Strategic Business Reporting – Int (SBR – INT) September/December 2020 Q4

On 1 January 20X2, Handfood Co introduced an additional benefi to encourage employees to remain in its employment for at least ve years. Handfood Co has promised its employees a lump-sum bene t, payable on 1 January 20X7, which is equal to 1% of their salary at 31 December 20X6, provided they remain employed until that date.

The current salaries of employees on 1 January 20X2 are $1·1 million per annum. The directors of Handfood Co have used the following assumptions:
– Salaries for year ended 31 December 20X2 will remain at $1·1 million.
– Salaries should increase by 3% each year from 1 January 20X3.
– There is a 75% probability that all employees will still be employed by Handfood Co at 31 December 20X6.

The discount rate is 5% per year.
Handfood Co recognises actuarial gains and losses in other comprehensive income. Interest is recognised by Handfood Co on an annual basis. Handfood Co uses the projected unit credit method to measure its de ned bene t obligation which means that the current service cost is the increase in the present value of the future de ned bene t liabilities. The bene t will be payable from the balance on Handfood Co’s business bank account at 1 January 20X7.
Present value factors Periods (years)

@5% discount factor
yr-4 0·823
yr-5 0·784
(b) (i)
Discuss, with suitable calculations, the principles of how Handfood Co should account for the current service cost of its additional employee bene t for the year ended 31 December 20X2.

examiner answer: Expected final salary $1·1million x (1·03)^4 = 1,238
Benefit for the current year (1% x $1·238 million) =12·4
Adjusted bene t for the current year (75% x $12,400) =9·3
Current service cost (($9,300 x 0·823) discounted at 5% over 4 years) = 7·7

my question is that why dont the caculation include dividing by 5 years of service? All cost is expensed in to P&L in year 1.