Defined Benefit Obligation Accounting

The assignment presents a scenario involving a defined benefit pension plan. It requires students to calculate the net defined benefit liability, reconcile the components of the DBO, and prepare journal entries for relevant transactions. The reconciliation process includes elements like interest expense, current service cost, contributions, benefits paid, return on plan assets, and actuarial losses.

ACC510 (ATMC) - Financial Reporting
Task 2 – Major Assignment
Semester 2 - 2017
Student Name:
Student ID #:
Campus:

Table of Contents
Question 1. Case Study 3.1....................................................................................................................3
Accounting Justification:................................................................................................................3
Relevant Issues:.............................................................................................................................3
1. Highest & Best Use................................................................................................................3
2. Application to aged care home..............................................................................................3
3. Two possible uses..................................................................................................................3
Question 2. Ex 7.14................................................................................................................................4
Accounting Justification:................................................................................................................4
Relevant Issues:.............................................................................................................................4
1. Impairment Test 31/12/16....................................................................................................4
a. Calculations:.......................................................................................................................4
b. General Journal Entries 31/12/16:.....................................................................................4
2. Impairment Test 31/12/17....................................................................................................4
a. Calculations........................................................................................................................4
b. General Journal Entries 31/12/17:.....................................................................................4
Question 3. Case Study 6.1....................................................................................................................5
Accounting Justification:................................................................................................................5
Relevant Issues:.............................................................................................................................5
1. Difference between two phases:...........................................................................................5
2. Accounting for Research & Development:.............................................................................5
3. Decision / Conclusion / Reasons and Justification:................................................................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
Page 2 of 9

Question 1. Case Study 3.1
Accounting Justification:
Fair value of the asset is the amount that can be procured when the asset is sold between
the willing and the knowledgeable parties at the arm’s length transaction and when they
enter the transaction freely. Paragraph B2 defines the entire concept of the fair value
measurement. Whereas Para 36 & Para 11 of the conceptual framework of general purpose
financial statements deals with the fair value accounting. The topic of fair value is subjective
and depends on the judgement being taken in the circumstances of the case. There may be
huge fluctuations in the fair value being computed by different individuals as it all depends
on the assumptions and judgements being used and hence depends on the circumstances of
the case. The transaction costs of selling an asset and that of transferring a liability in the
most advantageous transaction i.e., in the principal market should be directly attributable to
the asset and should meet the following criteria:
1. They should directly arise to the entity
2. They would not have taken place to entity had it not decided to dell asset or transfer
the liability.
Relevant Issues:
The most relevant issue here is the determination of the fair value being different in
different cases and being a subject which depends purely on judgemental decisions, the
value of property, plant and equipment as per fair value may vary hugely everyday. It is
generally used for the financial assets and further, it may be difficult for a non-profit entity
to use the fair value based on the highest and best use as the same property may be used
for varying purposes and market value may change depending on use.
1. Highest & Best Use
The principle of highest and best use comes for the non-financial assets where it is seen that
how the asset can be best utilised by the market participant to generate the highest
economic benefits out of the assets or to sell it to another market participant who can best
utilize the same. It considers 3 factors namely it should be physically possible, financially
feasible and legally acceptable.
2. Application to aged care home
The market value does not depends on the type of the entity or the valuation method being
used. So it should be applied uniformly whether its aged care homes or any profit making
entity based on the market based exit price as on the date of measurement.
3. Two possible uses
Fair valuation is of significant use in many cases like the impairment value assessment of
both the tangible and intangible assets. Secondly, International financial reporting standards
(IFRS) governs the reporting of the financial assets and liabilities in the financials in at fair
value. This is one another major use.
Page 3 of 9

Question 2. Ex 7.14
Accounting Justification:
AASB 136 deals with the impairment calculation of the assets. Also, Agenda 10F(a) of the
conceptual framework deals with the impairment. Impairment is the permanent
devaluation in the value of the asset. In case the internal or the external indicators do exist
that indicate the value of the assets needs to be reassessed and marked down basis that, it
should go the impairment test. The asset should not be carried at more than the
recoverable value of the asset which is higher of the value in use and the fair value of the
asset less the cost of disposal. It needs to be done both for the tangible fixed asset as well as
the intangible assets for the given assessment period.
Relevant Issues:
In the given case study, 2 divisions of the company Last ltd has been recognised to be Cash
generating units (CGU), namely Time and Leisure. The management has changed the
amount of depreciation to be carried each year and the impact of the same on the
calculation for impairment needs to be analysed.
1. Impairment Test 31/12/16
a. Calculations:
From the data points given, the impairment loss comes to $200 for Time and $ 12 for
Leisure. Now, as the standards, impairment loss first needs to be allocated to goodwill and
then to remaining assets. Since inventory and receivables are current assets held for sale,
impairment loss need not be allocated to them.
Account Carrying amount Carrying amount
Time Leisure
Plant 850 825
Patent 240 -
Inventories 54 75
Receivables 75 82
Goodwill 25 20
Total carrying amount (A) 1,244 1,002
Recoverable Value (B) 1,044 990
Fair value less cost of disposal of patent 220 -
Amount of impairment (A-B) 200 12
Impairment calculation as on 31st Dec., 2016
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Account Carrying
Amount Pro rata Impairment
loss allocated Adjusted CA Maximum
Allocation
Final Impairment
loss
Final Adjusted
CA
Plant 850 0.78 136 714 - 155 695
Patent 240 0.22 39 201 20 20 220
Goodwill 25 0.00 25 - - 25 -
Total CA 1115 1.00 200 915 20 200 915
Account Carrying
Amount Pro rata Impairment
loss allocated Adjusted CA Maximum
Allocation
Final Impairment
loss
Final Adjusted
CA
Goodwill 20 1.00 12 8 - 12 8
Total CA 20 1.00 12 8 - 12 8
For CGU - Time
For CGU - Leisure
b. General Journal Entries 31/12/16:
Date Account DR CR
31/12/16 Impairment loss - Time 200
To Accumulated depreciation &
impairment loss – Plant
155
To Accumulated depreciation &
impairment loss – Patent
20
To Accumulated depreciation &
impairment loss - Goodwill
25
31/12/16 Impairment loss - Leisure 12
To Accumulated depreciation &
impairment loss - Goodwill
12
2. Impairment Test 31/12/17
a. Calculations
The Adjusted carrying values will change for both the Time and Leisure CGU based on
change in depreciation values. Impairment on Goodwill once done, cannot be reversed.
Therefore, based on new carrying values and recoverable values, impairment loss recorded
earlier needs to be reversed.
Particulars Time Leisure
Total carrying amount (A) 1,322 1,433
Recoverable Value (B) 1,502 1,520
Impairment loss to be reversed(A-B) (180) (87)
Maximum extent of impairment reversal, excluding goodwill 175 0
Final impairment reversal 175 -
Impairment calculation as on 31st Dec., 2017
Page 5 of 9

b. General Journal Entries 31/12/17:
Date Account DR CR
31/12/17 Accumulated depreciation & impairment
loss - Plant
155
Accumulated depreciation & impairment
loss – Patent
20
To Impairment Loss - Time 175
Page 6 of 9

Question 3. Case Study 6.1
Accounting Justification:
Accounting for research and development costs is being dealt by the paragraph 8 of the
AASB standard 138 on the intangible assets. The same is being addressed by SSAP 13
accounting for research and development in case of the conceptual framework. This
generally arises in case of the internally generated intangible assets. Research is pre
requisite to the development and is the first original and planned cost that the company
may incur in order to gain the technical knowledge or scientific understanding of the
subject. In research phase, it is seen whether the same will be viable or not and whether it
will have future economic benefits or not. Whereas, development of anything is a post facto
activity coming as a result of due analysis or knowledge or plan or understanding at the time
of the research to in order to produce substantially improved products or come with the
better version of the old process before the production starts. In case the entity is unable to
find the split between the research and development cost in an internally generated
intangible asset, it will simple assume everything to be a part of the research costs only.
Relevant Issues:
The relevant issue here is to distinguish between the research and the development costs
being incurred and then how the same should be treated in the financial books, whether it is
bound by period or by the stages of R&D.
1. Difference between two phases:
The major difference between the research and the development phase is that research
is not certain to give an expected outcome whereas development is. Development of an
asset is only proceeded with by the company when its certain to give the future
economic benefits whereas research may or may not give so.
2. Accounting for Research & Development:
During a research phase the company won’t be able to prove or demonstrate that the
company would be having the future economic benefits from the internally generated
assets and therefore the same should be recognised as a part of the expense as and
when it is incurred. Whereas in the development phase which is further advanced than
the research phase the company would be able to demonstrate that the same has got
future economic benefits and hence the same should be capitalized in the value of the
intangible assets. In case any cost has been incurred by the company during the
development phase, the same needs to be capitalised in value of asset.
3. Decision / Conclusion / Reasons and Justification:
The conclusion or decision based on above is that the research cost should be charged
off to the P&L account whereas the development cost should be capitalized in the
books. The decision to capitalize is backed by whether it is saleable in the open market,
whether the technical feasibility exists, whether the intention was there to create it and
whether or not it can be accurately measured. The entity should be able to demonstrate
that the asset would be able to give probable future economic benefits.
Page 7 of 9

Question 4. Ex 9.19
Accounting Justification:
AASB 1056 deals with the defined benefit obligations and superannuation benefits for the
employees. This is a kind of pension benefit being given to the employees in lieu of the
services being rendered by them to the company. The option is given to the employee to
opt for it and this is given as a post retirement benefit to the employees. Furthermore, the
company in the given case has stopped giving such benefit to the new employees though it
continues to do so for the old employees who availed of such a benefit. In case of a defined
contribution plan both the employee as well as the employee contribute to the common
fund and the future benefits is dependent on the investment earnings which keeps on
fluctuating based on the interest rates available in the market.
Relevant Issues:
The relevant issue in the given case has already been mentioned above in the justification.
The related calculations are shown below:
Date Particulars Amount (Dr.) Date Particulars Amount (Cr.)
1/1/2016 To balance b/d 19,000,000 By Benefit Paid 2,100,000
To Contribution 1,000,000 31/12/16 By Balance c/d 20,130,000
Return on the plan assets (b/f) 2,230,000
22,230,000 22,230,000
Date Particulars Amount (Dr.) Date Particulars Amount (Cr.)
To benefit paid 2,100,000 1/1/2016 By Balance b/d 20,000,000
By Current service cost 800,000
By Actuarial Loss 100,000
By past service cost 2,000,000
31/12/16 To Balance c/d 23,000,000 By Interest (b/f) 2,200,000
25,100,000 25,100,000
Plan Assets A/C
Present Value of defined benefit obligation A/C
1. Deficit of Fund
The deficit in the fund is $ 1100000 here (2100000-1000000)
2. Net Defined Benefit Liability
The net defined benefit liability at the end of the period is $ 23,000,000
3. Net Interest
The net interest in the given case as can be seen in the 2nd account (Present value of defined
benefit obligation) as on 31st December 2016 is $ 2200000
4. Reconciliation
The reconciliation accounts have been shown below.
Net defined
benefit
Defined
benefit
Plan assets
$
Page 8 of 9

liability
$
obligation
$
Balance 1 January 2016 NA 20000000 19000000
Past service cost NA 2000000
Revised balance NA 22000000
Interest @ 10% NA 2200000
Current service cost NA 800000
Contributions received by fund NA 1000000
Benefits paid by fund NA -2100000 -2100000
Return on plan assets excluding interest
recognised *
NA 2230000
Actuarial loss on remeasurement of DBO NA 100000
Balance 31 December 2016 NA 23000000 20130000
5. Summary Journal
Date Account DR CR
31/12/16 Current service cost 800000
Interest cost 2200000
To Present value of defined benefit
obligation
3000000
31/12/16 Actuarial Loss 100000
To Present value of defined benefit
obligation
100000
31/12/16 Statement of P&L 3100000
To Current service cost 800000
To Interest cost 2200000
To Actuarial Loss 100000
Page 9 of 9