- 5 Marks
Question
Oboisah PLC (Oboisah) operates a defined benefit pension plan for employees who commenced employment with the company prior to 1 April 2021. The pension scheme is non-contributory.
At 31 March 2023, the Group recorded a net defined liability of GH¢157 million. The following information relates to the year ended 31 March 2024:
| Description | Amount (GH¢ million) |
|---|---|
| Employer contributions paid on 31 March 2024 | 43 |
| Benefits paid | 16 |
| Current service cost | 42 |
| Curtailment gain | 3 |
| Present value of defined benefit obligation at 31 March 2024 | 498 |
| Value of plan assets at 31 March 2024 | 315 |
The average yield on relevant corporate bonds was 20% on 1 April 2023. Entries so far made in respect of the employer contributions have been incorrectly debited to accounts receivable and credited to cash. Benefits paid have been correctly recorded.
Required:
In line with IAS 19: Employee Benefits, determine how much pension amounts should be included in the financial statements of Oboisah PLC for the year ended 31 March 2024. Show the appropriate extracts for the above and any correction entries, if necessary.
Answer
(i) Correction of Posting Error
The employer contributions were incorrectly recorded as an accounts receivable instead of being debited to the pension obligation. This needs to be corrected as follows:
Journal Entry to Correct Posting Error:
| Account | Debit (GH¢ million) | Credit (GH¢ million) |
|---|---|---|
| Pension Obligation | 43 | – |
| Accounts Receivable | – | 43 |
(ii) Calculation of Net Pension Obligation at 31 March 2024
Step 1: Determine the Closing Net Obligation
Closing Net Obligation=Defined Benefit Obligation−Plan Assets\text{Closing Net Obligation} = \text{Defined Benefit Obligation} – \text{Plan Assets} =498−315= 498 – 315 =GH¢183million= GH¢183 million
Step 2: Compute Net Pension Movement for the Year
| Description | Amount (GH¢ million) |
|---|---|
| Opening net obligation | 157 |
| Interest expense (20% x 157) | 31.4 |
| Current service cost | 42 |
| Contributions paid | (43) |
| Curtailment gain | (3) |
| Net remeasurement gain | (1.4) |
| Closing net obligation | 183 |
(iii) Financial Statement Extracts
Statement of Profit or Loss (Extract) for the Year Ended 31 March 2024
| Expense | GH¢ million |
|---|---|
| Current service cost | (42) |
| Curtailment gain | 3 |
| Interest expense on pension liability | (31.4) |
| Total pension expense | (70.4) |
Statement of Other Comprehensive Income (Extract) for the Year Ended 31 March 2024
| Item | GH¢ million |
|---|---|
| Net remeasurement gain | 1.4 |
Statement of Financial Position (Extract) as at 31 March 2024
| Item | GH¢ million |
|---|---|
| Equity: | |
| Cumulative remeasurement gain | 1.4 |
| Non-current Liabilities: | |
| Pension Obligation | 183 |
Conclusion
- The closing net pension obligation is GH¢183 million.
- A total pension expense of GH¢70.4 million is recognized in the profit or loss.
- A remeasurement gain of GH¢1.4 million is reported in other comprehensive income.
- A correction entry of GH¢43 million has been recorded to properly classify employer contributions.
- Tags: Defined Benefit Plan, Employee Benefits, Financial Reporting, IAS 19, Pension Obligation
- Level: Level 3
- Topic: IAS 19: Employee Benefits
- Series: Nov 2024
- Uploader: Salamat Hamid
