A
ceiling test is required for companies that have pension plan assets.
Instructions
Explain
how the asset ceiling test would be applied and why is it necessary. (See IFRIC
14 for information).
IFRIC 14 outlines the calculation for the asset ceiling
test and its rationale. Since the
surplus in the plan assets arguably belongs to the employees and not the
company, limitations must be put on the amount of asset that a company can
report when the funded status is a surplus.
Under IFRIC 14, a company is allowed to show as an asset (related to the
surplus of the pension plan) economic benefits available to the entity in the
form of refunds or reductions in the future contributions that would be made to
the plan. But only under conditions that
the entity has an unconditional right to realize these benefits at some point
either during the life of the plan or when the plan is settled.
The ceiling or maximum amount is determined by calculating
the present value of the future cost savings over the shorter period of the
expected life of the plan and the expected life of the entity. And this calculation is based on the
conditions prevailing at the report date.
