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https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p2/exampapers/int/P2INT_2013_jun_q.pdf.pdf That’s the question,
And this is the answer https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p2/exampapers/int/p2int_2013_jun_a.pdf.pdf
Regarding the above question, and the note dealing with the reversal of the impairment in 2013, (note 5) why does the answer take account of the depreciation that would have been charged if the asset hadn’t been devalued. Can’t we just credit to P&L a full $12M, what’s the use of taking account of the depreciation? Why adjust for depreciation? What’s the rationale behind this? Can you please explain why the examiner takes account of the depreciation and therefore reduces the credit to P&L and writes as follows:
“The credit to profit or loss is made up of a reversal of $12m impairment loss charged in 2012, less $0·42m for the
depreciation that would have been charged if the asset had not been devalued ($12m divided by 29)”I get that for revalued assets we transfer the excess depreciation to retained earnings because we are getting extra depreciation just because the asset’s value is higher but is there a similar rationale for the above situation? Why is the 0.41 taken into account?
Thanks,
Gabriel
I agree that it’s not the most sensible thing to do – why not just Dr the asset to get it up to $105m and Cr the revaluation reserve or the PorL?
“Well, there’s the rub” (Shakespeare) Do we credit PorL or do we credit Revaluation reserve?
We reverse the (too cautious) deficit on revaluation from last year. That was calculated as $90m less $3m depreciation = carrying value of $87 and then revalue downwards to $75m.
OK so far?
Next year we discover we were too hasty and need to reverse that previous year devaluation and some more. But in that reversal of the impairment, we are not allowed to reverse it to a value that IT WOULD HAVE BEEN if we had not devalued it in the first place.
After 2 years without the devaluation, the asset would have been $90m – $3m – $3m = $84
The effect of the devaluation was to reduce the carrying value to (follow this carefully!)
$90m – $3m depreciation – $12m devaluation = $75m ……….. then $75m / 29 depreciation for 2013 = $2.59m depreciation so carrying value at the year end 2013 is $75m – $2.59m = $72.41m …..
….. now reverse that original impairment, but not to a value greater than it would have been if we hadn’t impaired it in the first place ie, not above $84 as calculated above
The reversal through PorL is therefore restricted to $84 – $72.41 = $11.59 ie Dr Asset Cr PorL $11.59m
But that only gets us back up to $84m and we want to finish up with an asset with a carrying value of $105m
And the only way to do that is through Revaluation Reserve Dr Asset $21m (ie 105m – 84m) and Cr Revaluation Reserve $21m
OK?
Yes that makes sense but with regard to note 7, the question reads as:
The following information relates to the group pension plan of Trailer:
1 June 2012 ($m) 31 May 2013 ($m)
Fair value of plan assets 28 29
Actuarial value of defined benefit obligation 30 35The contributions for the period received by the fund were $2 million and the employee benefits paid in the year amounted to $3 million. The discount rate to be used in any calculation is 5%. The current service cost for the period based on actuarial calculations is $1 million. The above figures have not been taken into account for the year ended 31 May 2013 except for the contributions paid which have been entered in cash and the defined benefit obligation
We are told the “that everything was not taken into account EXCEPT the contributions paid of $2million” so why in the answer to this note, they add contributions of 2 under the asset column? See for pension workings we usually follow the standard proforma and the asset and liability columns are separate. So why in the working, in the asset column for pensions they are adding the contributions paid, when in fact, it had already been taken into account, isn’t that double counting?
@dreaded2014 said:
Yes that makes sense but with regard to note 7, the question reads as:The following information relates to the group pension plan of Trailer:
1 June 2012 ($m) 31 May 2013 ($m)
Fair value of plan assets 28 29
Actuarial value of defined benefit obligation 30 35The contributions for the period received by the fund were $2 million and the employee benefits paid in the year amounted to $3 million. The discount rate to be used in any calculation is 5%. The current service cost for the period based on actuarial calculations is $1 million. The above figures have not been taken into account for the year ended 31 May 2013 except for the contributions paid which have been entered in cash and the defined benefit obligation
We are told the “that everything was not taken into account EXCEPT the contributions paid of $2million” so why in the answer to this note, they add contributions of 2 under the asset column? See for pension workings we usually follow the standard proforma and the asset and liability columns are separate. So why in the working, in the asset column for pensions they are adding the contributions paid, when in fact, it had already been taken into account, isn’t that double counting?
I had the same doubt too. Interestingly similar thoughts!
Hi
It’s the only way that we can arrive at the value for the remeasurement. The workings start with the values brought forward (28 and 30) and then work out the “theoretical balance to carry forward. That theoretical value can be compared with the actuary’s assessment and that gives us the value of the remeasurement
The contributions amount cannot have been included in the brought forward values – think about it!
OK?
Yes but then could you explain to me what this line meant in the question,
[ The above figures have not been taken into account for the year ended 31 May 2013 except for the contributions paid which have been entered in cash and the defined benefit obligation]
I understand cash was credited but what was debited? Isn’t it the pension asset {defined benefit obligation} that he talks about above?
This is tricky! The $2m has actually been debited to Plan Assets, not credited! The credit entry for the $2m is in Trailer’s General Cash Account (Dr Pension Plan Assets, Cr General Cash Account)
The (copied) working below shows the $2m as a deduction in arriving at the net obligation as at the year end
Net obligation at 1 June 2012 ($30m – $28m) 2
Net interest cost ($1·5m – $1·4m) 0·1
Contributions (2)
Current service cost 1
Remeasurement loss ($5·5m – $0·6m) 4·9
––––
Net obligation at 31 May 2013 ($35m – $29m) 6
––––The current service cost and net interest cost will be charged to profit or loss ($1·1m) and the remeasurements to OCI ($4·9m). There will be no adjustment for the contributions, which have already been taken into account. Therefore the obligation will be credited with $6m.”
I have to admit that the wording (“except for the contributions paid which have been entered in cash and the defined benefit obligation”) is, in my opinion, not absolutely clear
I have got very perplexed regarding this question now. Below, I reproduce the same working, but this time not from ACCA but from my BPP revision kit and there they add the contributions of $2, just like it’s done in the normal way, however, in the end they do get the non current liability as 6. I don’t get what’s happening. ACCA answer is deducing the 2 while BPP adds it, so had it been included? Had it not been included? And how is the final answer of 6 same in both approaches, how can this be? This question almost driving me crazy …
Thanks,
Gabriel
Changes in fair value of plan assets
$m
Opening fair value of plan assets – 28.0
Interest on plan assets: 28 *5% = 1.4
Contributions 2.0 (notice the addition here)
Benefits paid (3.0)
Gain on re-measurement through OCI (balancing figure) 0.6
Closing fair value of plan assets 29.0
Changes in present value of the defined benefit obligation
$m
Opening defined benefit obligation 30.0
Interest cost on defined benefit obligation: 30 *5% 1.5
Current service cost 1.0
Benefits paid (3.0)
Loss on remeasurement through OCI (balancing figure) 5.5
Closing defined benefit obligation 35.0
Adjustment to the group accounts:
$m $m
DEBIT Profit or loss (retained earnings) 1.1
DEBIT Other comprehensive income (other components of equity) 4.9
CREDIT Non-current liabilities (1.1 + 4.9) 6The only difference, surely, is that the examiner’s answer has merged the plan assets with the future obligation and started with a figure for “net obligation”
All those adjustments that you have listed are merged (eg interest on plan assets 1.4 merged with interest cost on defined benefit obligation 1.5)
The 2m contribution is added to plan assets in the separated calculations but is a deduction against the net obligation in the merged calculations
OK?
Ok I get it, the examiner has taken the view of the liability; so yes contributions reduce the liability (reduce the net obligation). But can you please tell me why they were added to the plan assets in the BPP answer (because from your posts above, the plan assets were already debited and cash was credited) so why add it again? Is it because we start with the opening balance, which didn’t take into account the 2 but again the examiner says nothing is taken into account EXCEPT the contributions so I’m yet floating …
“Is it because we start with the opening balance, which didn’t take into account the 2”
That’s exactly the reason. The opening balance cannot have been inclusive of the 2 contributions because they were only contributed during this year.
All the other entries are “notional” based on the accruals concept and the expert assessment of the actuary. They are simply book adjustments whereas the cash is definitive – it’s an actual movement of funds
Think about this – when the company CFO makes a payment out of general funds (Cr General Cash Account) she has to put the debit somewhere
But where she also estimates the expected return on the plan assets, that value is just an estimate in her head – it has involved neither cash paid nor received
Don’t float! More important, don’t sink! You’re getting closer and closer to being able to put your feet down on terra firma
Hi Mikelittle,
Hope you are still at opentuition. The solutions from acca are:
Dr Property, plant and equipment $32·58m
Cr Profit or loss $11·58m
Cr Revaluation reserve $21mWhat I do not understand is why didn’t they DR the accumulated deprecation of 2.58 to 0. Isn’t that the usual method everytime we revalue sth in this case to 105mil?
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