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IAS 19Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIAS 19L4 · Expert

Plan in surplus: asset ceiling, minimum funding, member contributions and disclosures

6 documents15 tasks≈ 120 min
0 / 17 items completed
Standards
IAS 19 — Employee Benefits
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Vellaris SA (fictitious entity) closes its accounts on 31 December 20X6. Its defined benefit pension plan, funded through a separate fund, shows a surplus at the closing date. The finance director wants to know which net asset to recognise in the statement of financial position, how to take the required minimum funding into account, how to treat the contributions of the members and which information to prepare for the notes.

Your assignment

State what the surplus measures and what the asset ceiling limits; conclude on the economic benefits available; compute, for each of the next three years, the difference between the minimum funding contributions for future service and the future service cost, then the benefit available as a reduction in contributions; determine the net asset to recognise and the effect of the ceiling, then record it and present its effect on the financial statements; classify the two kinds of member contributions and compute the net service cost; place the 2021 agenda decision; say which information to prepare for the notes and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

6 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Vellaris SA (fictitious entity) makes electronic components; it closes its accounts on 31 December and its functional currency is the euro. Case conventions (pedagogical assumptions): amounts in EUR; the defined benefit cost of the year is already recognised before the ceiling, so the surplus is in the net asset and the effect of the ceiling was nil at the opening; the horizon of the future flows is limited to three years; no minimum funding requirement creates an additional liability; the tax effect is ignored; the rates, the flows and the sensitivities are data from the actuary.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Closing obligation€12,400,000.00
Fair value of the plan assets€13,750,000.00
Surplus of the plan€1,350,000.00
Discount rate of the plan5%
Present value of the future service cost (three years)€1,197,343.70
Present value of the minimum contributions for future service (three years)€779,138.32
Increase in the obligation if the rate falls by 0.5 point€670,000.00
Decrease in the obligation if the rate rises by 0.5 point€610,000.00
Future service cost, year 1€430,000.00
Future service cost, year 2€440,000.00
Future service cost, year 3€450,000.00
Total minimum contribution, year 1€300,000.00
Total minimum contribution, year 2€590,000.00
Total minimum contribution, year 3€330,000.00
Part for past service, year 1€120,000.00
Part for past service, year 2€120,000.00
Part for past service, year 3€120,000.00
Part for future service, year 1€180,000.00
Part for future service, year 2€470,000.00
Part for future service, year 3€210,000.00
Gross service cost of 20X6€520,000.00
Member contributions independent of seniority€90,000.00
Member contributions dependent on seniority€27,000.00
Recruitment firm invoice€14,800.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort6

  • Company profile and case conventions

  • Actuary report at 31 December 20X6

  • Plan rules and funding schedule

  • Rules: member contributions

  • Finance note: "Retirement 62" plan

  • Recruitment firm invoice

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        What does the surplus of the plan measure, and what does the asset ceiling limit?

      2. Task 2Professional judgement

        Does the entity have an unconditional right to a refund or to a reduction in future contributions?

      3. Task 3Calculation

        Compute, for each of the three years and then in present value, the difference between the minimum funding contribution for future service and the future service cost.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute, for each of the three years and then in present value, the difference between the minimum funding contribution for future service and the future service cost.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Difference in present value (779,138.32 − 1,197,343.70)

      4. Task 4Calculation

        Determine the benefit available as a reduction in contributions, without it being below zero.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Determine the benefit available as a reduction in contributions, without it being below zero.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Analysis

        Why are the contributions for past service (regulatory deficit) not part of the computation of the benefit available?

      6. Task 6Calculation

        Determine the net asset to recognise.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Determine the net asset to recognise.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Compute the effect of the ceiling.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the effect of the ceiling.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Journal entries

        Record the effect of the ceiling.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      9. Task 9Effects on the financial statements

        What is the effect of the entry on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      10. Task 10Professional judgement

        Which of the two kinds of member contributions may be recognised as a reduction of the service cost, and how to treat the other?

      11. Task 11Calculation

        Compute the net service cost of 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the net service cost of 20X6.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Analysis

        Does the 2021 agenda decision impose an attribution method, and what does this case do with its conclusion?

      13. Task 13Analysis

        What is the objective of the information to provide on the plan, and which reconciliation of the net asset to prepare?

      14. Task 14Analysis

        Which sensitivity analysis to present, and what do the data from the actuary show?

      15. Task 15Conclusion

        Write the conclusion.

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 17).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 19 §64
      • IAS 19 §93
      • IAS 19 §135
      • IAS 19 §145