Cima F2 Exam Question No 39

Question No 39:

Defined benefit plans?

The pension payable on retirement normally depends on either the final salary or the average salary of the employee during their career.

• The employer undertakes to finance a pension income of a certain amount, e.g. 2/3 × final salary × (years of service/40 years)

• The employer has an ongoing obligation to make sufficient contributions to the plan to fund the pensions.

• An actuary calculates the amount that must be paid into the plan each year in order to provide the promised pension. The calculation is based on various estimates and assumptions including: - life expectancy - expected length of service to retirement / employee turnover - investment returns - wage inflation.

• Therefore, the cost of providing pensions is not certain and varies from year to year.
  

Cima F2 Exam Question No 38

Question No 38:

A sale and repurchase agreement can be in the form of a sale and leaseback?

• Under a sale and leaseback transaction, an entity sells one of its own assets and immediately leases the asset back.
• This is a common way of raising finance whilst retaining the use of the related assets. The buyer / lessor is normally a bank.
• The leaseback is classified as finance or operating in accordance with the usual IAS 17 criteria.

Cima F2 Exam Question No 37

Question No 37:

Determining the substance of a transaction?

Common features of transactions whose substance is not readily apparent are:

• The legal title to an asset may be separated from the principal benefits and risks associated with the asset
• A transaction may be linked with other transactions which means that the commercial effect of the individual transaction cannot be understood without an understanding of all of the transactions
• Options may be included in a transaction where the terms of the option make it highly likely that the option will be exercised.