The Pension Deficit That Would Not Sit Still
Corvane plc operates a defined benefit pension scheme. At 31 December 20X4 the actuarial deficit reported under IAS 19 was £48m, recognised in full in the statement of financial position. During 20X5 the following occurred: current service cost £14m; past service cost from a benefit enhancement agreed in March 20X5 £9m; contributions paid £11m; a curtailment gain of £6m from closing a division; and a remeasurement loss of £22m, of which £17m arose from a fall in the discount rate from 3.8% to 3.1%. The company also agreed, in December 20X5, a new funding plan requiring £15m of annual contributions for the next four years. The finance director proposes to spread the £22m remeasurement loss over four years to 'match the funding plan' and to net the £6m curtailment gain against the £9m past service cost, presenting £3m as a single past service cost.
1. Advise on the correct accounting treatment of each element and compute the closing IAS 19 deficit at 31 December 20X5.
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Framework under IAS 19.
| Element | Treatment | Amount |
|---|---|---|
| Opening deficit | Liability at 31 Dec 20X4 | £48m |
| Current service cost | P&L (operating) | £14m |
| Past service cost | P&L in full when the amendment occurs (March 20X5) | £9m |
| Curtailment gain | P&L when the curtailment occurs | (£6m) |
| Contributions paid | Reduces the liability | (£11m) |
| Net interest | P&L (not given; ignore) | - |
| Remeasurement loss | OCI, not P&L, and not spread | £22m |
Closing deficit = £48m + £14m + £9m − £6m − £11m + £22m = £76m.
On the FD's two proposals:
- Spreading the remeasurement loss is not permitted. IAS 19 requires remeasurements to be recognised immediately in OCI and never recycled to profit or loss. The four-year funding plan is a cash-flow arrangement, not an accounting basis; matching accounting to funding is not a concept in IAS 19. The £22m must hit OCI in full in 20X5.
- Netting past service cost against a curtailment gain is not permitted. IAS 19 treats past service cost and curtailment gains/losses as separate items, each recognised when the relevant event occurs. They arise from different events (a benefit enhancement vs closing a division) and must be presented separately. Presenting £3m net obscures the £9m cost of the enhancement and the £6m gain, and is misleading.
Additional point. The fall in the discount rate to 3.1% increases the present value of obligations; this is a remeasurement, correctly in OCI. The new funding plan is a disclosure matter (IAS 19.146-147) - it does not change the liability recognised, which is the actuarial present value of the obligation, not the funding commitment.
2. Explain the conceptual and presentation consequences of the FD's proposals, and how the closing position should be presented in the primary statements.
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Conceptual consequences.
- Spreading the remeasurement loss would smooth profit and flatter the statement of financial position in 20X5 by deferring £22m of a real economic loss. It would also create an unrecognised liability, breaching the definition of a liability in the Conceptual Framework (a present obligation arising from a past event).
- Netting the curtailment gain against past service cost would violate the offsetting principle: assets and liabilities, and income and expenses, should not be offset unless required or permitted by an IFRS. IAS 19 does not permit it. It also impairs understandability and comparability for users assessing the cost of the benefit enhancement separately from the division closure.
- The funding plan is not a liability until contributions fall due; the obligation recognised is the actuarial one. Disclosing the plan is required, but it does not justify changing measurement.
Presentation in the primary statements (31 December 20X5).
- Statement of financial position: net pension liability of £76m, presented as a non-current liability (or split if settlement is within 12 months).
- Statement of profit or loss: current service cost £14m, past service cost £9m and curtailment gain £6m - each on its own line or clearly disclosed within operating expenses. Net P&L charge before interest = £17m.
- Statement of other comprehensive income: remeasurement loss of £22m, presented as an item that will not be reclassified to profit or loss.
- Statement of changes in equity: the £22m flows through the remeasurement reserve within equity.
- Disclosure: the new four-year funding plan, the discount rate change and the sensitivity of the obligation to the discount rate.