Ind AS 19, Employee Benefits, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams
Question 1 –
AKJ Ltd is a listed company engaged in the business of manufacturing of electronic equipment. The company has various branch offices spread out across India and has 1,000 employees.
As per the statutory requirements, gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years –
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
The completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
The amount payable is determined by a formula linked to number of years of service and last drawn salary. The amount payable to an employee shall not exceed Rs. 10,00,000.
Compute the amount of employee benefit, if any, attributed to each year of service.
Solution –
The amount of gratuity would be attributed to each year of service and calculated as follows:
Number of employees not likely to fulfill the eligibility criteria will be ignored.
Other employees will be grouped according to period of service they are expected to render taking into account:
- mortality rate,
- disablement and
- resignation after 5 years.
Gratuity payable will be calculated in accordance with the formula prescribed in the governing statute based on the period of service and the salary at the time of termination of employment, assuming promotion, salary increases etc.
For those employees for whom the amount payable as per the formula does not exceed Rs. 10,00,000, over the expected period of service, the amount payable will be divided by the expected period of service and the resulting amount will be attributed to each year of the expected period of service, including the period before the stipulated period of 5 years.
In case of the remaining employees, the amount as per the formula exceeds Rs. 10,00,000 over the expected period of service of 10 years, and the amount of the threshold of Rs. 10,00,000 is reached at the end of 8 years i.e. Rs. 1,25,000 (Rs. 10,00,000 divided by 8) is attributed to each of the first 8 years. In this case, no benefit is attributed to subsequent two years. This is because service beyond 8 years will lead to no material amount of further benefits.
Question 2 –
OPQ Ltd is a listed company having its corporate office at Nagpur. The company has a branch office at Chennai. The company has been operating in Indian market for the last 10 years.
The company operates a pension plan that provides a pension of 2.5% of the final salary for each year of service. The benefits become vested after seven years of service.
On 1st April, 2018, the company increased the pension to 3% of the final salary for each year of service starting from 1st April, 2011. On the date of the improvement, the present value of the additional benefits for service from 1April, 2011 to 1st April 218 was as follows:
- Employees with more than seven years’ service on 1 January 2018 – Rs. 2,75,000
- Employees with less than 7 years of service – Rs. 2,21,000 (average 4 years to go). What would be the accounting treatment in this case?
Solution –
OPQ Ltd increased the pension to 3% of the final salary for each year of service starting from 1st April, 2011 to 1st April, 2018.
The company would recognize the total amount of Rs. 4,96,000 (i.e. Rs. 2,75,000 + Rs. 2,21,000) immediately, as for the purpose of recognition it does not make any difference as to whether the benefits are already vested or not.
Question 3 –
RKA Private Ltd is an old company established in 19XX. The company started with a very small capital base and today it is one of the leading companies in India in its industry. The company has an annual turnover of Rs. 11,000 crores and planning to get listed in the next year.
The company has a large employee base. The company provided a defined benefit plan to its employees. Following is the information relating to the balances of the fund’s assets and liabilities as at 1st April, 20X1 and 31st March, 20X2.
|
Particulars |
1st April, 20X1 | 31st March, 20X2 |
| Present value of benefit obligation | 1,400 | 1,580 |
| Fair value of plan assets | 1,140 | 1,275 |
For the financial year ended 31st March, 20X2, service cost was Rs. 55 lacs. The company made a contribution of an amount of Rs. 111 lacs to the plan. No benefits were paid during the year.
Consider a discount rate of 8%. You are required to –
(a) Compute the balance(s) of the company to be included its balance sheet as on 31st March, 20X2 and amounts to be recognized in the statement of profit and loss and other comprehensive income for the year ended 31st March, 20X2.
(b) Give the journal entries in respect of amount(s) to be recognized.
Solution –
(a) Extract of the Balance Sheet of RKA Private Ltd as at 31st March, 20X2
| Rs. in lacs | |
| Closing net defined liability (1,580 – 1,275) lacs | 305 |
Extract of the Statement of Profit or Loss of RKA Private Ltd for the year ended 31st March, 20X2
| Particulars | Rs. in lacs |
| Service cost | 55 |
| Net interest (Refer W.N.1) | 21 |
| Profit or loss | 76 |
| Other comprehensive income: | |
| Remeasurements (Refer W.N.2) | 80 |
| Total | 156 |
(b) Journal entries in the books of RKA Private Ltd
| Particulars | Rs. in lacs | Rs. in lacs |
| Profit & Loss | 76 | |
| Other comprehensive income | 80 | |
|
To Cash (Contribution) |
111 | |
|
To Net defined benefit liability (Refer WN 3) |
45 |
Working Notes:
1. Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) lacs
= 8% x 260 lacs
= 21 lacs (Rounded off to nearest lacs)
2. Computation of Remeasurements
Actuarial gain or loss on defined benefit liability:
| Particulars | Rs. in lacs |
| Opening balance of liability | 1,400 |
| Current service cost | 55 |
| Interest on opening liability (1,400 x 8%) | 112 |
| Actuarial loss (Bal. fig) | 13 |
| Closing balance of liability | 1,580 |
Actual return on plan assets:
| Particulars | Rs. in lacs |
| Opening balance of asset | 1,140 |
| Cash contribution | 111 |
| Actual return (Bal. fig) | 24 |
| Closing balance of asset | 1,275 |
Net interest on opening balance of plan asset = Rs. 91 lacs (i.e. Rs. 1,140 lacs x 8%) (Rounded off to nearest lacs)
Hence there is a decrease in plan assets due to remeasurement for which computation is as follows:
Actual Return – Net interest on opening plan asset
= Rs. 24 lacs – Rs. 91 lacs = Rs. 67 lacs.
Net remeasurement would be computed as follows:
Actuarial loss on liability + Loss on return
= Rs. 13 lacs + Rs. 67 lacs = Rs. 80 lacs.
3. Computation of increase/ decrease in net defined benefit liability:
| Particulars | Rs. in lacs |
| Opening net liability (Rs. 1,400 lacs – Rs. 1,140 lacs) | 260 |
| Closing net liability (Rs. 1,580 lacs – Rs. 1,275 lacs) | 305 |
| Increase in liability | 45 |
Question 4 –
A Ltd. prepares its financial statements to 31st March each year. It operates a defined benefit retirement benefits plan on behalf of current and former employees. A Ltd. receives advice from actuaries regarding contribution levels and overall liabilities of the plan to pay benefits. On 1st April, 2017, the actuaries advised that the present value of the defined benefit obligation was Rs.6,00,00,000. On the same date, the fair value of the assets of the defined benefit plan was Rs.5,20,00,000. On 1st April, 2017, the annual market yield on government bonds was 5%. During the year ended 31st March, 2018, A Ltd. made contributions of Rs.70,00,000 into the plan and the plan paid out benefits of Rs.42,00,000 to retired members. Both these payments were made on 31st March, 2018.
The actuaries advised that the current service cost for the year ended 31st March, 2018 was Rs.62,00,000. On 28th February, 2018, the rules of the plan were amended with retrospective effect. These amendments meant that the present value of the defined benefit obligation was increased by Rs.15,00,000 from that date.
During the year ended 31st March, 2018, A Ltd. was in negotiation with employee representatives regarding planned redundancies. The negotiations were completed shortly before the year end and redundancy packages were agreed. The impact of these redundancies was to reduce the present value of the defined benefit obligation by Rs.80,00,000. Before 31st March, 2018, A Ltd. made payments of Rs.75,00,000 to the employees affected by the redundancies in compensation for the curtailment of their benefits. These payments were made out of the assets of the retirement benefits plan.
On 31st March, 2018, the actuaries advised that the present value of the defined benefit obligation was Rs.6,80,00,000. On the same date, the fair value of the assets of the defined benefit plan were Rs.5,60,00,000.
Solution –
All figures are Rs. in ’000.
On 31st March, 2018, A Ltd. will report a net pension liability in the statement of financial position. The amount of the liability will be 12,000 (68,000 – 56,000).
For the year ended 31st March, 2018, A Ltd. will report the current service cost as an operating cost in the statement of profit or loss. The amount reported will be 6,200. The same treatment applies to the past service cost of 1,500.
For the year ended 31st March, 2018, A Ltd. will report a finance cost in profit or loss based on the net pension liability at the start of the year of 8,000 (60,000 – 52,000). The amount of the finance cost will be 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a defined benefit obligation. The gain on settlement of 500 (8,000 – 7,500) will be reported in the statement of profit or loss.
Other movements in the net pension liability will be reported as remeasurement gains or losses in other comprehensive income.
For the year ended 31st March, 2018, the remeasurement loss will be 3,400 (Refer W. N.).
Working Note:
Remeasurement of gain or loss
| Rs. | |
| Liability at the start of the year (60,000 – 52,000) | 8,000 |
| Current service cost | 6,200 |
| Past service cost | 1,500 |
| Net finance cost | 400 |
| Gain on settlement | (500) |
| Contributions to plan | (7,000) |
| Remeasurement loss (balancing figure) | 3,400 |
| Liability at the end of the year (68,000 – 56,000) | 12,000 |
Question 5 –
SA Pvt Ltd is engaged in the business of retail having 100 retail outlets across Northern and Southern India. The company’’s head office is located at Chennai.
SA Pvt Ltd is a subsidiary of SAG Ltd. SAG Ltd is listed on the National Stock Exchange in India. Following information is available for SA Pvt Ltd:
Plan Assets
At 1st April, 2011, the fair value of plan assets was Rs. 10,000.
Contribution to the plan assets done on 31March, 2012 – Rs. 3,000
Amount paid on 31st March, 2012 – Rs. 300
At 31st March, 2012, the fair value of plan assets was Rs. 14,700 Actual return on plan assets – Rs. 2,000
Defined Benefit Obligation
At 1st April, 2011, present value of the defined benefit obligation was Rs. 12,000.
At 31st March, 2012, present value of the defined benefit obligation was Rs. 15,500.
Actuarial losses on the obligation for the year ended 31st March, 2012 were Rs. 100.
Current Service Cost – Rs. 2,500
Benefit paid – Rs. 300
Discount rate used to calculate defined benefit liability – 10%.
As per Ind AS 19, please suggest if there is any amount based on the above mentioned information that would be taken to other comprehensive income (with workings). Also compute net interest on the net defined benefit liability (asset).
Solution –
As per Ind AS 19, net remeasurement of Rs. 900 would be recognized in other comprehensive income.
Computation of Net remeasurement
= Remeasurement – Actuarial loss
= Rs. 1000 (Refer WN – 1) – Rs. 100 (Given in the question)
= Rs. 900.
Computation of net interest expense
| Particulars | Amount in Rs. |
| Defined benefit liability as at 1 April 20X1 (A) (Given in the question) | 12,000 |
| Fair value of plan asset as at 1 April 20X1 (B) (Given in the question) | (10,000) |
| Net defined benefit liability (A – B) | 2,000 |
| Net interest expense (as it is net liability) (Refer note given below) | 200 |
Note:
Net interest expense would be computed on net defined benefit liability using discount rate of 10% given in the question-
= Net defined benefit liability x Discount rate
= 2,000 x 10%
= Rs. 200.
Working Note:
Computation of amount of remeasurement
|
Particulars |
Amount in Rs. |
| Actual return on plan asset for the year ended 31 March 20X2 (C)
(Given in the question) |
2,000 |
| Less: Interest income on Rs. 10,000 held for 12 months at 10% (D) | (1,000) |
| Remeasurement (E = C – D) | 1,000 |
Question 6 –
ABC Limited operates a defined benefit plan which provides to the employees covered under the plan a pension benefit which is equal to 0.75% final salary for each year of completed service. An employee needs to complete minimum of five years’ service for becoming eligible to the benefit. On 1st April, 2015, the entity improves the pension benefit to 1% of final salary for each year of service, including prior years. The present value of the defined benefit obligation is therefore, increased by Rs.80 million. Given below is the composition of this amount:
| Employees with more than 5 years’ of service at 1st April, 2015 | Rs.60 million |
| Employees with less than 5 years’ of service at 1st April, 2015 | Rs.20 million |
The employees in the second category have completed average 2 and half years of service. Hence, they need to complete another two and half year of service until vesting.
Comment on the treatment of Rs.80 million of the defined benefit obligation in the financial statements both as per AS 15 and Ind AS 19.
Solution –
Under AS 15, a past service cost of Rs.60 million needs to be recognized immediately, as those benefits are already vested. The remaining Rs.20 million cost is recognized on a straight line basis over the vesting period, i.e., period to two and half years commencing from 1st April, 2015.
Under Ind AS 19, the entire past service cost of Rs.80 million needs to be recognized and charged in profit or loss immediately. ABC Ltd. cannot defer any part of this cost.
Question 7 –
(All numbers in Rs. ’000 unless otherwise stated)
ABL Ltd. operates a defined retirement benefits plan on behalf of current and former employees. ABL Ltd. receives advice from actuaries regarding contribution levels and overall liabilities of the plan to pay benefits. On 1st April, 20X1, the actuaries advised that the present value of the defined benefit obligation was Rs. 60,000. On the same date, the fair value of the assets of the defined benefit plan was Rs. 52,000. On 1st April, 20X1, the annual market yield on high quality corporate bonds was 5%. During the year ended 31st March 20X2, ABL Ltd. made contributions of Rs. 7,000 into the plan and the plan paid out benefits of Rs. 4200 to retired members. Assume that both these payments were made on 31st March 20X2. The actuaries advised that the current service cost for the year ended 31st March 20X2 was Rs. 6,200. On 28th February, 20X2, the rules of the plan were amended with retrospective effect. These amendments meant that the present value of the defined benefit obligation was increased by Rs. 1500 from that date. During the year ended 31st March, 20X2, ABL Ltd. was in negotiation with employee representatives regarding planned redundancies. The negotiations were completed shortly before the year end and redundancy packages were agreed. The impact of these redundancies was to reduce the present value of the defined benefit obligation by Rs. 8000. Before 31st March, 20X2, ABL Ltd. made payments of Rs. 7500 to the employees affected by the redundancies in compensation for the curtailment of their benefits. These payments were made out of the assets of the retirement benefits plan. On 31st March, 20X2, the actuaries advised that the present value of the defined benefit obligation was Rs.68,000. On the same date, the fair value of the assets of the defined benefit plan were Rs.56,000.
Solution –
(All numbers in Rs.’000 unless otherwise stated)
On 31st March 20X2, ABL Ltd. will report a net pension liability in the statement of financial position. The amount of the liability will be Rs.12,000 (68,000 – 56,000).
For the year ended 31st March 20X2, ABL Ltd. will report the current service cost as an operating cost in the statement of profit or loss. The amount reported will be Rs.6,200. The same treatment applies to the past service cost of Rs.1,500.
For the year ended 31st March 20X2, ABL Ltd. will report a finance cost in profit or loss based on the net pension liability at the start of the year of Rs.8,000 (60,000 – 52,000). The amount of the finance cost will be Rs.400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a defined benefit obligation. The gain on settlement of Rs.500 (8,000 – 7,500) will be reported in the statement of profit or loss.
Other movements in the net pension liability will be reported as remeasurement gains or losses in other comprehensive income.
For the year ended 31st March 20X2, the remeasurement loss will be Rs.3,400 (refer W.N.).
Working Note:
Calculation of remeasurement gain or loss:
| Liability at the start of the year (60,000 – 52,000) | 8,000 |
| Current service cost | 6,200 |
| Past service cost | 1,500 |
| Net finance cost | 400 |
| Gain on settlement | (500) |
| Contributions to plan | (7,000) |
| Remeasurement loss (balancing figure) | 3,400 |
| Liability at the end of the year (68,000 – 56,000) | 12,000 |
Question 8 –
On 1 April 20X1, the fair value of the assets of XYZ Ltdʼs defined benefit plan were valued at Rs.20,40,000 and the present value of the defined obligation was Rs.21,25,000. On 31st March, 20X2 the plan received contributions from XYZ Ltd amounting to Rs.4,25,000 and paid out benefits of Rs.2,55,000. The current service cost for the financial year ending 31 March 20X2 is Rs.5,10,000. An interest rate of 5% is to be applied to the plan assets and obligations. The fair value of the planʼs assets at 31 March 20X2 was Rs.23,80,000, and the present value of the defined benefit obligation was Rs.27,20,000. Provide a reconciliation from the opening balance to the closing balance for Plan assets and Defined benefit obligation. Also show how much amount should be recognised in the statement of profit and loss, other comprehensive income and balance sheet?
Solution –
Reconciliation of Plan assets and Defined benefit obligation
| Plan Assets Rs. | Defined benefit obligation Rs. | |
| Fair value/present value as at 1st April 20X1 | 20,40,000 | 21,25,000 |
| Interest @ 5% | 1,02,000 | 1,06,250 |
| Current service cost | 5,10,000 | |
| Contributions received | 4,25,000 | – |
| Benefits paid | (2,55,000) | (2,55,000) |
| Return on gain (assets) (balancing figure) | 68,000 | – |
| Actuarial Loss (balancing figure) | – | 2,33,750 |
| Closing balance as at March 31,20X2 | 23,80,000 | 27,20,000 |
In the Statement of Profit and loss, the following will be recognised:
| Rs. | |
| Current service cost | 5,10,000 |
| Net interest on net defined liability (Rs. 1,06,250 – Rs. 1,02,000) | 4,250 |
Defined benefit re-measurements recognised in Other Comprehensive Income:
| Rs. | |
| Loss on defined benefit obligation | (2,33,750) |
| Gain on plan assets | 68,000 |
| (1,65,750) |
In the Balance sheet, the following will be recognised :
| Rs. | |
| Net defined liability (Rs. 27,20,000 – Rs. 23,80,000) | 3,40,000 |