value of the obligation (60.0)
Post-employment net benefit obligation (38.0)
The scheme actuary provided the following information:
During the year ending 31 December 20X6, 15 senior employees will be made redundant and as a
consequence, EyeOP will commit to pay additional pensions to these employees under the terms of their
redundancy. This contributes an additional £4.2 million to the present value of the pension obligation.

The valuation of the pension scheme assets and the present value of the pension obligation at 31 December
20X6 are now expected to be £32.6 million and £74.5 million respectively.

Other information estimated for the year ending 31 December 20X6:

Yield on high-quality corporate bonds 5% pa

£m
Current service cost 5.9
Benefits paid to former employees 2.1
Actual return on scheme assets 6.3

Except for the recognition of the pension contributions of £9.2 million in administrative expenses, no adjustments
have been made to the draft forecast statement of profit or loss for the year ending 31 December 20X6.

Requirement: Explain how each of the above transactions should be treated in the financial statements for the
year ended 31 December 20X6.