ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits
Cedar Group's defined benefit plan had an obligation of $50 million and plan assets of $44 million at the date it settled part of its obligations. Cedar paid $8 million from plan assets to settle obligations with a carrying value of $7.2 million. No other changes occurred. What amount is recognised in profit or loss for the settlement, and what does it represent?
Cedar recognises a $0.8 million loss in profit or loss. A settlement gain or loss is the settlement price of $8.0 million less the $7.2 million obligation extinguished, so paying more than the carrying value of the obligation produces a loss.
- ALoss of $0.8 million, being settlement price less obligation settledCorrect
- BGain of $0.8 million, being settlement price less obligation settled
- CLoss of $8.0 million, being the full amount paid
- DNo amount, as settlements are recognised in other comprehensive income
Explanation
Gain or loss on settlement is the difference between the present value of the obligation settled, measured at the settlement date ($7.2m), and the settlement price including plan assets transferred and payments made ($8.0m). The price exceeds the obligation, giving a $0.8m loss in profit or loss. Recognising the full $8.0m would ignore the obligation extinguished.
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