May 2021 Q3 a.
Meagya Ltd is a government business entity in Ghana. Meagya Ltd operates a defined benefit scheme which at 31 December 2019 was in deficit by GH¢120 million. Details for the current year are as follows:
. GH¢’million
Current service cost 55
Cash contribution to the scheme 100
Benefits paid in the year 80
Net loss on curtailment 11
Gain on remeasurement of liability at 31 December 2020 9
The rate of interest applicable to corporate bonds was 5% at 31 December 2019. The cash contributions for the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2020. This is the only adjustment that has been made in respect of the scheme.
Required:
Recommend the correct accounting treatment of the above transactions to the directors of Meagya Ltd in the financial statements for the year ended 31 December 2020, including financial statements extracts in accordance with IAS 19: Employee Benefits. (5 marks)
View Solution
Pension scheme
The defined benefit scheme for the year should have been recorded as follows:
. GH¢ million
Net obligation at 31 December 2019 120
Cash contribution into the scheme (100)
Net finance cost for the year (GH¢120 million x 5%) 6
Current service cost 55
Loss on curtailment 11
Gain on remeasurement (9)
Net liability at 31 December 2020 83
The benefits paid do not affect the net liability for the year. Since only the cash contributions have been recorded for the year, the net obligation should be increased by GH¢63 million (GH¢83 million – GH¢20 million). GH¢72 million should be expensed to profit or loss (W12) being the service cost component (current and curtailment) plus the interest charge. GH¢9 million should be credited to other components of equity being the gain on remeasurement.
Statement of profit or loss extract for the year ended (Extract)
. GH¢ million
Defined benefit scheme (GH¢55 + GH¢6 + GH¢11) (72)
Statement of financial position extract GH¢ million
Equity and liability:
OCI – remeasurment component 9
Non-current liabilities:
Increased in defined benefit obligation 63
. 3 marks for financial statement extracts
. 2 marks for reconciliation and movements