Defined Benefit Pension Plan Accounting

This assignment focuses on the accounting treatment of a defined benefit pension plan. It presents a series of journal entries illustrating various components of pension accounting, including opening balance adjustments, past service costs, net interest expense, service costs, contributions, plan asset gains/losses, and actuarial losses. The final step involves calculating the closing balance for the period.

ACC210(ATMC) - Financial Accounting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Ex 3.1..................................................................................................................................3
Accounting Justification:................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Determine subject of measurement..........................................................................................3
2. Determine valuation premise/method......................................................................................3
3. Determine market.....................................................................................................................3
4. Determine Valuation technique.................................................................................................3
Question 2. Ex 5.18................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Calculations & General Journal Entries 1/7/16 to 30/6/17:.......................................................4
2. Calculations & General Journal Entries 1/8/18:.........................................................................4
3. Calculations & General Journal Entries 30/6/18:.......................................................................4
Question 3. Ex 6.11................................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Explain accounting issues...........................................................................................................5
2. Differences Internally Generated vs Acquired...........................................................................5
3. Reasons for Reluctance..............................................................................................................5
Question 4. Ex 9.19................................................................................................................................6
Accounting Justification:................................................................................................................6
Relevant Issues:.............................................................................................................................6
1. Deficit of Fund...........................................................................................................................6
2. Net Defined Benefit Liability......................................................................................................6
3. Net Interest................................................................................................................................6
4. Reconciliation............................................................................................................................6
5. Summary Journal.......................................................................................................................6
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Question 1. Ex 3.1
Accounting Justification:
The Australian accounting standard number thirteen - Measurement of Fair value,
prescribes the framework for determining the fair value of the asset as mentioned in the
statement of affairs. In accordance with the clause number 9 of the thirteen number
standards, the fair value of the asset will be equivalent to the amount which the seller will
receive from selling the asset in the market or the amount which will be paid in order to set
off the obligation in relation to that asset (AASB, 2011).
Relevant Issues:
The issue involved in this heading is to how the measurement of the fair value shall be done
as per the given circumstances and which method shall be adopted in order to confirm with
the correct valuation of the asset and along with this, the type of market has also been
detailed.
1. Determine subject of measurement
The subject of the fair value determination and the measurement comprises of the two
forms of assets as given in the study. One is factory and other one is land. On measurement
of the fair value of the asset, both the assets are required to be treated as either jointly or
severally. It means either the fair value shall be measured by considering it as the single
group or by treating it as to different and separate.
2. Determine valuation premise/method
In accordance with the paragraph number thirty one of the accounting standard number
thirteen, the valuation premise is defined and determined with the highest and best
possible use of the concerned asset. In the given case the assets are land and factory as
separate and joint. When it is probable that the highest and best use has been achieved
then the fair value will be equal to the price at which the asset will be sold to the other
market participant and the other market participant will use the same asset in different way.
Thus, valuation premise depends upon the use and the sale price from the point of view of
the other market participant (Draft and Standard, 2005). In the given case, the valuation
premise will determine the fair value of the asset as equivalent to the sale price minus the
amount paid for the bringing the asset for the use by the other market participant which is
cost of demolishing. Fair value is thus equals to 900000 dollar (1000000 dollar – 100000
dollar)
3. Determine market
In the given case, the market determines is the active one. It is because of the fact that the
price of land has been considerably increased over the years with the increase in the
demand of the residential houses. Secondly both the parties to the contracts are dealing in
an active and efficient manner(Marton, 2009).
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4. Determine Valuation technique
Valuation techniques will be cost approach and accordingly fair value will be the amount
incurred for replacing the current asset which is 900000 dollar.
Question 2. Ex 5.18
Accounting Justification:
The definitions, procedures and the accounting treatment relating to the property plant and
equipment are dealt with the Australian accounting standard number sixteen (Aboody,
Barth and Kasznik, 2009). It defines two valuation methods - one is cost model and second is
revaluation model. In the initial year cost model is used, the choice is made available from
the subsequent year. ( Easton and Eddey and Harris, 2013).
Relevant Issues:
The major issue concerned with this heading is the accounting treatment of the property
plant and equipment and its related depreciation.
1. Calculations & General Journal Entries 1/7/16 to
30/6/17:
Date Account DR CR
1/7/2016 Machine A 100000
Machine B 60000
Cash 1600000
30/06/2017 Depreciation – Machine A (100000/5) 20000
Depreciation – Machine B (60000/3) 20000
Accumulated Depreciation – Machine A 20000
Accumulated Depreciation – Machine B 20000
30/06/2017 Machine A (84000-80000) 4000
Revaluation Surplus 4000
30/06/2017 Revaluation Surplus (40000-38000) 2000
Machine B 2000
2. Calculations & General Journal Entries 1/8/18:
Date Account DR CR
01/01/2018 Depreciation – Machine B 9500
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Accumulated Depreciation – Machine B 9500
(Depreciation for Sic Months38000 / 2
*0.5)
01/01/2018 Cash 29000
Profit on Sale of Machine B 500
Machine B (38000-9500) 28500
01/01/2018 Machine C 80000
Cash 80000
01/01/2018 General Reserve 8000
Revaluation Surplus 2000
Bonus Share Capital 10000
3. Calculations & General Journal Entries 30/6/18:
Date Account DR CR
30/06/2018 Depreciation – Machine A (84000/4) 21000
Depreciation – Machine C (80000/4*0.5) 10000
Accumulated Depreciation – Machine A 21000
Accumulated Depreciation – Machine C 10000
30/06/2018 Impairment Loss 3500
Machine A (63000-61000) 2000
Machine C (70000-68500) 1500
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Question 3. Ex 6.11
Accounting Justification:
The accounting standard number one hundred and thirty eight deals with the intangible
assets. In accordance with the provisions of the accounting standard, it is defined as the
assets - which can be easily identifiable, which can be expressed in monetary terms and
which does not possess any form of the physical substance
Relevant Issues:
Under this heading, the accounting treatment of intangible assets has been discussed with
regard to the provisions of the accounting standard.
1. Explain accounting issues
Internally generated intangible assets are defined in the common parlance as the assets
which created within the organization. To start with the accounting treatment of the
internally generated intangible assets, the company at first will be required to identify the
various stages through which the development of the intangible assets will pass through.
These stages are required to be broadly classified under two heads and these are research
and development.
First to begin with the research phase, any expenditure which is incurred in the research
phase will not be capitalized in any situation rather it will be charged to the profit and loss
account for the period ending in which the said expenditure have been incurred. The
aforesaid accounting treatment is followed because of the two basic reasons. One of the
reasons is that during the research phase, the company can never have the high probability
that the intangibles are there for use by the company. Second reason is that there is no
confirmation that the intangible assets being developed will generate the economic benefits
in the coming years.
Further moving to the second phase of the development, the expenditure shall be
capitalised on the fulfilment of the following conditions:
 The project shall be technically feasible as well as viable with regard to is completion
within the due time.
 The company shall have the clear strategic intent that the project shall be completed
within the due time and shall be completed.
 The company shall provide the assets either for use or for sale.
 The company shall have the high predictions with the confirmation that the
intangible assets shall be capable enough to generate benefits for the company in
monetary terms in the upcoming years.
 The amount incurred during the development stage shall be easily measurable in the
monetary terms (AASB, 2015).
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In this way, the standard has prescribed the accounting treatment of intangible assets.
2. Differences Internally Generated vs Acquired
Following are the differences in the internally generated goodwill and the acquired goodwill:
- For developing the internally generated goodwill, the expenditure is required to be
differentiated into two stages – research and development. In case of the acquired
goodwill, the expenditure will directly capitalize.
- In the internally generated goodwill, the amount paid during research phase is
directly expenses in the profit and loss account. In the acquired goodwill, whole of
the amount is capitalised (Padrtová, 2013).
3. Reasons for Reluctance
Following are the reasons for reluctance among the companies in relation to changes in the
accounting standard:
 During the charging of the expenditure incurred during research phase in the
statement of profit and loss, the capitalised value of the internally generated
goodwill will always be less as compared to acquired goodwill.
 The establishment of the future economic benefits to the company will always be
there with the acquired goodwill.
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Question 4. Ex 9.19
Accounting Justification:
The Australian accounting standard number 119 is dealing with the employee benefits. The
standard has provided the meaning and definition of employee benefits and its contents
and the accounting treatment of each and every item of the employee benefits. (AASB,
2011).
Relevant Issues:
The issue involved in the study is the calculation and accounting treatment of the employee
benefit obligation in accordance with the terms of the accounting standard.
1. Deficit of Fund
Deficit occurs when the present value of the defined benefit obligation exceeds the fair
value of the asset planned. Surplus occurs in the reverse situation where the fair value of
asset exceeds the present value of the defined obligation as on date.
Therefore, Deficit equals to the Present value of the Defined benefit obligation less the fair
value of concerned plan asset
Deficit = 23000000 dollar - 20130000 dollar= 2870000 dollar.
2. Net Defined Benefit Liability
It is calculated when the deficit from the plan asset is adjusted for any limit which has been
placed on the net defined asset. In the given case no such asset ceiling has been mentioned
and therefore the Net defined benefit liability is equivalent to the deficit amount of dollar
2870000.
3. Net Interest
Net Interest = Expense –Income
Net Interest = 2200000 dollar – 1900000 dollar = 300000 dollar
Workings:
Expense = ($20000000 + $2000000)*10% = $2200000
Income = $19000000*10% = $1900000
4. Reconciliation
S. No. Particulars NDBL - Net DBO - Defined PA - Plan Assets
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Defined Benefit
Liability
Benefit
Obligation
1 Opening Balance –
01/01/2016
1000000 20000000 19000000
2 Add Past Service
Cost
0 2000000 0
3 Added Balance 22000000
4 Interest @10% 2200000 1900000
5 Current Service Cost 800000
6 Contribution
received
1000000
7 Benefits paid (2100000) (2100000)
8 Return on Plan
Assets
330000
9 Actuarial Loss 100000
Closing Balance –
31/12/2016
2870000 23000000 201300000
Return on Plan Assets = $20130000 – ($19000000 + $1900000 + $1000000 – $2100000) =
$330000.
5. Summary Journal
Date Account DR CR
31/12/2016 Expense – Superannuation 3100000
Income – Superannuation 230000
Bank 1000000
Net Defined Liability - Superannuation 1870000
Workings :
S. No. Particulars Income
Statement
Other
Comprehensive
Income
Bank Net
defined
Benefit
Liability
1 Opening Balance 1000000
Cr
2 Past Service Cost 2000000 Dr
3 Net Interest 300000 Dr
4 Service Cost 800000 Dr
5 Contribution 1000000Cr
6 Plan Assets – 330000 Cr
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Profit
7 Actuarial Loss 100000Dr
Closing Balance 3100000 Dr 230000 Cr 1000000Cr 1870000
Cr
REFERENCES
Aboody, D., Barth, M.E. and Kasznik, R., (2009), “Revaluations of fixed assets and future firm
performance”, Evidence from the UK. Journal of Accounting and Economics, 26(1), pp.149-
178
AASB, (2011), “Fair Value Measurement” available at
www.aasb.gov.au/admin/file/content105/c9/AASB13_09-11.pdf accessed on 05/10/2017
AASB, (2011), “Employee Benefits” available at
www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdfaccessed on 05/10/2017
AASB, (2015), “Intangible Assets” available at
www.aasb.gov.au/admin/file/content105/.../AASB138_08-15_COMPoct15_01-18.pdf
accessed on 05/10/2017
Draft, E. and Standard, I.A.,( 2005). “Fair Value Measurement”. MEASUREMENT, 9, p.90
Easton, P.D., Eddey, P.H. and Harris, T.S., (2013), “An investigation of revaluations of
tangible long-lived assets” Journal of Accounting Research, pp.1-38.
Marton, J,(2009). “Fair Value Measurement” COMMENT LETTER ON THE EXPOSURE DRAFT
(ED/2009/5) University of Gothenburg.
.
Padrtová, M., (2013), “Accounting of Internally Generated Intangible Assets at Public
Universities in the Czech Republic”. Littera Scripta, p.104.
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