Accounting for pension costs and disclosure
Accounting for pensions is about recognising the cost of DB promises in employer financial statements. The exam tests IAS 19 and FRS 102 mechanics, the split between profit or loss and OCI, and disclosure.
Core rules
- The defined benefit obligation is measured using the projected unit credit method and discounted at a high-quality corporate bond yield (IAS 19) or a comparable AA bond yield (FRS 102).
- Service cost and net interest go to profit or loss; remeasurements (actuarial gains/losses, return on assets above or below interest) go to OCI.
- Past service costs, curtailments and settlements are recognised when they occur.
- A surplus is recognised only if it is recoverable (asset ceiling/IFRIC 14).
- Disclosures include assumptions, sensitivity, maturity profile and reconciliation of the net liability.
Worked example
Opening obligation £100m; plan assets £85m; discount rate 4%. Net interest cost = 4% × (100 − 85) = £0.6m. Current service cost is £4m. Contributions are £3m. A remeasurement loss of £2m arises from assumption changes. P&L charge = 4 + 0.6 = £4.6m. Closing net liability = 15 + 4.6 − 3 + 2 = £18.6m. The £2m loss sits in OCI, not profit.
Traps
Using funding assumptions in the accounts; crediting expected asset returns to P&L under old IAS 19; ignoring IFRIC 14; netting a surplus that is not recoverable; forgetting that net interest uses the discount rate on the net liability, not the expected return on assets.