Employee Benefits - (Pensions)

Question 1

IAS 19 Short-term employee benefit meaning

Answer 1

benefit settled within 12 months of the year-end of the year when employee gives service

Question 2

IAS 19 Termination benefit meaning

Answer 2

Redundancy benefits

Question 3

IAS 19 Post-employment benefit meaning

Answer 3

Benefit payable after termination of employment (that is not a short-term or termination benefit).

Question 4

Accounting for short-term benefits

Answer 4

Recognise the undiscounted amount of benefits expected to be paid as a liability after deducting any amounts which have been paid to employees

Question 5

Where there is a present obligation on the employer to make a payment, how should it be recognised?

Answer 5

liabilities for bonuses/commission and the accompanying expenses should be recognised.

Question 6

In considering benefits that allow employees to take leave, what is accumulating benefits?

Answer 6

e.g. unused holiday leave

• unused entitlements can be carried forward to future years
• Ensure accruals are made for any entitlements carried forward into next year.

Question 7

In considering benefits that allow employees to take leave, what is non-accumulating benefits

Answer 7

e.g. unused sick leave

on a ‘use it or lose it basis’ - entitlements cannot be carried forward to future years.

only recognise the entitlement used as an expense when employees take leave

Question 8

Post-employment benefits (Pension) introduction:

Pension occurs when as part of the terms of the employment contract… who agrees the. contribution and how is it utilised?

Answer 8

the employer agrees to make contributions into a fund which may be used for the employees to draw a cash benefit (a pension) once they have retired until they die.

Question 9

Post-employment benefits (Pension) introduction:

Most pension schemes (plans) are ‘funded’.

How is it normally set up?

Answer 9

A separate entity is set up, the employer and/or employees pay contributions into the fund.

The contributions are invested into an asset which earns return to pay for future pensions.

Question 10

Post-employment benefits (Pension) introduction:

State pensions are oftern ‘unfunded’, what does this mean?

Answer 10

It means that contributions from current employees ( NI contribution) pay current pensioners.

–> accounted on accrual basis similar to short-term benefits.

Question 11

What are the two main types of contribution

Answer 11

Defined contribution pension plan

Defined benefit pension plan

Question 12

What is a defined contribution pension plan?

Answer 12

Employers pay a specified %contn (based on salary) to the pension fund.

The fund invests into an asset.

On retirement, the asset accumulated in the fund is used to purchase annuity investment which pays the retiree annual pension benefit.

Question 13

What negatives of defined contribution pension plan?

Answer 13

investment risk exists, if the pension fund performs badly, this would result in a low annual pension for the employee

Question 14

How to account for defined contribution plan?

Answer 14

The pension fund remain in a separate entity

Employer simply shows their accrued contribution for the accounting period as expense.

Any amount not paid as liability.

Question 15

how to know if it is a Defined benefit pension plan?

Answer 15

If a pension plan does not meet the definition of a defined contribution pension plan then it is classified as a defined benefit pension plan.

Question 16

How does benefit pension plan work?

Answer 16

typically the employer has an obligation to pay a specified pension benefit to the employee every year from retirement until their death.

Sometimes employees can also pay a% of their salary as a contribution.

The contribution to the scheme by employees is put into an asset

Question 17

How is the benefit pension plan normally calculated?

Answer 17

This benefit is typically calculated as a fraction of the employee’s final salary times the number of years of service.

Varies by the scheme( e.g. final average or career average may be used).

Question 18

Is the benefit pension plan better for the employees?

Answer 18

Yes, as the investment risk lies with the employer, if the accumulated pension funds perform badly and/or

the expected pension obligation increases (e.g. due to pay rise or increase in life expectancy of employees).

The employer will have to increase contributions to allow the plan to have sufficient assets to meet the pension obligation.

(employer accountable for any pension deficit)

Question 19

Accounting for defined benefit pension plan:

Answer 19

Record the obligation to pay contributions into the pension plan as an expense in the income statements as the employees provide service (pro-rata)

Liabilities are limited to any pension contributions outstanding at year-end

The pension plan assets are held in a separate entity (not included in employers’ SOFP)

The plan does not require adjustments for changes in actuarial assumptions or FV

Question 20

Defined benefit scheme:

Pension plan assets, how are employees protected in their Pension plan assets?

Answer 20

Assets are held in a legally separate entity from the reporting entity. (RIngfencing). This is in place to ensure if the employe company becomes insolvent, the pension assets cannot be used to pay the employer company creditors.

Therefore employees protected.

Question 21

How is Pension plan assets measured?

Answer 21

Measured at fair value, ususally market value but IFRS 13 FV applies here.

In exams normally given valuations for assets at the start and end of the reporting period(year).

The end of year adjustments are treated as an actuarial adjustment

Question 22

Defined Benefit scheme:

Pension plan obligation

Answer 22

employers promise to pay for an employees pension –> obligating event

Question 23

Future pension liabilities are uncertain and will need to be adjusted, how do we adjust for them?

Answer 23

Need to be estimated in trying to calculate the future pension liability.

The actuary will put in place assumptions about these uncertainties based on modeled data.

We call these actuarial assumptions.

as These change over time, the pension plan would need to be adjusted -> another actuarial adjustment at the end of the reporting period.

Question 24

Defined benefit pension - what is reported in the SOFP?

Answer 24

Pension fund assets are netted off against the pension obligation and are reported as a single NET figure in the statement of financial position.

This could be a net pension liability (where the pension plan is in deficit and the plan obligation is greater than plan assets or a net pension asset (where the pension plan is in surplus and plan assets exceed plan obligation.)

Question 25

What do we need to apply if there is a net pension asset?

Answer 25

Asset ceiling must apply.

Question 26

Asset Ceiling, what is it?

Answer 26

present value of any refunds of/ reductions in future contributions to the pension plan due to the surplus.

asset ceiling is given in exam

Question 27

How do we account for when the asset ceiling is lower than the net pension asset?

Answer 27

the entity must reduce (impair) the pension asset down to the asset ceiling

charging the impairment lost to other comprehensive income (OCI).

Question 28

How do we account for when the asset ceiling is higher than the net pension asset?

Answer 28

no adjustments needed

Some argue this is asymmetric prudence.

Question 29

IAS 19 critiques

Defined benefit plan critique, Kiosse and peasnell(2009) argued that IAS 19 places large liabilities on the SOFP.. why might that be a problem?

Answer 29

Considered IAS 19 places large liabilities on the SOFP of an entity and increased volatility to the income statement.

Consequently, defined benefit plans has decreased drastically

However peasnell also provided that the shift may be due to increased longevity of employees increasing pension costs, increased prudential regulations and reduced tax incentives

Question 30

IAS 19 critiques of defined benefit plan

Anantharaman and chuk (2018) that IAS 19…has positive impact on what…

Answer 30

had positive impact on risk management of defined benefit pensions

They observed entities shifted towards less volatile plan assets after adopting IAS 19.

But it also meant lower returns.

Question 31

IAS 19 critiques of defined benefit plan

Many commentators also pointed out that IAS 19 does not provide ‘hybrid’ pension plans….

Answer 31

which contain both defined contribution elements and defined benefits elements.

Question 32

IAS 19 critiques of defined benefit plan

Napier (2009) argues asymmetric prudence…

Answer 32

in assets are capped, but a similar cap doesn’t exist for liabilities.

Further asymmetric prudence shown in the calculation of plan obligations in that the project unit credit method incorporates future pay rises

but the plan assets are valued at their current MV

Question 33

IAS 19 critiques of defined benefit plan

The pension fund is kept at a separate entity than the employer, why might that be an issue

Answer 33

Some argue that we should include pension fund in employers financial statement as the employer bears risks related to defined benefit plan

Others argue that the employer does not control net pension assets created from funds in surplus as the asset ‘belong’ in trust to the employees not the employer

Question 34

Conceptually, is it consistent to recognise some of the gains on plan assets in the IS and some in OCI (Reserves)?

Answer 34

Although use of OCI does shield the IS from volatility arising from revising actuarial assumptions

but does this contravene the framework that states key elements of performance should be reported in IS? –> faithful representation?

Question 35

IAS 19 Pension Disclosures:

Why does benefit pension plans need extensive disclosure notes?

Answer 35

Because it does expose entities to consideration risk, as it may be volatile and liabilities may be huge.

Therefore, detailed disclosure notes is required and sensitivity analysis is conducted to report the impact on future cash flows.