## **Learning Outcomes**

After reading this article, you will be able to explain the components of defined benefit pension cost under IAS 19. You will learn to identify and present service cost, net interest, and remeasurement in the financial statements, and distinguish their effects on profit or loss and other comprehensive income. You will also understand how to calculate and present net pension liabilities or assets according to ACCA FR requirements.

## **ACCA Financial Reporting (FR) Syllabus**

For ACCA Financial Reporting (FR), you are required to understand the recognition and measurement of defined benefit obligations and plan assets under IAS 19. In particular, focus your revision on:

- The recognition and measurement of defined benefit pension obligations and associated plan assets
- The required split of pension expense into service cost, net interest, and remeasurement
- The prescribed financial statement presentation for each component
- The distinction between profit or loss and other comprehensive income for pension-related items

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which part of defined benefit pension expense is presented in other comprehensive income under IAS 19?
   a) Service cost  
   b) Net interest  
   c) Remeasurement  
   d) Employer contribution

2. Are all changes in the defined benefit obligation recorded in profit or loss? Explain your answer briefly.

3. True or false? The net defined benefit liability is shown in the statement of financial position as a non-current item.

4. In which section(s) of the financial statements are service cost and net interest presented?

## **Introduction**

Accounting for defined benefit pension schemes requires careful distinction between different components of the expense. IAS 19 Employee Benefits splits the annual pension cost into three elements: service cost, net interest, and remeasurement. Each is calculated and presented separately in the financial statements.

This separation is essential for ACCA FR candidates. You must allocate costs correctly between staff expenses, finance costs, and other comprehensive income, in line with the standard's requirements.

> **Key Term: defined benefit plan**
> A post-employment benefit plan where the employer promises a specified level of future retirement benefits, usually linked to employee service and salary.

## The Three Components of Defined Benefit Pension Expense

IAS 19 requires entities to recognise the total pension cost as three distinct items:

- Service cost
- Net interest
- Remeasurement

Each type is treated differently in the financial statements.

### Service Cost

Service cost is the increase in the present value of the defined benefit obligation for employee service in the current period. It also includes:

- Current service cost: Cost for service rendered in the reporting period
- Past service cost: Changes in the obligation due to plan amendments and curtailments
- Losses or gains on settlement

Service cost is recognised in profit or loss as part of staff costs.

> **Key Term: service cost**
> The increase in the defined benefit obligation resulting from employee service in the period plus plan amendments, curtailments, or settlements.

### Net Interest

Net interest reflects the effect of discounting the net defined benefit liability (or asset) at the previous year-end's discount rate. It represents the "cost of time" on the outstanding obligation, less the expected return on plan assets.

Net interest is recognised in profit or loss, typically within finance costs.

> **Key Term: net interest on the net defined benefit liability**
> The increase in the net pension liability or asset due to unwinding the discount rate, after accounting for expected return on assets.

### Remeasurement

Remeasurement includes all actuarial gains and losses arising from changes in assumptions or experience, and actual returns on plan assets that are different from those assumed in net interest. Remeasurements cannot be recycled to profit or loss.

Remeasurement is always presented in other comprehensive income and accumulates in equity.

> **Key Term: remeasurement of the net defined benefit liability**
> Gains or losses from actuarial changes in assumptions, experience adjustments, and actual returns differing from expected, all recorded in OCI.

## Statement Presentation

The three components must be presented as follows:

- Service cost: profit or loss (within staff costs)
- Net interest: profit or loss (as finance cost/ income)
- Remeasurement: other comprehensive income (never recycled through profit or loss)

The net pension liability (or asset) appears separately in the statement of financial position, normally classified as non-current.

### **Worked Example 1.1**

An entity has a defined benefit liability of \$500,000 at 1 January. The discount rate is 4%. The current service cost for the year is \$55,000. Employer contributions paid to the scheme are \$45,000. At 31 December, the scheme actuary reports:

- Actual return on plan assets: \$18,000
- Expected return on plan assets: \$16,000
- Actuarial loss on the defined benefit obligation: \$8,000

Calculate:

**a) The amounts to report in profit or loss and other comprehensive income;**  
**b) The closing net pension liability at 31 December.**

> **Answer:**
> a)
>
> - Service cost (P/L): \$55,000
> - Net interest (4% × \$500,000): \$20,000 (P/L)
> - Remeasurement (OCI): \$8,000 actuarial loss + (\$18,000 − \$16,000) = \$10,000 (OCI)
>
> b)  
> Opening liability: \$500,000
>
> - Service cost: \$55,000
> - Net interest: \$20,000
> - Actuarial loss: \$8,000  
>   – Actual return on assets: \$18,000  
>   – Employer contribution: \$45,000  
>   = Closing liability: \$520,000

### **Exam Warning**

> Many candidates wrongly put all pension amounts in profit or loss. Only service cost and net interest are reported there; all remeasurements must go to OCI.

## **Summary**

IAS 19 splits defined benefit pension expense into three: service cost, net interest, and remeasurement. Service cost and net interest are recorded in profit or loss; remeasurement is recorded in OCI. Each component is calculated separately. The net obligation or surplus is reported as a non-current item in the statement of financial position.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Identify and define the three components of defined benefit pension cost per IAS 19
- Know where service cost, net interest, and remeasurement are shown in the financial statements
- Recognise that remeasurement is always reported in OCI and not recycled
- State that net pension liabilities/ assets are shown as non-current items in the statement of financial position
- Calculate and allocate plan components between profit or loss and OCI as required

## **Key Terms and Concepts**

- defined benefit plan
- service cost
- net interest on the net defined benefit liability
- remeasurement of the net defined benefit liability

Employee benefits (IAS 19) - Defined benefit components and presentation