CR – May 2021 – L3 – Q3a – Defined Benefit Scheme Accounting

Recommend the correct accounting treatment of defined benefit scheme transactions for Meagya Ltd.

Question

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.

Answer

The defined benefit scheme for the year should have been recorded as follows:

Description	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, 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.