A ceiling test is required for companies that have pension plan assets

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.