1.

(a) Taxable Profit and Current Tax Expense (2015 & 2016)

To calculate the taxable profit, we adjust the accounting Profit Before Tax (PBT) by adding back non-
deductible items (Accounting Depreciation) and deducting tax-allowable items (ZIMRA Wear and Tear).

Item 2015 ($) 2016 ($)

Profit Before Tax (PBT) 1,104,000 1,380,000
Add: Accounting Depreciation¹ 920,000 920,000
Less: Capital Allowances (W&T)² (920,000) -
Less: Accounting Gain on Disposal³ - (280,000)
Add: Tax Balancing Charge (Recoupment)⁴ - 1,200,000
Taxable Profit 1,104,000 3,220,000
Current Tax Expense (@ 35%) 386,400 1,127,000

Supporting Calculations:

1. Accounting Depreciation: $4,600,000 / 5 = $920,000 per annum.

2. Capital Allowances (W&T): 2015 is the 3rd year. Allowance = 20% *$4,600,000 = $920,000. By end
of 2015, the asset is 100% depreciated for tax (50%+30%+20%).
3. Accounting Gain: Sale Proceeds ($1.2M) – Carrying Amount ($920,000) = $280,000.
4. Balancing Charge: Sale Proceeds ($1.2M) – Tax Base ($0) = $1,200,000. Under ZIMRA rules, since
you claimed the full cost as a deduction, the entire sale price is recovered as taxable income.

(b) Temporary Differences and Deferred Tax (2013-2016)

A temporary difference arises because the timing of tax allowances (50/30/20) differs from accounting
depreciation (straight-line over 5 years).

Year Carrying Tax Base ($) Temp. Difference ($) Deferred Tax @
Amount ($) 35%
2013 3,680,000 2,300,000 1,380,000 (Taxable) 483,000 (DTL)
2014 2,760,000 920,000 1,840,000 (Taxable) 644,000 (DTL)
2015 1,840,000 - 1,840,000 (Taxable) 644,000 (DTL)
2016 - - - -

Journal Entries for 2016:

 DR Income Tax Expense (Current) $1,127,000

 CR Income Tax Liability (SOFP) $1,127,000 (Being current tax for the year ended 31 Dec 2016)
 DR Deferred Tax Liability (SOFP) $644,000
 CR Income Tax Expense (Deferred - SOPL) $644,000 (Being the reversal of deferred tax liability
upon disposal of equipment)
(c) Financial Statement Extracts (Year ended 31 Dec 2016)

These extracts comply with IAS 12: Income Taxes.

Extract: Statement of Profit or Loss

$
Profit Before Tax 1,380,000
Income Tax Expense (483,000)
Current Tax Expense (1,127,000)
Deferred Tax Benefit (Reversal) 644,000
Profit for the Year 897,000

Extract: Statement of Financial Position

Current Liabilities $
Income Tax Payable 1,127,000
Non-Current Liabilities
Deferred Tax Liability -
 2. Overview of IAS 19 Employee Benefits (Defined Benefit Plans)

The core principle of IAS 19 is that the cost of providing employee benefits should be
recognized in the period in which the benefit is earned by the employee, rather than when it is
paid. For a Defined Benefit (DB) Plan like the Zaranyika Pension Fund in your scenario, the
entity (Matare Ltd) bears the actuarial and investment risks.

2019
Year ended 31 Dec 2021 ($) 2020 ($)
($)

Present value of defined benefit obligation (DBO) 1,850,00

1,700,000 1,600,000
– end of year 0

1,820,00
Fair value of plan assets – end of year 1,600,000 1,550,000
0

Current service cost 310,000 280,000 270,000

Contributions paid by employer (Matare Ltd) 310,000 250,000 170,000

Benefits paid out by fund 360,000 400,000 340,000

Additional information:

 On 1 January 2020, plan amendment → past service cost = $60,000

 Discount rate at beginning of year:

o 2021: 13.5%

o 2020: 14.0%

o 2019: 12.9%

 Expected increase in salaries (not directly needed for required calculations unless asked for
future service cost — but given for context)

Required (implied from typical IAS 19 questions):

Calculate the net defined benefit liability/asset at each year end, and the amounts to be
recognised in SOPL and OCI for 2019, 2020, and 2021.
Also account for the past service cost on 1 Jan 2020.

Step 1 – Calculate the net defined benefit liability (surplus/deficit) at each year end

Net liability = DBO – Fair value of plan assets

If negative → surplus (asset)

Year
DBO ($) Plan assets ($) Net liability/(asset) ($)
end

2019 1,600,000 1,550,000 50,000 liability

2020 1,700,000 1,600,000 100,000 liability

2021 1,850,000 1,820,000 30,000 liability

Step 2 – Reconstruct movement in DBO (to find remeasurement)

We work backwards using the standard IAS 19 DBO movement formula:

DBO closing = DBO opening + Current service cost + Past service cost + Interest cost +
Remeasurement (loss)/gain – Benefits paid

Interest cost = DBO opening × Discount rate (at beginning of year)

For 2019

Item Amount ($)

DBO opening (1 Jan 2019) Not given, but we can solve for remeasurement
 Item Amount ($)

Current service cost 270,000

Past service cost 0

Interest cost (1,600,000? No — careful)

We don’t have DBO opening for 2019.

But the question likely expects us to calculate remeasurement for 2020 and 2021 only, using
2019 as base year.

However, for completeness, let’s compute 2020 and 2021 fully.

For 2020 (year ended 31 Dec 2020)

 DBO opening (1 Jan 2020) = 1,600,000 (from 2019 closing)

 Current service cost = 280,000

 Past service cost (1 Jan 2020) = 60,000

 Interest cost = 1,600,000 × 14.0% = 224,000

 Benefits paid = 400,000

 DBO closing (given) = 1,700,000

Solve for remeasurement (gain)/loss on DBO:

1,600,000 + 280,000 + 60,000 + 224,000 – 400,000 + Remeasurement = 1,700,000

1,764,000 + Remeasurement = 1,700,000
Remeasurement loss on DBO = –64,000 (i.e., a gain of 64,000, because DBO increased less
than expected)

For 2021

 DBO opening (1 Jan 2021) = 1,700,000

 Current service cost = 310,000

 Past service cost = 0

 Interest cost = 1,700,000 × 13.5% = 229,500

 Benefits paid = 360,000

 DBO closing (given) = 1,850,000

1,700,000 + 310,000 + 0 + 229,500 – 360,000 + Remeasurement = 1,850,000

1,879,500 + Remeasurement = 1,850,000

Remeasurement loss on DBO = –29,500 (i.e., a gain of 29,500)

Step 3 – Reconstruct movement in plan assets

Plan assets closing = Plan assets opening + Contributions + Interest income on assets +
Remeasurement gain/loss on assets – Benefits paid

Interest income on assets = Plan assets opening × Discount rate (same rate as for DBO)

For 2020

 Plan assets opening (1 Jan 2020) = 1,550,000

 Contributions = 250,000

 Interest income = 1,550,000 × 14.0% = 217,000

 Benefits paid = 400,000

 Closing (given) = 1,600,000

1,550,000 + 250,000 + 217,000 – 400,000 + Remeasurement = 1,600,000

1,617,000 + Remeasurement = 1,600,000

Remeasurement loss on assets = –17,000 (i.e., actual return was $17,000 less than interest
income)

For 2021

 Plan assets opening = 1,600,000

 Contributions = 310,000

 Interest income = 1,600,000 × 13.5% = 216,000

 Benefits paid = 360,000

 Closing (given) = 1,820,000

1,600,000 + 310,000 + 216,000 – 360,000 + Remeasurement = 1,820,000

1,766,000 + Remeasurement = 1,820,000

Remeasurement gain on assets = +54,000 (actual return exceeded interest income)

Step 4 – Net interest component and service cost (SOPL)

Under IAS 19 (revised 2011), the net interest is calculated on the net defined benefit
liability/asset opening balance.

Net interest = Net liability opening × Discount rate

Yea
Net liability opening ($) Discount rate Net interest (SOPL)
r

2020 50,000 14.0% 7,000 (expense)

2021 100,000 13.5% 13,500 (expense)

Service cost (SOPL) = Current service cost + Past service cost (recognised immediately when
plan amendment occurs)

 2019: 270,000

 2020: 280,000 + 60,000 = 340,000

 2021: 310,000

Step 5 – Remeasurement (OCI)

Total remeasurement = Remeasurement on DBO (gain/loss) + Remeasurement on assets

(gain/loss)
But note: Under IAS 19, remeasurement includes:
 Actuarial gains/losses on DBO

 Return on assets less interest income

Let’s compute total remeasurement recognised in OCI:

Remeasurement on Remeasurement on
Year Total OCI (gain)/loss
DBO assets

47,000 gain (credit to

2020 (64,000) gain (17,000) loss
OCI)

24,500 gain (credit to

2021 (29,500) gain 54,000 gain
OCI)

Wait — check sign:

Gain on DBO reduces liability → credit OCI.
Loss on assets reduces assets → debit OCI (i.e., reduces gain).
So for 2020: 64,000 (credit) – 17,000 (debit) = 47,000 credit to OCI.

Step 6 – Movement in net liability (reconciliation)

Net Closin
Openin Servic
Yea interes Contributio Remeasureme g net
g net e cost
r t ns (cash) nt (OCI) liabilit
liability (P&L)
(P&L) y

202 340,00
50,000 7,000 (250,000) (47,000) gain 100,000
0 0

202 310,00
100,000 13,500 (310,000) (24,500) gain 30,000
1 0

Note: Contributions reduce the net liability (credit).

Step 7 – Journal entries (summary)

For year ended 31 December 2020

Service cost & net interest (SOPL)

Dr Service cost (SOPL) 340,000

Dr Net interest expense (SOPL) 7,000
Cr Net defined benefit liability 347,000

Contributions paid

Dr Net defined benefit liability 250,000

Cr Bank 250,000

Remeasurement gain (OCI)

Dr Net defined benefit liability 47,000

Cr OCI – remeasurement gain 47,000

For year ended 31 December 2021

Service cost & net interest

Dr Service cost (SOPL) 310,000

Dr Net interest expense (SOPL) 13,500
Cr Net defined benefit liability 323,500

Contributions paid

Dr Net defined benefit liability 310,000

Cr Bank 310,000

Remeasurement gain (OCI)

Dr Net defined benefit liability 24,500

Cr OCI – remeasurement gain 24,500
Step 8 – SOFP extract (as at 31 December)

2021
2020 ($) 2019 ($)
($)

Non-current liability

Net defined benefit liability 30,000 100,000 50,000

Step 9 – SOPL extract (for each year)

2021 ($) 2020 ($) 2019 ($)

Service cost (incl. past service

310,000 340,000 270,000
cost)

Net interest on net liability 13,500 7,000 not calc

Total defined benefit cost in P&L 323,500 347,000 270,000

Step 10 – OCI extract (remeasurement)

2021 ($) 2020 ($)

Remeasurement gain (OCI) – not reclassified to P&L 24,500 47,000

Tax note (IAS 12, as at 2026)

Under IAS 12, the net defined benefit liability has a tax base of nil (because future contributions
are deductible only when paid).

The carrying amount (e.g., $30,000 in 2021) exceeds tax base (0) → deductible temporary
difference → deferred tax asset recognised if probable future taxable profit.

The remeasurement gain in OCI affects temporary differences and deferred tax is also recognised
in OCI.