IAS 19 Defined Benefit Plan - Past Service Cost

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novicepq
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Joined: 12 Mar 2020, 16:58

IAS 19 Defined Benefit Plan - Past Service Cost

Post by novicepq »

Hi,
I am a bit confused about the accounting of the past service cost. Most of the times, there is a service length threshold for an employee to enjoy the plan, say they must work for the company for 5 years.
Employees with less than five years' service PV of the additional benefit: 120,000
(average length of service: two years)
In the text book, the whole of 120,000 is charged to P/L.
I don't get why. Shouldn't the amount chargeable be: 2/5 * 120,000 = 48,000.
Thank you.
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Marek Muc
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Re: IAS 19 Defined Benefit Plan - Past Service Cost

Post by Marek Muc »

Please quote the whole example as your post is unclear to me
novicepq
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Joined: 12 Mar 2020, 16:58

Re: IAS 19 Defined Benefit Plan - Past Service Cost

Post by novicepq »

OK, here is the whole illustration:

An entity operates a pension plan that provides a pension of 2% of final salary for each year of service. on 1 Jan 20X5, the entity improves the pension to 2.5% of final salary for each year of service, including service before this date. Employees must have worked for the entity for at least five years in order to obtain this increased benefit. At the date of the improvement, the present value of the additional benefits for service from 1 January 20X1 to 1 January 20X5, is as follows:
Employees with more than five years' service at 1.1.X5 150
Employees with less than five years' service at 1.1.X5 120
(average length of service: two years)
------
270
------

Required:
Explain how the additional benefits are accounted for in the financial statements of the entity.

Solution:
The entity recognises all $270 immediately as an increase in the defined benefit obligation following the amendment to the plan on 1 January 20X5. This will form part of the service cost component. Whether or not the benefits have vested by the reporting date is not relevant to their recognition as an expense in the financial statements.

What I don't get is for those employees with less than five years' service, why account for the full amount 120? Because I saw some youtube channel on how to account for past servic cost, and they showed me that years of service should be taken into account when it comes to recognise the accrued cost. So based on youtube channel illustration, the amount should be 2/5 * 120 = 48, which is contradictory to how the textbook is showing.

Thank you.
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Marek Muc
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Re: IAS 19 Defined Benefit Plan - Past Service Cost

Post by Marek Muc »

past service cost is recognised immediately in P&L
note that the CU 120 relates to service before 1 January 20X5, so it is already 'earned' at 1 January 20X5
novicepq
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Joined: 12 Mar 2020, 16:58

Re: IAS 19 Defined Benefit Plan - Past Service Cost

Post by novicepq »

Ah, I think I get it now. Thank you.
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