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ACCA Strategic Professional · Strategic Business Reporting (International) · Employee benefits

Falco Co, a parent, has a subsidiary Gale Co with a defined benefit plan. The finance director suggests reclassifying the plan as defined contribution in the group financial statements to remove a $3m deficit and improve gearing ratios, although Gale still guarantees the pension level. Which response best reflects IAS 19 and ethical requirements for a professional accountant?

The accountant should refuse because the plan is defined benefit in substance, as Gale guarantees the pension level and retains the risk. Reclassifying merely to hide the $3m deficit and improve gearing would mislead users and breach the principles of integrity and objectivity; disclosure would not cure it.

  1. AAccept the change, as management may choose the classification that best presents the group's position
  2. BRefuse, because the plan's substance is defined benefit and reclassifying to improve ratios would be misleading, breaching integrity and objectivityCorrect
  3. CAccept the change provided the deficit is disclosed in a note
  4. DAccept it in the subsidiary's statements but not in the group statements

Explanation

Classification depends on the substance of who bears actuarial and investment risk, not management's preference. Gale guarantees the pension level, so the plan is defined benefit and the deficit must be recognised. Reclassifying to manipulate gearing would breach the fundamental principles of integrity and professional behaviour. Disclosure cannot cure a misclassification.

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