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BBFA 4014 CRCI

– TUTORIAL 3
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a) (Answer)

Plan A Plan B
 Existing plan closed for new employees from 31  New plan created to replace Plan A from 01 Nov
Oct 20x6 20x6

 Both Eyer and Eyee contributes equally (6+6)%  Both Eyer and Eyee contributes equally (6+6)%

 Guarantee pension amount based on YOS and last  Not guarantee on the returns on contribution paid
drawn salary in

 Risk is borne by Joydan PLC  Risk is borne by Eyee themselves (depends on

how well the fund is being managed)

 Eyee will get what has been contracted  Eyee may get more pensions if the fund performed
better/well and vise versa

 Eyer is liable to top up extra contribution to make  Liability of the Eyer is limited to the their portion
up the shortfall if fund’s asset is insufficient to contribution made (6%)
meet the obligations

 Defined benefit plan  Defined contribution plan

CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a) (Answer)

Under defined benefit

obligations,
“Contributions Received”
never appears in the
calculation.

Whereas under plan

assets, no past service
cost, current service cost
and curtailment would
appear.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a) (Answer)

Int Paid > Int Earned

Equal to PnL Exp

Calculated earlier under def.

benefit obligation and plan asset.

Asset value < Liability obligations

CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(a) (Answer)

This is a classic example of our Malaysia EPF scheme!

– no recognition of asset nor liability
– All costs (eyer + eyee contribution) go to PnL.

DR Salaries & Wages (PnL)

CR Bank
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b)

Chronological given on Wallace is managing the defined benefit plan for its employees
with year end on every 31 Oct:-

Sep 20x7 : decided to relocate the division to another country for good (cheaper
labour and material costs)
30 Sep 20x7 : Relocation plan approved
Dec 20x7 : 50% employees were made redundant
Stop accruing benefits under the defined benefit plan
May 20x8 : Relocation took place

In preparation of the FS for year ended 31 Oct 20x7:-

• Reduction in net pension liability has a PV of $15m
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b)
Chronological given on Wallace is managing the defined benefit plan for its employees
with year end on every 31 Oct:-

Sep 20x7 : decided to relocate the division to another country for good (cheaper
labour and material costs)
30 Sep 20x7 : Relocation plan approved
Dec 20x7 : 50% employees were made redundant
Stop accruing benefits under the defined benefit plan Curtailment
May 20x8 : Relocation took place

In preparation of the FS for year ended 31 Oct 20x7:-

• Reduction in net pension liability has a PV of $15m
Curtailment? – Occurs when the entity significantly reduces the # of employees
covered by a plan and will be treated one type of “past service cost”.
Past service cost shall be “negative” when benefits are withdrawn and thereby resulting in the
decrease of PV of the defined benefit obligations ie. $15m. DR Liability (SOFP) CR PnL
Despite redundancy in Dec 20x7 (after YE), the adjustment be reflected in the FS for year ended 31
Oct 20x7.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b) (Answer)

According to IAS19, current service cost and net interest for the remaining period
shall be determined/computed using the updated actuarial assumptions whenever
there is a plan amendment (curtailment and/or settlement).

In the case of Wallace Co:-

• Curtailment occurs on 30 Sep 20x7 when the plan is approved/accounted for.
• Hence there is only 1 month impact on the updated actuarial assumptions.
• Is the adjustment material?
• Very likely that it is not
• So, no requirement for the adjustment to be made
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q3(b) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q1

As at 01 Jan 20x1
• PV future benefit obligations = $110m
• FV plan assets = $150m
During the year, contributions received (+$7m) and pensions paid (-$10m)
31 Dec 20x1
PV pension plan obligations $116m (+$6m)
FV plan assets $140m (-$10m)
Present cost of pensions earned $11m
(Current Service Cost)
*Yield on corporate bonds at 01 Jan 20x1 = 10%. Plan change will cost $10m.
(Past Service Cost)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q1 (Answer)

Given in Q
Incl $10m past service cost
paid in the beginning of year. Given in Q
Given in Q
Given in Q

Given in Q

Given in Q
Given in Q
Given in Q
Given in Q

Given in Q
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q1 (Answer)

Interest Paid < Interest Rec’d

Calculated earlier under def. benefit

obligation and plan asset.

Liabilities
Assets
Asset > Liabilities
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(a)

Need to be incl.
in the interest
calc.

Made redundant >> Compensate $58k in the

form of pensions to 5 pax. Also known as
curtailment cost.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(a) (Answer)

Under defined benefit

obligations,
“Contributions Received”
never appears in the
calculation.

Whereas under plan

assets, no past service
cost, current service cost
and curtailment would
appear.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(a) (Answer)

Int Paid > Int Earned

Equal to PnL Exp

Calculated earlier under def.

benefit obligation and plan asset.

Asset value < Liability obligations

CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(b)

Also called past

Need NOT be service cost
incl. in the
interest calc.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(b) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(b) (Answer)

Why gain?
Liability is reduced by
11.4m$ but asset reduced
by 10.8m$ net off 400k$
cash taken out.

Gain to be recognized in
PnL.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(b) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(c)

2 years contract
01 July 20x7 30 June 20x9
Bed InvestCo.invested $10m (principal) Interest at maturity @ 2.5% p.a.
+3% if FX ≥ $1.15 : RKR1.00

Looks like something similar to “Fixed-term Deposit” (one type of financial instruments).

How should this be recorded in FS?

Which IFRS?  IFRS 9
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(c) (Answer)
Bed InvestCo.
• This form of deposit = financial asset and thereby falls under IFRS 9 Financial
Instruments – measured at either amortised cost or fair value.
• Amortised Cost:
a) defined as assets held with the objective to collect contractual cash flow.
b) contractual terms clearly determine the date(s) of the solely payment of principal
and interest.
• Fair Value: Anything not falling under Amortised Cost will be considered as FV.

Now, does the said deposit meet the criteria of Amortised Cost?
 It appears to have met the conditions given that (1) contractual with basic lending
arrangement on time value for money & credit risk and (2) specified date (maturity
date @ 30/06/20x9) of principal ($10m) and interest payment (2.5%).
BUT
The element on extra 3% interest to be given on FX condition (ie. FX ≥ $1.15 :
RKR1.00) is not related to the basic lending arrangement. So, not qualify for
Amortised Cost approach.

 This is called “embedded derivative” and shall be measured by Fair Value basis.
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Tutorial Q2(c) (Answer)
CORPORATE REPORTING & CURRENT ISSUES (CRCI)
Introduction

Name : Lee KL
Mobile phone # : +6012-219 2432 / +6012-2900 382 (Whatapps only)
Email : leekl_1223@yahoo.com