Profit and loss account of diverse plc

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Reference no: EM13954504

Diverse plc has established a defined benefit pension scheme for all the company's full- time employees. The scheme receives contributions from the company and the participating employees. The scheme was originally established on 31 December 1991 and was actuarially valued at 31 December 1994. The scheme showed a deficit of £6 million. This deficit was caused by a reassessment of the original actuarial assumptions (an experi- ence deficiency). No change to contribution levels was made as a result of the 1994 valuation. However, the deficit was funded by a one-off lump sum payment of £6 million into the scheme on 30 June 1995. The result of the 1994 valuation was not available when the 1994 financial statements of Diverse plc were approved by the Directors.

The scheme was actuarially valued for the second time at 31 December 1997. The results of this second valuation showed a surplus of £4 million. The actuaries advised that £3 mil- lion of this surplus was caused by a significant reduction in the number of scheme members because of a redundancy programme. The result of the 1997 valuation was not available when the 1997 financial statements of Diverse plc were approved by the Directors. No change was made to the normal contribution levels for 1998. Total contribu- tions payable to the scheme for 1998 were £5 million. The average remaining service lives of participating employees in the scheme was estimated to be 20 years at the date of incep- tion of the scheme. This estimate is reckoned to continue to be applicable in the medium term as older employees retire and younger employees join.

Requirements

(a) Explain the principles outlined in SSAP 24 - Accounting for Pension Costs, under which the profit and loss account charge for pension costs is determined in the financial statements of employing companies. You should indicate why the computation of the pension cost is more complicated in the case of defined benefit schemes than defined contribution schemes.

(b) Compute the charge in the profit and loss account of Diverse plc in respect of the pension costs for the year to 31 December 1998.

(c) Compute the pension asset or liability which would appear in the balance sheet of Diverse plc at 31 December 1998 and explain how it would be disclosed on the balance sheet.

Reference no: EM13954504

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