2. Which of these events will cause a change in a defined benefit obligation?

Size: px

Start display at page:

Download "2. Which of these events will cause a change in a defined benefit obligation?"

Lee Higgins
6 years ago
Views:

CIS FINANCIAL ACCOUNTIG 2.1 CONTACT NUMBER 08038400843 CONTACT HOURS TUESDAYS AND FRIDAY 6PM 7PM. QUESTIONS. WEEK 8- BORROWING & RETIREMENT BENEFIT CHAPTER 14 & 15. MULTIPLE CHOICE 1.

1 CIS FINANCIAL ACCOUNTIG 2.1 CONTACT NUMBER CONTACT HOURS TUESDAYS AND FRIDAY 6PM 7PM. QUESTIONS. WEEK 8- BORROWING & RETIREMENT BENEFIT CHAPTER 14 & 15. MULTIPLE CHOICE 1. An entity contributes to an industrial pension plan that provides a pension arrangement for its employees. A large number of other employers also contribute to the pension plan, and the entity makes contributions in respect of each employee. These contributions are kept separate from corporate assets and are used together with any investment income to purchase annuities for retired employees. The only obligation of the entity is to pay the annual contributions. This pension scheme is a a. Multiemployer plan and a defined contribution scheme. b. Multiemployer plan and a defined benefit scheme. c. Defined contribution plan only. d. Defined benefit plan only. 2. Which of these events will cause a change in a defined benefit obligation? a. Changes in mortality rates or the proportion of employees taking early retirement. b. Changes in the estimated salaries or benefits that will occur in the future. c. Changes in the estimated employee turnover. d. Changes in the discount rate used to calculate defined benefit liabilities and the value of assets. e. All of the above. 3. An entity has decided to improve its defined benefit pension scheme. The benefit payable will be determined by reference to 60 years service rather than 80 years service. As a result, the defined benefit pension liability will increase by N10 million. The average remaining service lives of the employees is ten years. How should the increase in the pension liability by N10 million be treated in the financial statements? a. The past service cost should be charged against retained profit. b. The past service cost should be charged against profit or loss for the year. c. The past service cost should be spread over the remaining working lives of the employees. d. The past service cost should not be recognized. Page 1

2 4. Which of these elements are taken into account when determining the discount rate to be used? a. Market yields at the statement of financial position date on high-quality corporate bonds. b. Investment or actuarial risk. c. Specific risk associated with the entity s business. d. Risk that future experiences may differ from actuarial assumptions. 5. An entity operates a defined benefit plan that pays employees an annual benefit based on their number of years of service. The annual payment does allow the employer to vary the final benefit. Over the last five years the entity has used this flexibility to increase employees pensions by the current growth in earnings per share. How will employees benefit be calculated if they retire in the current period? a. It will be based on the existing plan rules with no additional award. b. It will be based on the existing plan rules plus the current rate of growth of earnings per share. c. It will be based on the plan rules plus the current rate of inflation. d. It will be based on the plan rules plus the increase in earnings per share anticipated over the remaining working lives of the employees. 6. Which of these assets should be included within the valuation of plan assets? a. Unpaid contributions. b. Unlisted corporate bonds that is redeemable but not transferable without the entity s permission. c. A loan to the entity that cannot be assigned to a third party. d. Investments in listed companies. 7. An entity has decided to protect its pension obligation with an insurance policy. The insurance policy permits the entity to cash in the insurance policy. Is this insurance policy a qualifying insurance policy that will be included in plan assets? a. Yes. b. No. 8. An entity uses International Financial Reporting Standards to prepare its financial statements, but the defined benefit obligation has been calculated using assumptions that are different from IFRS. The service costs. How should the entity measure its net pension liability? a. The net present value of the defined benefit obligation less the fair value of the plan assets. b. The net present value of the defined benefit obligation less the fair value of plan assets less the unrecognized past service costs. Page 2

3 c. The net present value of the defined benefit obligation less the fair value of the plan assets less the unrecognized past service costs. In addition, a review of the assumptions should be undertaken to remeasure the obligation. d. The value in the entity s statement of financial position will simply be used in the consolidated financial statements. 9. An entity operates a defined benefit pension plan and changes it on January 1, 20X4, to a defined contribution plan. The defined benefit pension plan still relates to past service but not to future service. The net pension liability after the plan amendment is N70 million, and the net pension liability before the amendment was N100 million. How should the entity account for this change? a. The entity recognizes a gain of N30 million. b. The entity does not recognize a gain. c. The entity recognizes a gain of N30 million over the remaining service lives of the employees. d. The entity recognizes the gain but applies the 10% corridor approach to it. 10. An entity on December 31, 20X5, changes its defined benefit pension plan to a defined contribution plan. The entity agrees with the employees to pay them N9 million in totals on the introduction of a defined contribution plan. The employees forfeit any pension entitlement for the defined benefit plan. The pension liability recognized in the statement of financial position at December 31, 20X4, was N10 million. How should this curtailment be accounted for in the statement of financial position at December 31, 20X5? a. A settlement gain of N1 million should be shown. b. The pension liability should be credited to reserves and a cash payment of N9 million should be shown in expense in the statement of comprehensive income. c. The cash payment should go to reserves and the pension liability should be shown as a credit to the statement of comprehensive income. d. A credit to reserves should be made of N1 million. 11. The salaried employees are entitled to 30 days paid leave each year. The entitlement accrues evenly over the year and unused leave may be carried forward for one year. The holiday year is the same as the financial year. At September 30, 20X9, the entity has 100 salaried employees and the average unused holiday entitlement is two days per employee. 4% of employees leave without taking their entitlement and there is no cash payment when an employee leaves in respect of holiday entitlement. There are 240 working days in the year and the total annual salary cost is N2 million. What would be the accrual in the financial statements for holiday pay entitlement? a. N2 million b. N Page 3

4 c. N160,000 d. N16, An entity has the following balances relating to its defined benefit plan: Present value of the obligation: N13 million Fair value of plan assets: N17 million Actuarial losses: N1.3 million unrecognized Past service cost: N1.2 million unrecognized Present value of available future refunds and reduction in future contributions: N0.1 million Calculate the value that will be given to the net plan asset under IAS 19. a. N6.5 million b. N3.9 million c. N4 million d. N2.6 million 13. An entity has a defined benefit pension plan. As of January 1, 20X9, these values relate to the pension scheme: Fair value of plan assets: N2.5 million Present value of defined benefit obligation: N2 million Cumulative unrecognized actuarial gains: N1 million Average remaining working lives of employees: 20 years At the end of the period at December 31, 20X9, the fair value of the plan assets has risen by N0.5 million. The present value of the defined benefit obligation has risen by N0.3 million. The actuarial gain is N1.2 million, and the average remaining working lives of the employees is 20 years. The entity wishes to use the full recognition approach for actuarial gains and losses. Show how the actuarial gain or loss for the period ending December 31, 20X9, could be recognized in the financial statements. a. N1.2 million b. N0.75 million c. N0.5 million d. N37,500 Page 4

5 14. What would be the correct answer if the corridor approach was used? a. N1.2 million b. N0.75 million c. N0.5 million d. N37,500 Page 5

6 15. Borrowing costs shall be capitalized as part of the asset when a. They relate to qualifying assets and the entity capitalizes them under IAS 23. b. They relate to motor cars purchased for office use from a dealership in town. c. They are not directly attributable to the acquisition of qualifying assets as defined under IAS 23. d. They relate to the period after the qualifying assets are substantially ready for their intended use although some minor routine administrative work is still going on. 16. Which of the following may not be considered a qualifying asset under IAS 23? a. A power generation plant that normally takes two years to construct. b. An expensive private jet that can be purchased from a local vendor. c. A toll bridge that usually takes more than a year to build. d. A ship that normally takes one to two years to complete. 17. Which of the following costs may not be eligible for capitalization as borrowing costs under IAS 23? a. Interest on bonds issued to finance the construction of a qualifying asset. b. Amortization of discounts or premiums relating to borrowings that qualify for capitalization. c. Imputed cost of equity. d. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs pertaining to a qualifying asset. 18. Capitalization of borrowing costs a. Shall be suspended during temporary periods of delay. b. May be suspended only during extended periods of delays in which active development is delayed. c. Should never be suspended once capitalization commences. d. Shall be suspended only during extended periods of delays in which active development is delayed. 19. Which of the following is not a disclosure requirement under IAS 23? a. Accounting policy adopted for borrowing costs. b. Amount of borrowing costs capitalized during the period. c. Segregation of assets that are qualifying assets from other assets on the balance sheet or as a disclosure in the footnotes to the financial statements. d. Capitalization rate used to determine the amount of borrowing costs eligible for capitalization. Page 6

7 Question One (a) EAU operates a defined benefit pension plan for its employees. At 1 January 2010 the fair value of the pension plan assets was N2,600,000 and the present value of the plan liabilities was N2,900,000. The actuary estimates that the current and past service costs for the year ended 31 December 2010 is N450,000 and N90,000 respectively. The past service cost is caused by an increase in pension benefits. The plan liabilities at 1 January and 31 December 2010 correctly reflect the impact of this increase. The interest cost on the plan liabilities is estimated at 8% and the expected return on plan assets at 5%. The pension plan paid N240,000 to retired members in the year to 31 December EAU paid N730,000 in contributions to the pension plan and this included N90,000 in respect of past service costs. At 31 December 2010 the fair value of the pension plan assets is N3,400,000 and the present value of the plan liabilities is N3,500,000. In accordance with the amendment to IAS 19 Employee Benefits, EAU recognises actuarial gains and losses in other comprehensive income in the period in which they occur. Required: Calculate the actuarial gains or losses on pension plan assets and liabilities that will be included in other comprehensive income for the year ended 31 December (Round all figures to the nearest N000). Page 7

8 QUESTION 2 A socially responsible multinational corporation (MNC) decided to construct a tunnel that will link two sides of the village that were separated by a natural disaster years ago. Realizing its role as a good corporate citizen, the MNC has been in this village for a couple of years exploring oil and gas in the nearby offshore area. The tunnel would take two years to build and the total capital outlay needed for the construction would be not less than N20 million. To allow itself a margin of safety, the MNC borrowed N22 million from three sources and used the extra N2 million for its working capital purposes. Financing was arranged in this way: Bank term loans: N5 million at 7% per annum Institutional borrowings: N7 million at 8% per annum Corporate bonds: N10 million at 9% per annum In the first phase of the construction of the tunnel, there were idle funds of N10 million, which the MNC invested for a period of six months. Income from this investment was N500,000. Required When MNC capitalizes borrowing costs under IAS 23, how would it treat the borrowing costs? How would it capitalize the borrowing costs and what would it do with the investment income? Page 8

9 Question 3 Question One (a) NB operates a defined benefit pension plan for its employees. At 1 April 2013 the fair value of the pension plan assets was N8,200,000 and the present value of the pension plan liabilities was N8,500,000. The actuary estimated that the service cost for the year to 31 March 2014 was N2,100,000. The pension plan paid N500,000 to retired members and NB paid N1,900,000 in contributions to the pension plan in the year to 31 March The actuary estimated that the relevant discount rate for the year to 31 March 2014 was 6%. On 31 March 2014 NB announced improvements to the benefits offered by the pension plan to all of its members. The actuary estimated that the past service cost associated with these improvements was N2 million. At 31 March 2014 the fair value of the pension plan assets was N10,200,000 and the present value of the pension plan liabilities (including the past service costs) was N12,500,000. Question one continues on the opposite page Required: In accordance with IAS 19 Employee Benefits: (i) Calculate the net actuarial gain or loss (stating which) that will be included in NB s other comprehensive income for the year ended 31 March (ii) Calculate the net pension asset or liability (stating which) that will be included in NB s statement of financial position as at 31 March (6 marks) Page 9

TOPIC: END OF THE DIET MOCK

FINANCIAL REPORTING TOPIC: END OF THE DIET MOCK Kindly go through the video lecture on financial reporting before you attempt the questions because the topic have been simplified and analyzed for easy