Question Tag: Settlement

Mensah Ltd is a telecommunication company with a year-end of 30 September 2022 that operates a defined benefit pension scheme. On 31 March 2022, the company announced that it was to close down a business division and agreed to pay each of its 300 staff a cash payment of GH¢100,000 to compensate them for the loss of pension arising from wage inflation. It is estimated that the closure will reduce the present value of the pension obligation by GH¢11.6 million. Mensah Ltd is unsure of how to deal with the settlement and curtailment and has not yet recorded the transaction in its financial statements.

Required:
In accordance with IAS 19: Employee Benefits, show the accounting treatment for the above transaction in Mensah Ltd’s financial statement for the year ended 30 September 2022.
(Total: 5 marks)

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Answer:

1. Settlement and Curtailment Loss
   The estimated settlement on the pension liability is calculated as follows:
   • 300 employees x GH¢100,000 = GH¢30 million
   • This amount of GH¢30 million should be included within current liabilities in the statement of financial position.
2. Curtailment Gain
   The curtailment gain is estimated at GH¢11.6 million. As this is GH¢18.4 million (i.e., GH¢30 million – GH¢11.6 million) more than the estimated curtailment gains, a loss of GH¢18.4 million should be recognised within retained earnings.
3. Reduction in Non-Current Liabilities
   The non-current liabilities are reduced by the GH¢11.6 million due to the reduction in pension obligations.

(Appropriate distribution of 5 marks)