Defined Benefit Obligation Accounting

The assignment demonstrates the accounting treatment of a defined benefit obligation through a series of journal entries. It covers recording an actuarial loss, current service cost, interest cost, and the initial recognition of the present value of the obligation. The provided example uses dates (31/12/2016) and specific amounts ($3,000,000, $100,000, $800,000, $2,200,000).

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:.....................................................................................5
2. Impairment Test 31/12/17....................................................................................................5
a. Calculations........................................................................................................................5
b. General Journal Entries 31/12/17:.....................................................................................6
Question 3. Case Study 6.1....................................................................................................................7
Accounting Justification:................................................................................................................7
Relevant Issues:.............................................................................................................................7
1. Difference between two phases:...........................................................................................7
2. Accounting for Research & Development:.............................................................................7
3. Decision / Conclusion / Reasons and Justification:................................................................7
Question 4. Ex 9.19................................................................................................................................8
Accounting Justification:................................................................................................................8
Relevant Issues:.............................................................................................................................8
1. Deficit of Fund...........................................................................................................................8
2. Net Defined Benefit Liability......................................................................................................8
3. Net Interest................................................................................................................................8
4. Reconciliation............................................................................................................................9
5. Summary Journal.......................................................................................................................9
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Question 1. Case Study 3.1
Accounting Justification:
Para B2 of AASB 13 deals with the concept of Fair valuation measurement and accounting.
Fair value may be defined as the value at which an asset may be sold by the willing seller to
the willing buyer in a rational free market at the arm’s length price. The topic has also been
extensively covered in Para 11 and 36 of the conceptual framework of general purpose
financial statements. The topic of fair valuation is a widely subjective and debatable one as
it may vary from person to person and situation to situation based on the assumptions
taken and the circumstances of the case. (Abbott & Kantor, 2017) It may see huge variations
in values being computed by 2 different users as it depends on the estimates and
judgements being taken into consideration. The transaction cost involved here in selling the
asset or transferring the liability to the other party will only be recognised if following 2
conditions are satisfied:
1. It should directly relate to the party.
2. The transaction cost would not have been incurred if the entity had not decided to
sell the asset or transfer the liability.
Relevant Issues:
In the given case study, the most relevant and critical issue is the determination of fair value
and how it fluctuates according to its use by the different entities. The value of PPE may
differ entirely if based on the fair values as it has separate uses for a non-profit organisation
and one which deals in profits. (Alexander, 2016) Thus, it has to be seen that what is the
best and the highest use of the asset relevant to the circumstance to determine the correct
fair value.
1. Highest & Best Use
Highest and best use may be defined as how the non-financial asset can be put to the best
possible use to extract the maximum economic benefit out of it. Or, if can be sold to the
other party who has the ability to extract the best out of it or sell it at the best possible
price. While using this concept, 3 things need to be considered. i.e., physical presence of
asset, economic feasibility and legal status of the transaction. (Das, 2017)
2. Application to aged care home
When the above principle is applied to the aged home care, the value of the assets may
come out to be substantially less when the same is compared against the commercial or
business entities. But, in true sense, the value of the asset or property should bot change
according to who is using it but should be uniform based on the exit price in the market as
on the final measurement date.
3. Two possible uses
Fair valuation is the essence of modern day accounting and is used in wide areas like the
determination of impairment amount of the tangible and intangible assets, inventory
valuation in the books and several other reporting requirements as per IFRS framework.
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Question 2. Ex 7.14
Accounting Justification:
AASB 136 deals with the impairment of the tangible and intangible assets. Agenda 10F(a) of
the conceptual framework of general purpose accounting also deals extensively on the
issues related to impairment. (Dichev, 2017) Impairment is the permanent write down in
the value of assets when the indicators so exists and hint the write down in value. These
indicators may be internal or external in nature and based on these factors, the impairment
testing is done towards the end of the period. The asset should not be carried in the books
of accounts at more than the recoverable value which is higher of the value in use or the fair
value of the asset less the cost of disposal. All this is calculated in accordance with the
standards prescribed.
Relevant Issues:
The relevant issue here is the determination of the impairment loss for the 2 CGU of the
company which has been named as Time and Leisure. The company has also changed the
value of depreciation in the 2nd accounting year based on the assessment, the impact of the
same also needs to be analysed on the impairment loss for the year. (Visinescu, Jones, &
Sidorova, 2017)
1. Impairment Test 31/12/16
a. Calculations:
As per the below calculations made, it is evident that there is an impairment loss in the 2
CGU’s as $ 200 for Time and $ 12 for Leisure. While calculating so, it was taken care that
impairment loss is first assigned to the goodwill and then to the other remaining assets. The
value of the plant is limited to the recoverable value and so the reallocation had to be done
to other assets. Loss will not be allocated to Inventory and receivables as both of them are
current assets held for sale. (Murray & Markey Towler, 2017)‐
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
31/12/2016 Impairment loss on CGU - Time 200
To Accumulated depn & impairment loss -
Plant
155
To Accumulated depn & impairment loss –
Patent
20
To Accumulated depn & impairment loss -
Goodwill
25
31/12/2016 Impairment loss on CGU - Leisure 12
To Accumulated depn & impairment loss -
Goodwill
12
2. Impairment Test 31/12/17
a. Calculations
While calculating the impairment loss for 2017, the new carrying values given by the
company for the assets were considered basis which reversal of impairment loss is coming.
However, goodwill once impaired, cannot be reversed back in any circumstance. The
impairment calculation further on is given below:
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
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b. General Journal Entries 31/12/17:
Date Account DR CR
31/12/2017 Accumulated depn & impairment loss -
Plant
155
Accumulated depn & impairment loss
– Patent
20
To Impairment Loss on CGU - Time 175
Page 6 of 10

Question 3. Case Study 6.1
Accounting Justification:
The question of research and development expenditure arises when the company is dealing
with the internally generated intangible assets. The topic is being extensively dealt in by
AASB 138, paragraph 8 and SSAP 13 of the conceptual framework of accounting. Research
cost is the pre facto cost which is being incurred in the initial phase before the development
of the asset takes place. It is done to check on the technical and scientific feasibility of the
project in hand. It is checked that whether the project would be economically viable and
financially feasible to carry on with. (Trieu, 2017) Further, development of the asset is the
phase which comes after the research phase and the company is sure that the asset once
generated would bring future economic benefits to the entity. It is during this phase that the
company comes up with the advanced technology or invests in developing a new and
enhanced product or to bring a new version of process of the existing one. In case there is
an issue of non-classification of the research and development expenses in the absence of
information, full value should be considered as the research cost. (Heminway, 2017)
Relevant Issues:
The relevant issue of discussion here is the bifurcation of the research and the development
cost and how the same should be treated in the financial books of accounts
1. Difference between two phases:
The difference between the 2 phase is that the research comes before the development
phase starts. Research may or may no result into an asset whereas development phase
will surely result in to an asset. Research is not associated with future economic benefits
whereas development is. These are the basic differences in between the two. (Raiborn,
Butler, & Martin, 2016)
2. Accounting for Research & Development:
The research phase is not expected to give the future economic benefits to the entity
neither the entity can demonstrate so. It is not done with the intention of creating the
asset rather it is done just to get the understanding of the thing. Hence, it should be
charged off to expense in the P&L. Whereas the development is the post facto phase of
the research where the development of the enhanced product or technology or process
is being carried out such that the company can derive the future economic benefits out
of it and therefore the same should be capitalized in the books. (Félix, 2017) Further, if
any incidental costs are incurred during the developmental phase, the same should be
capitalised in the books.
3. Decision / Conclusion / Reasons and Justification:
On the basis of the above discussion and study, it can be concluded that the research
costs needs to be charged off as an expense to the P&L whereas the development costs
should be capitalised in the books. However, before the decision is taken on the
accounting, It should be seen that whether the motive was there to create the asset,
Page 7 of 10

whether the asset is saleable in the open market, whether it is economically feasible in
the future and before capitalization, whether it can be reliably measured.
Question 4. Ex 9.19
Accounting Justification:
AASB 1056 deals on the employee benefits being offered by the company to their
employees in lieu of the services rendered. It includes defined benefit plan, contribution
plan and superannuation plan. It is in the nature of the pension which is being paid to the
employee after retirement but the funds are to be accumulated upfront. Defined benefit
plan includes contribution only by the employer to the common fund whereas defined
contribution plan includes contribution to be made both by the employer as well as
employee. (Jones, 2017) In the given case study, the company has stopped giving this
benefit to the new employees however, it continues to do so and contribute towards the
old employees who opted for it in the past. The return earned on these funds depends on a
lot of internal as well as external factors and particularly the interest rate which is prevailing
in the market for the investment made by the company. (Werner, 2017)
Relevant Issues:
The issue of discussion here is the computation of the benefit or deficit in the funds, asset or
liability as on the balance sheet date. Accordingly, the computation has been 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 amount in the fund computed is $ 1,100,000 (2,100,000 – 1,000,000)
2. Net Defined Benefit Liability
The net defined benefit liability for the company at the end of the period is $ 23,000,000
3. Net Interest
In the table given above (Present value of defined benefit obligation account), net interest is
computed as on 31st December 2016 to be $ 2,200,000.
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4. Reconciliation
The reconciliation accounts of the company have been shown below.
Particulars Amount ($)
Opening balance 20,000,000
Add: Current service cost 800,000
Add: Interest Cost 2,200,000
Add: Past service cost 2,000,000
Add: Actuarial Loss 100,000
Less: Benefit Paid (2,100,000)
Closing balance 23,000,000
Particulars Amount ($)
Opening balance 19,000,000
Add: Contribution 1,000,000
less: Benefit Paid (2,100,000)
Add: Return 2,230,000
Closing balance 20,130,000
Present Value of defined benefit obligation A/C
Plan Assets A/C
Reconciliation of the following accounts:
5. Summary Journal
Date Account DR CR
31/12/2016 Current service cost A/C …………………Dr. 800,000
Interest cost A/C …………………………….Dr. 2,200,000
To Present value of defined benefit
obligation
3,000,000
31/12/2016 Actuarial Loss A/C……………………………..Dr. 100,000
To Present value of defined benefit
obligation
100,000
31/12/2016 Statement of P&L……………………………….Dr. 3,100,000
To Current service cost 800,000
To Interest cost 2,200,000
To Actuarial Loss 100,000
Page 9 of 10

References
Abbott, M., & Kantor, A. (2017). Fair Value Measurement and Mandated Accounting Changes: The
Case of the Victorian Rail Track Corporation. Australian accounting Review.
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4),
411-431.
Das, P. (2017). Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social
Science Studies, 2(2), 10-17.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632.
Félix, M. (2017). A study on the expected impact of IFRS 17 on the transparency of financial
statements of insurance companies. MASTER THESIS, 1-69.
Heminway, J. (2017). Shareholder Wealth Maximization as a Function of Statutes, Decisional Law,
and Organic Documents. SSRN, 1-35.
Jones, P. (2017). Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Murray, C., & Markey Towler, B. (2017). A Theory of Return-Seeking Firms.‐ SSRN, 1-14.
Raiborn, C., Butler, J., & Martin, K. (2016). The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), 10-21.
Trieu, V. (2017). Getting value from Business Intelligence systems: A review and research agenda.
Decision Support Systems, 93, 111-124.
Visinescu, L., Jones, M., & Sidorova, A. (2017). Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), 58-66.
Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25, 57-80.
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