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Hi,
I’m quite unsure about what exactly a settlement transaction is.
BPP provides the following definition (BPP SBR Workbook Sep 2019 – Jun 2020) (Page 100):
“A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit plan (other than a payment of benefits to, or on behalf of, employees that is set out in the terms of the plan and included in the actuarial assumptions)”.
BPP also gives the following example (BPP SBR Workbook Sep 2019 – Jun 2020) (Page 100):
A lump-sum cash payment made in exchange for rights to receive post-employment benefits.
The gain or loss on a settlement is recognised in profit or loss when the settlement occurs:
Dr. PV Obligation (as advised by actuary) X
Cr. FV plan assets (any assets transferred) X
Cr. Cash (paid directly by the entity) X
Cr./Dr. P/L (Difference) XCan you kindly explain what exactly happens during a settlement in simple terms?
Thanks
I would’ve thought that the money would be paid out by the pension plan rather than the employing entity
The pension fund will give money to the employee. So the pension fund assets will be reduced.
The pension fund no longer owes money to the employee. So the pension fund liabilities will be reduced.
There will be a difference and this goes to P&L and is treated in the same way as a service cost.
In the exam I think that they will give you the profit or loss on settlement and you just have to remember to put it in the P&L
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