Defined benefit pension schemes

Examiners prefer to test defined benefit pension schemes as they are the more complex to account for.  So how can you remember the items that need to be reported in the financial statements?  Here’s a mnemonic to help.

Pensions Create Important Security In Retirement For Purpose of Enjoying Life

In the statement of comprehensive income the service cost and interest component are reported within profit.  The service cost will be reported as an expense and the interest component will be included in finance costs.  A remeasurement gain or loss is recognised within OCI.

In the statement of financial position the pension liability will be reported as a non-current liability.  The pension liability is the net of the fair value of the fund’s assets and the present value of the obligations.  It is the norm that this is a net liability rather than a net asset.

In equity a pension reserve will accumulate the remeasurement gains and losses that have been recognised in OCI.

Pensions                                                Pensions

Comprehensive Income                           Create Important

Service cost                                           Security

Interest cost                                          In

Remeasurement component                    Retirement

Financial Position                                    For Purpose of

Equity                                                   Enjoying

Liability                                                 Life

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