- 20 Marks
CR – May 2020 – L3 – Q2c – Defined Benefit Pension Plan
Recommend the accounting treatment for a defined benefit pension plan with supporting calculations.
Question
Nzema prepares its financial statements in accordance with International Financial Reporting Standards (IFRS) with a financial year end of 31 December 2018. On 1 January 2018, Nzema commenced a defined benefit pension plan for a number of head office employees. Under the pension scheme, Nzema has an obligation to provide these staff with agreed post-employment benefits. Nzema carries the actuarial and investment risk associated with the pension scheme.
The following information has been compiled from workings by Nzema’s accounting staff and actuarial reports for the 2018 financial year:
| GH¢ | |
|---|---|
| Interest income on plan assets | 16,500 |
| Employer contributions to plan | 550,000 |
| Current service cost | 600,000 |
| Interest on plan liability | 18,000 |
| Fair value of plan assets at 31/12/2018 | 580,000 |
| Present value of plan obligation at 31/12/2018 | 620,000 |
The Accountant was not sure which accounting standard to apply when accounting for the pension scheme. The only adjustment made to account for the scheme was to expense the company’s contributions of GH¢550,000 for the 2018 financial year in the Statement of Profit or Loss and Other Comprehensive Income and to credit the ‘Cash’ account.
Required:
Recommend, with appropriate calculations, the necessary accounting treatment for this accounting issue.
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