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Hello Tutor,
I am pasting a question from a thread which is closed now. I am still not clear on this issue.
IAS 19 says Past service cost should be recognised immediately to the extent that it relates to the former employees or to active employees already vested otherwise it’s amortised until benefits become vested.
Past service costs:
In the example in Kaplan text book, an entity operates a defined benefit plan that provides a pension of 2% of final salary for each year of service. On the start of year 1 Jan 20×5, it improved to 2.5%, including service before that date. Employees must have worked for the entity for at least 5 years. At the date of improvement, the present value of the additional benefits for service from 1 Jan 20X1 to 1 Jan 20X5, is as follows:
Employees with more than 5 years’ service at 1.1.X5 150
Employees with less than 5 years’ service at 1.1.X5 120
(average length of service: 2 years)
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270
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Question: explain how the additional benefits are accounted for in the financial statements of the entity.The solution uses the figure of 270, including employees with less than 5 years’ service at 1.1.20X5. I don’t understand why. Doesn’t the entity stipulate that employees must have worked for the entity for at least 5 years to qualify for the additional pension benefit? So why then use 270, but not 150?
Past service cost is recognised as an expense at the earlier of the date when a plan amendment or curtailment occurs and the date when an entity recognises any termination benefits, or related restructuring costs under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. [IAS 19(2011).103] (Source IAS PLUS).
Your reference to amortisation sounds like the old standard.
Re the question. My assumption would be that all the staff will eventually have worked for the company for more than 5 years, so I would probably have expensed 270 immediately. It probably depends on how you want to read the question.
Either way all the examiner wants to see is that you know that the double entry is Dr P&L Cr Liability.
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