- 20 Marks
PSAF – L2 – Q9.3 – Employee Benefits
Question
As at 31st December 2023, the following balances were outstanding in respect of employee pensions which are determined based on a formula that considers number of years of service and the best last six months remuneration of the employee:
| GHC million | |
|---|---|
| Pension plan assets | 65 |
| Pension liabilities | 85 |
During the year ending 31st December 2024, the following transactions occurred:
| GHC million | |
|---|---|
| Transfers into the investments of the scheme | 15 |
| Pension payments made | 29 |
| Investments liquidated to support pension payments | 11 |
| Current service cost | 10 |
| Cost resulting from improvement to the plan formula | 6 |
At 31st December 2024, the present value of pension liabilities was computed at GHc127 million (using a discount rate of 15%) and the fair value of plan assets estimated at GHc98 million.
Required:
You are required to show extracts of the financial statements in respect of employee benefits for the year ended 31st December 2024.
Answer
In accordance with IPSAS 39: Employee Benefits, the Ministry of Transport and Infrastructure needs to recognise and disclose pension plan-related transactions and balances in its financial statements. The steps towards producing extracts of the financial statements in respect of employee benefits for the year ended 31st December 2024 are as follows.
First is the determination of the net pension liability at the beginning of 2024. This was GHc20 million (that is liability of GHc85 million – asset of GHc65 million).
Second is the calculation of the net pension liability at the end of December 2024. The closing net pension liability is GHc29 million (being a liability of GHc127 million – assets of GHc98 million).
Third is to determine the pension expenses. In this case, there is pension plan improvement expenses of GHc6 million, current service cost of GHc10 million, and interest expense of GHc3 million. This figure is calculated by applying the 15% interest rate given in the question to the opening net pension liability (that is 0.15 × 20 million). Thus, the total pension expense for 2024 is GHc19 million.
Fourth is determination of cash flow transactions relating to employee benefit. During the year, there was a single cash flow transaction being the GHc15 million contribution to the plan. (Note that the pension payments of GHc29 million would have been paid out of the plan assets and not out of the entity’s cash and cash equivalents.)
Lastly, the movement on the net pension liability is constructed using the above information in order to identify the actuarial difference arising (as a balancing figure). This working is as follows:
| Fund position | Net | ||
|---|---|---|---|
| Assets | Liability | ||
| GHc m | GHc m | GHc m | |
| At start of year | 65 | (85) | (20) |
| Transfers into scheme | 15 | 15 | |
| Pensions paid | (29) | 29 | – |
| Liquidation of investment | 11 | 11 | |
| Cash | (11) | (11) | |
| Investments | |||
| Current service cost | (10) | (10) | |
| Improvements to cost formula | (6) | (6) | |
| Interest (0.15 × GHc 20) | (3) | (3) | |
| Expected year end position | 51 | (75) | (24) |
| Actuarial difference (bal. figure) | 47 | (52) | (5) |
| Actual year end position | 98 | (127) | (29) |
This results in an overall double entry as follows:
| Dr | Cr | |
|---|---|---|
| Surplus/deficit | 19 | |
| Cash | 15 | |
| Net assets | 5 | |
| Defined benefit liability | 24 |
The above information is presented in the financial statements as follows:
Statement of financial position as at 31st December 2024 (extract)
| GHc million | |
|---|---|
| Pension liability | 29 |
Statement of financial performance for the year ended 31st December 2024 (extract)
| GHc million | |
|---|---|
| Pension expense | 19 |
Extract of statement of movement in net assets for the year ended 31st December 2024 (extract)
| GHc million | |
|---|---|
| Actuarial loss | (5) |
Cash flow statement for the year ended 31st December 2024 (extract)
| GHc million | |
|---|---|
| Cash flow from operating activities | |
| Contributions to defined benefit plan | 15 |
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