Absa Bank Zambia Plc, formerly Barclays Bank of Zambia, is a commercial bank in Zambia. It is licensed by the Bank of Zambia, the central bank and national banking regulator. The Bank sponsors a non-contributory; defined benefit pension plan that covers its over 150 employees. The company is in the process of shifting to a defined contribution plan.

a)How does the accounting for a contributory pension plan differ from a defined benefit plan and briefly explain why Absa is shifting to a defined contribution plan (7 marks) Mr Banda has recently been hired as Managing Director of Absa. While reviewing last year’s financial statements with a financial accountant. Mr Banda expressed confusion about several of the items in the notes to the financial statements relating to the pension plan. In part, the note reads as follows.

The company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee’s compensation during the last four years of employment. The company’s funding policy is to contribute annually the maximum amount allowed under the tax law. Contributions are intended to provide for benefits expected to be earned in the future as well as those earned to date. The net periodic pension expense on the Daily Gold comparative income statement was

K504,000 in 2019 and K403,760 in 2020.

Given that Absa workforce has been stable for the last 6 years, Mr Banda could not understand the increase in the net periodic pension expense. The Financial accountant explained that the net periodic pension expense consists of several elements, some of which may increase or decrease the net expense. You agree with the financial accountant that the determination of the net periodic pension expense is a function of two or more elements.

b)List and briefly describe any two of these elements to Managing Director Mr Banda.

The following are selected figures from the plan’s funded status and amounts recognized Absa's statement of financial position at December 31, 2020 (amounts in thousands).

Defined benefit obligation K (8,400)

Plan assets at the fair value of 7,350

Defined benefit obligation in excess of plan assets (1050)

c) Explain to Mr. Banda the implication of this fund status to Absa and to the employees 

d) Pension gains and losses are not recognized in net income in the period in which they arise.

Required

Briefly describe how pension gains and losses are recognized and explain a rationale for why the International Accounting Standards Board (IASB) has decided to exclude from the current-period income statement the effects of gains and losses due to changes in actuarial assumptions.

Answer rating: 100% (QA)

AThe main difference between accounting for a contribut ory pension plan and a defined benefit plan is that with a contribut ory pension plan employee... View the full answer