CFA Level II ExamFinancial Statement AnalysisMedium
A company is preparing its financial statements under IFRS. It has a defined benefit pension plan. During the year, the fair value of plan assets increased by €10 million due to actual returns exceeding expected returns. The present value of the defined benefit obligation (PVDBO) also increased by €8 million due to changes in actuarial assumptions. How will these events be recognized in the company's financial statements under IFRS?
- AThe €10 million gain is recognized in profit and loss, and the €8 million loss is recognized in OCI.
- BThe €10 million gain is recognized in OCI, and the €8 million loss is recognized in profit and loss.
- CBoth the €10 million gain and €8 million loss are recognized in profit and loss.
- DBoth the €10 million gain and €8 million loss are recognized in Other Comprehensive Income (OCI).
Show answer & explanationAnswer & explanation
Correct answer: D. Both the €10 million gain and €8 million loss are recognized in Other Comprehensive Income (OCI).
Under IFRS, remeasurements of the net defined benefit liability (asset), which include actuarial gains and losses on the PVDBO and the difference between actual and interest income on plan assets, are recognized in Other Comprehensive Income (OCI).
Why the other options are wrong
- A. Incorrect. Both are remeasurements that go to OCI under IFRS.
- B. Incorrect. Both are remeasurements that go to OCI under IFRS.
- C. Under IFRS, remeasurements are not recognized in P&L.
IFRS Pension Remeasurements
Under IFRS, actuarial gains and losses on the defined benefit obligation and the difference between actual return on plan assets and interest income on plan assets (remeasurements) are recognized in Other Comprehensive Income (OCI) and are not subsequently reclassified to profit or loss.
- Remeasurements include actuarial gains/losses and asset return differences.
- Recognized directly in OCI under IFRS.
- Not subsequently reclassified to P&L.
- Differs from U.S. GAAP which allows for a 'corridor' approach or P&L recognition for some remeasurements.
Memory trick: IFRS Remeasurements: 'Always OCI' for actuarial and asset differences.