- 15 Marks
CR – Nov 2017 – L3 – Q5 – Employee Benefits (IAS 19)
Explain and distinguish between defined contribution and defined benefit plans, providing IAS 19 accounting treatments for two pension plans.
Question
Tinubun Plc., a public limited company, operates two pension plans.
Pension Plan 1
The terms of the plan are as follows:
- Employees contribute 6% of their salaries to the plan.
- Tinubun Plc. contributes, currently, the same amount to the plan for the benefit of the employees.
- On retirement, employees are guaranteed a pension based on the number of years’ service with the company and their final salary.
- This plan was closed to new entrants from October 31, 2016, but it remains open for future service accrual for employees already in the scheme.
The following details relate to the plan in the year ending October 31, 2017:
| Description | Amount (₦’m) |
|---|---|
| Present value of obligation at Nov 1, 2016 | 200 |
| Present value of obligation at Oct 31, 2017 | 240 |
| Fair value of plan assets at Nov 1, 2016 | 190 |
| Fair value of plan assets at Oct 31, 2017 | 225 |
| Current service cost | 20 |
| Pension benefits paid | 19 |
| Total contributions paid to the scheme | 17 |
Actuarial gains and losses are recognized in the Statement of Other Comprehensive Income.
Pension Plan 2
Under the terms of this plan, Tinubun Plc. does not guarantee any return on the contributions paid into the fund. The company’s legal and constructive obligation is limited to the amount contributed to the fund. The following details relate to this scheme:
| Description | Amount (₦’m) |
|---|---|
| Fair value of plan assets at Oct 31, 2017 | 21 |
| Contributions paid by company | 10 |
| Contributions paid by employees | 10 |
The discount rates for the two plans are as follows:
| Date | Discount Rate |
|---|---|
| October 31, 2017 | 6% |
| November 1, 2016 | 5% |
Required:
a. Explain the nature and differences between a defined contribution plan and a defined benefit plan with specific reference to the company’s two schemes.
(7 Marks)
b. Show the accounting treatments for the two Tinubun Plc. pension plans for the year ended October 31, 2017 under IAS 19 ‘Employee Benefits’.
(8 Marks)
Total: 15 Marks
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