20-1 7.explain the accounting for unexpected gains and losses. 8. explain the corridor approach to...
TRANSCRIPT
20-1
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund. (SELF-STUDY)
2. Identify types of pension plans and their characteristics. (SELF-STUDY)
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
6.6. Describe the amortization of prior service Describe the amortization of prior service
costs.costs.
Accounting for Pensions and Postretirement Benefits2020
20-3
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-4
An arrangement whereby an employer provides benefits (payments) to
retired employees for services they provided in their working years.
Pension PlanAdministrator
Pension PlanAdministrator
ContributionsEmployerEmployer
Retired Employees Benefit Payments Assets &
Liabilities
Nature of Pension Plans
LO 1
20-5
Pension plans can be:
Contributory: employees voluntarily make payments to
increase their benefits.
Noncontributory: employer bears the entire cost.
Qualified pension plans: offer tax benefits.
Pension fund should be a separate legal and accounting
entity.
Nature of Pension Plans
LO 1
20-6
Nature of Pension Plans
LO 1
Illustration 20-2Pension Funds andPension Expense
The two most common types of pension plans are defined
contribution plans and defined benefit plans.
20-7
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-8
Defined-Contribution PlanDefined-Contribution Plan Defined-Benefit Plan
Employer contribution
determined by plan (fixed)
Risk borne by employees
Benefits based on plan
value
Benefit determined by plan
Employer contribution
varies (determined by
Actuaries)
Risk borne by employer
Actuaries make predictions (called actuarial assumptions) of mortality
rates, employee turnover, interest and earnings rates, early retirement
frequency, future salaries, and any other factors necessary to operate a
pension plan
Nature of Pension Plans
LO 2
20-9
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-10
Two questions:
1) What is the pension obligation that a company should
report in the financial statements?
2) What is the pension expense for the period?
Accounting for Pensions
LO 3
20-11
Employer’s pension obligation is the deferred compensation obligation it has to its employees for their service under the terms of the pension plan.
Alternative Measures of the Liability
Accounting for Pensions
Illustration 20-3
FASB’s choice
LO 3
20-12
Recognition of the Net Funded Status of the Pension Plan
Companies must recognize on their balance sheet the
full overfunded or underfunded status of their defined
benefit pension plan.
Accounting for Pensions
LO 3
The overfunded or
underfunded status is
measured as the difference
between the fair value of the
plan assets and the
projected benefit obligation.
20-13
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-15
Service Costs ++1.1.
Accounting for Pensions
Components of Pension Expense
Actuarial present value of benefits attributed by the pension
benefit formula to employee service during the period
Effect on Expense
LO 4
20-16
Interest on the Liability ++2.2.
Accounting for Pensions
Components of Pension Expense
Interest for the period on the projected benefit obligation
outstanding during the period
The interest rate use is referred to as the settlement rate.
Effect on Expense
LO 4
20-17
Actual Return on Plan Assets +-+-3.3.
Accounting for Pensions
Components of Pension Expense
Increase in pension funds from interest, dividends, and
realized and unrealized changes in the fair value of the plan
assets.
Illustration 20-5
Effect on Expense
LO 4
20-18
Accounting for Pensions
Components of Pension Expense
Plan amendments often include provisions to increase
benefits for employee service provided in prior years.
Company allocates the cost (prior service cost) of providing
these retroactive benefits to pension expense in the future,
specifically to the remaining service-years of the affected
employees.
Amortization of Prior Service Costs ++4.4.
Effect on Expense
LO 4
20-19
Gain or Loss +-+-5.5.
Accounting for Pensions
Components of Pension Expense Effect on Expense
Volatility in pension expense can result from sudden and
large changes in the fair value of plan assets and by changes
in projected benefit obligation.
LO 4
20-20
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-21
Pension Work SheetGENERAL JOURNAL ENTRIES MEMO RECORD
Annual Prior Pension ProjectedPension Service Asset / Benefit Plan
Items Expense Cash Costs (PSC) Gain/Loss Liability Obligation Assets
Other Comprehensive Income (OCI)
The “General Journal Entries” columns
determine the journal entries to be
recorded in the formal general ledger.
The “Memo Record”
columns maintain balances
for the unrecognized
pension items.
Using a Pension Worksheet
LO 5
20-22
Illustration: On January 1, 2014, Zarle Company provides the
following information related to its pension plan for the year 2014.
Plan assets, January 1, 2014, are $100,000.
Projected benefit obligation, January 1, 2014, is $100,000.
Annual service cost is $9,000.
Settlement rate is 10 percent.
Actual return on plan assets is $10,000.
Funding contributions are $8,000.
Benefits paid to retirees during the year are $7,000.
Prepare the pension worksheet for 2014.
Using a Pension Work Sheet
LO 5
20-23
Pension Projected Pension Asset / Benefit Plan
Items Expense Cash PSC Gain/Loss Liability Obligation Assets
Jan. 1, 2014 0 (100,000) 100,000
Service costs 9,000 (9,000)
Interest costs 10,000 (10,000)
Actual return (10,000) 10,000
Contributions (8,000) 8,000
Benefits paid 7,000 (7,000)
Journal entry 9,000 (8,000) (1,000)
Dec. 31, 2014 - - (1,000) (112,000) 111,000
MEMO RECORD GENERAL JOURNAL ENTRIES
OCI
Using a Pension Work Sheet
Prepare a pension worksheet for 2014.
($100,000 x 10%)($100,000 x 10%)
($1,000) net liability($1,000) net liability
LO 5
Illustration 20-8
20-24
Pension Projected Pension Asset / Benefit Plan
Items Expense Cash PSC Gain/Loss Liability Obligation Assets
Jan. 1, 2014 0 (100,000) 100,000
Service costs 9,000 (9,000)
Interest costs 10,000 (10,000)
Actual return (10,000) 10,000
Contributions (8,000) 8,000
Benefits paid 7,000 (7,000)
Journal entry 9,000 (8,000) (1,000)
Dec. 31, 2014 - - (1,000) (112,000) 111,000
MEMO RECORD GENERAL JOURNAL ENTRIES
OCI
Pension Journal Entry
LO 5
Illustration 20-8
Pension Expense 9,000
Cash 8,000
Pension Asset/Liability 1,000
20-25
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-26
Amortization of Prior Service Cost
Company should not recognize the retroactive benefits as
pension expense in the year of amendment.
Employer should recognize the pension expense over the
remaining service lives of the employees who are expected to
benefit from the change in the plan.
Prior Service Cost
Amortization Method:
Board prefers a years-of-service method.
Employers may use straight-line amortization over the
average remaining service life of the employees.
LO 6
20-27
E20-7: The following defined pension data of Rydell Corp. apply to the year 2014.
Using a Pension Work Sheet
Projected benefit obligation, 1/1/14 (before amendment)
$560,000Plan assets, 1/1/14
546,200Pension liability
13,800On January 1, 2014, Rydell Corp., through plan amendment, grants prior service benefits having a present value of
120,000Settlement rate
9%Service cost
58,000Contributions (funding)
65,000Actual (expected) return on plan assets
52,280Benefits paid to retirees
40,000Prior service cost amortization for 2014
17,000
Instructions: For 2014, prepare a pension work sheet for Rydell Corp. that shows the journal entry for pension expense.
LO 6
20-28
E20-7
Annual Prior Pension Projected Pension Service Gain / Asset / Benefit Plan
Items Expense Cash Cost Loss Liability Obligation Assets Dec. 31, 2014 (13,800) (560,000) 546,200
PSC 120,000 (120,000)
Bal. Jan. 1, 2014 (680,000) 546,200
Service costs 58,000 (58,000)
Interest costs 61,200 (61,200)
Asset Return (52,280) 52,280
Amort. PSC 17,000 (17,000)
Contributions (65,000) 65,000
Benefits paid 40,000 (40,000)
Journal entry 83,920 (65,000) 103,000 (121,920)
AOCI -12/31/2013 -
Dec. 31, 2014 103,000 - (135,720) (759,200) 623,480
MEMO RECORD GENERAL JOURNAL ENTRIES
OCI
Using a Pension Work Sheet
($135,720) liability($135,720) liability
20-29
Pension Expense 83,920
Other Comprehensive Income (PSC) 103,000
Pension Asset/Liability 121,920
Cash65,000
Using a Pension Work Sheet
E20-7: Pension Journal Entry for 2014.
Dec. 31
LO 6
20-30
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-31
Gain or Loss
Unexpected swings in pension expense can result from:
1. Sudden and large changes in the fair value of plan assets,
and
2. Changes in actuarial assumptions that affect the amount of
the projected benefit obligation.
Gains and Losses
LO 7
20-32
Question: What is the potential negative impact on net
income of these unexpected swings?
Volatility
The profession decided to reduce the volatility with smoothing techniques.
Gains and Losses
LO 7
20-33
Smoothing Unexpected Gains and Losses on Plan Assets
Companies include the expected return on the plan assets
as a component of pension expense, not the actual return in
a given year.
Companies record asset gains and asset losses in an
account, Other Comprehensive Income (G/L), combining
them with gains and losses accumulated in prior years.
Gains and Losses
LO 7
20-35
Smoothing Unexpected Gains and Losses on the Pension Liability
Companies report liability gains and liability losses in Other
Comprehensive Income (G/L).
Companies combine the liability gains and losses in the
same Other Comprehensive Income (G/L) account.
They accumulate the asset and liability gains and losses in
Accumulated Other Comprehensive Income and report on
the balance sheet in the stockholders’ equity section.
Gains and Losses
LO 7
20-36
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-37
Corridor Amortization
FASB invented the corridor approach for amortizing
the accumulated net gain or loss balance when it gets
too large. How large is too large?
10% of the larger of the beginning balances of the
projected benefit obligation or the market-related
value of the plan assets.
Any Accumulated OCI net gain or loss balance above
the 10% must be amortized.
Gains and Losses
LO 8
20-38
Illustration: Data for Callaway Co.’s projected benefit
obligation and plan assets over a period of six years.
Gains and Losses
LO 8
Illustration 20-14Computation of the Corridor
20-40
BE20-7: Shin Corporation had a projected benefit obligation of
$3,100,000 and plan assets of $3,300,000 at January 1, 2014.
Shin also had a net actuarial loss of $465,000 in accumulated
OCI at January 1, 2014. The average remaining service period of
Shin’s employees is 7.5 years.
Instructions: Compute Shin’s minimum amortization of the
actuarial loss.
Gains and Losses
LO 8
20-41
BE20-7: Compute Shin’s amortization of the loss.
Gains and Losses
Amortization
Projected benefit obligation (3,100,000)$
Plan assets 3,300,000 3,300,000$
Corridor percentage 10%
Corridor amount 330,000
Accumulated loss 465,000
Excess loss subject to amortization 135,000
Average remaining service 7.5
Amortized to pension expense 18,000$
÷
LO 8
20-42
Using a Pension Work Sheet
P20-2: Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2013, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data are as follows.
2013 2014 2015
Annual service cost 16,000$ 19,000$ 26,000$
Settlement rate and expected rate of return 10% 10% 10%
Actual return on plan assets 18,000 22,000 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Prior service cost (plan amended, 1/1/14) 160,000
Amortization of prior service cost 54,400 41,600
Change in actuarial assumptions, Dec. 31 PBO 520,000
Average remaining service life 15 years 15 years 15 years
LO 8
20-43
Annual Prior Pension ProjectedPension Service Gain / Asset / Benefit Plan
Items Expense Cash Cost Loss Liability Obligation AssetsBal. Jan. 1, 2013 (50,000) (250,000) 200,000
Service costs 16,000 (16,000)
Interest 25,000 (25,000)
Return on assets (18,000) 18,000
Unexpected loss (2,000) 2,000
Contributions (16,000) 16,000
Benefits paid 14,000 (14,000)
Journal entry 21,000 (16,000) 2,000 (7,000)
AOCI - 12/31/12 -
Dec. 31, 2013 - 2,000 (57,000) (277,000) 220,000
OCI
GENERAL JOURNAL ENTRIES MEMO RECORD
Using a Pension Work Sheet
P20-2: Pension Work Sheet for 2013
($57,000)($57,000)* Expected Return on Plan Assets $200,000 x
10% = $20,000
**
LO 8
20-44
Using a Pension Work Sheet
P20-2 Pension Journal Entry for 2013
Pension Expense 21,000
OCI – Gain/Loss 2,000
Pension Asset/Liability 7,000
Cash 16,000
Dec. 31
LO 8
20-45
Annual Pension ProjectedPension Gain / Asset Benefit Plan
Items Expense Cash PSC Loss Liability Obligation AssetsBal. Jan. 1, 2014 2,000 (57,000) (277,000) 220,000
Prior service costs 160,000 (160,000)
Adj Bal., 1/1/14 (437,000) 220,000
Service costs 19,000 (19,000)
Interest 43,700 (43,700)
Return on assets (22,000) 22,000
Amort. of PSC 54,400 (54,400)
Contributions (40,000) 40,000
Benefits paid 16,400 (16,400)
Journal entry 95,100 (40,000) 105,600 (160,700)
AOCI - 12/31/13 2,000
Dec. 31, 2014 105,600 2,000 (217,700) (483,300) 265,600
GENERAL JOURNAL ENTRIESOCI
MEMO RECORD
Using a Pension Work Sheet
P20-2: Pension Work Sheet for 2014
($217,700) liability($217,700) liability* Actual return = Expected Return
**
LO 8
20-46
Pension Expense 95,100
Other Comprehensive Income (PSC) 105,600
Pension Asset/Liability 160,700
Cash40,000
Dec. 31
Using a Pension Work Sheet
P20-2 Pension Journal Entry for 2014
LO 8
20-47
Annual Pension ProjectedPension Gain / Asset / Benefit Plan
Items Expense Cash PSC Loss Liability Obligation AssetsBal. Dec. 31, 2014 105,600 2,000 (217,700) (483,300) 265,600
Service costs 26,000 (26,000)
Interest 48,330 (48,330)
Return on assets (24,000) 24,000
Unexpected loss (2,560) 2,560
Amort. of PSC 41,600 (41,600)
Contributions (48,000) 48,000
Benefits paid 21,000 (21,000)
Liability gain (16,630) 16,630
Journal entry 89,370 (48,000) (41,600) (14,070) 14,300
AOCI - 12/31/14 105,600 2,000
Dec. 31, 2015 64,000 (12,070) (203,400) (520,000) 316,600
GENERAL JOURNAL ENTRIESOCI
MEMO RECORD
Using a Pension Work Sheet
P20-2: Pension Work Sheet for 2015
($203,400) liability($203,400) liability* Plug * Plug
**
LO 8
20-48
Using a Pension Work Sheet
P20-2 Pension Journal Entry for 2013
Pension Expense 89,370
Pension Asset/Liability 14,300
Other Comprehensive Income (G/L) 14,070
Other Comprehensive Income (PSC)41,600
Cash48,000
Dec. 31
LO 8
20-51
6. Describe the amortization of prior service costs.
7. Explain the accounting for unexpected gains and losses.
8. Explain the corridor approach to amortizing gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
After studying this chapter, you should be able to:
LEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVESLEARNING OBJECTIVES
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
Accounting for Pensions and Postretirement Benefits2020
20-52
Within the Financial Statements
Recognition of the net funded status of the plan
Classification of pension asset or pension liability
Aggregation of pension plans
Actuarial gains and losses/prior service cost
Reporting Pension Plans in Financial Statements
LO 9
20-53
Within the Notes to the Financial Statements
Reporting Pension Plans in Financial Statements
LO 9
1. Major components of pension expense.
2. Reconciliation showing how the projected benefit obligation
and the fair value of the plan assets changed.
3. A disclosure of the rates used in measuring the benefit
amounts (discount rate, expected return on plan assets, rate
of compensation).
20-54
4. A table indicating the allocation of pension plan assets by
category (equity securities, debt securities, real estate, and
other assets), and showing the percentage of the fair value to
total plan assets.
5. The expected benefit payments to be paid to current plan
participants for each of the next five fiscal years and in the
aggregate for the five fiscal years thereafter. Also required is
disclosure of a company’s best estimate of expected
contributions to be paid to the plan during the next year.
Within the Notes to the Financial Statements
Reporting Pension Plans in Financial Statements
LO 9
20-55
6. The nature and amount of changes in plan assets and benefit
obligations recognized in net income and in other
comprehensive income of each period.
7. The accumulated amount of changes in plan assets and benefit
obligations that have been recognized in other comprehensive
income and that will be recycled into net income in future
periods.
Within the Notes to the Financial Statements
Reporting Pension Plans in Financial Statements
LO 9
20-56
8. The amount of estimated net actuarial gains and losses and
prior service costs and credits that will be amortized from
accumulated other comprehensive income into net income over
the next fiscal year.
Within the Notes to the Financial Statements
Reporting Pension Plans in Financial Statements
LO 9
20-57
The Pension Reform Act of 1974
Pension Terminations
Special Issues
Reporting Pension Plans in Financial Statements
LO 9
20-59
Accounting Guidance
In December 1990, the FASB issued rules on “Employers’
Accounting for Postretirement Benefits Other Than Pensions.”
These rules cover for healthcare and other “welfare benefits”
provided to retirees, their spouses, dependents, and beneficiaries.
Other welfare benefits include life insurance offered outside a
pension plan; medical, dental, and eye care; legal and tax services;
tuition assistance; day care; and housing assistance.
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10 Identify the differences between pensions and postretirement healthcare benefits.
20-60
Differences Between Pension Benefits and Healthcare Benefits
Illustration 20A-1
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
20-61
Differences Between Pension Benefits and Healthcare Benefits
Measuring the future payments for healthcare benefit plans is so much
more difficult than for pension plans.
1. Many postretirement plans do not set a limit on healthcare benefits.
2. The levels of healthcare benefit use and healthcare costs are
difficult to predict. Increased longevity, unexpected illnesses (e.g.,
AIDS, SARS, and avian flu), along with new medical technologies
and cures, cause changes in healthcare utilization.
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
20-62
Postretirement Benefits Accounting Provisions
Attribution Period - period of time over which the
postretirement benefit cost accrue.Illustration 20A-2
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
20-63
Postretirement Benefits Accounting Provisions
Obligations Under Postretirement Benefits
Expected postretirement benefit obligation (EPBO) is the
actuarial present value as of a particular date of all benefits a
company expects to pay after retirement to employees
and their dependents.
Accumulated postretirement benefit obligation (APBO) is
the actuarial present value of future benefits attributed to
employees’ services rendered to a particular date.
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
20-64
Postretirement Benefits Accounting Provisions
Postretirement Expense
1. Service Cost
2. Interest Cost
3. Actual Return on Plan Assets
4. Amortization of Prior Service Costs
5. Gains and Losses
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
20-65
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.
2014 Entries and Worksheet
Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2014, Quest Company adopts a healthcare benefit plan. The following facts apply to the postretirement benefits plan for the year 2014.
► Plan assets at fair value on January 1, 2014, are zero.
► Actual and expected returns on plan assets are zero.
► Accumulated postretirement benefit obligation (APBO), January 1, 2014, is zero.
► Service cost is $54,000.
► No prior service cost exists.
► Interest cost on the APBO is zero.
► Funding contributions during the year are $38,000.
► Benefit payments to employees from plan are $28,000.
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
20-66
Illustrative Accounting Entries
Illustration 20A-4
Journal Entry
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2014 Entries and Worksheet
20-67
Recognition of Gains and Losses
Illustrative Accounting Entries
Gains and losses represent changes in the APBO or the value
of plan assets. Gains and losses are recorded in other
comprehensive income.
The Corridor Approach
Amortization Methods
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 11
20-68
Illustrative Accounting Entries
Illustration: The following facts apply to the postretirement benefits plan for
Quest Company for the year 2015.
► Actual return on plan assets is $600.
► Expected return on plan assets is $800.
► Discount rate is 8 percent.
► Increase in APBO due to change in actuarial assumptions is $60,000.
► Service cost is $26,000.
► Funding contributions during the year are $18,000.
► Benefit payments to employees during the year are $5,000.
► Average remaining service to expected retirement: 25 years.
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2015 Entries and Worksheet
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Illustrative Accounting Entries
Journal Entry
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2015 Entries and Worksheet
Illustration 20A-6
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Amortization of Gains and Losses in 2016
Illustrative Accounting Entries
Illustration 20A-8
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2016 CORRIDOR TEST
2016
LO 11
20-71 LO 12 Compare the accounting for pensions under GAAP and IFRS.
RELEVANT FACTS - Similarities
IFRS and GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar.
IFRS and GAAP recognize a pension asset or liability as the funded status of the plan (i.e., defined benefit obligation minus the fair value of plan assets). (Note that defined benefit obligation is referred to as the projected benefit obligation in GAAP.)
IFRS and GAAP compute unrecognized past service cost (PSC) (referred to as prior service cost in GAAP) in the same manner. However, IFRS recognizes past service cost as a component of pension expense in income immediately. GAAP amortizes PSC over the remaining service lives of employees.
20-72
RELEVANT FACTS - Differences
IFRS and GAAP include interest expense on the liability in pension expense. Regarding asset returns, IFRS reduces pension expense by the amount of interest revenue (based on the discount rate times the beginning value of pension assets). GAAP includes an asset return component based on the expected return on plan assets.
Under IFRS, companies recognize both liability and asset gains and losses (referred to as remeasurements) in other comprehensive income. These gains and losses are not “recycled” into income in subsequent periods. GAAP recognizes liability and asset gains and losses in “Accumulated other comprehensive income” and amortizes these amounts to income over remaining service lives, using the “corridor approach.”
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RELEVANT FACTS - Differences
The accounting for pensions and other postretirement benefit plans is the same under IFRS. GAAP has separate standards for these types of benefits, and significant differences exist in the accounting.
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ON THE HORIZON
The IASB and the FASB have been working collaboratively on a postretirement benefit project. The recent amendments issued by the IASB moves IFRS closer to GAAP with respect to recognition of the funded status on the statement of financial position. However, as illustrated in the About the Numbers section above, significant differences remain in the components of pension expense. The FASB is expected to begin work on a project that will reexamine expense measurement of postretirement benefit plans. The FASB likely will consider the recent IASB amendments in this area, which could lead to a converged standard.
LO 12
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At the end of the current period, Oxford Ltd. has a defined benefit
obligation of $195,000 and pension plan assets with a fair value of
$110,000. The amount of the vested benefits for the plan is $105,000.
What amount related to its pension plan will be reported on the
company’s statement of financial position?
a. $5,000.
b. $90,000.
c. $85,000.
d. $20,000.
IFRS SELF-TEST QUESTION
LO 12
20-76
At the end of the current year, Kennedy Co. has a defined benefit
obligation of $335,000 and pension plan assets with a fair value of
$245,000. The amount of the vested benefits for the plan is $225,000.
Kennedy has unrecognized past service costs of $24,000 and an
unrecognized actuarial gain of $8,300. What account and amount(s)
related to its pension plan will be reported on the company’s statement of
financial position?
a. Pension Liability and $74,300.
b. Pension Liability and $90,000.
c. Pension Asset and $233,300.
d. Pension Asset and $110,000.
IFRS SELF-TEST QUESTION
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At January 1, 2014, Wembley Company had plan assets of $250,000
and a defined benefit obligation of the same amount. During 2014,
service cost was $27,500, the discount rate was 10%, actual and
expected return on plan assets were $25,000, contributions were
$20,000, and benefits paid were $17,500. Based on this information,
what would be the defined benefit obligation for Wembley Company at
December 31, 2014?
a. $277,500. c. $27,500.
b. $285,000. d. $302,500.
IFRS SELF-TEST QUESTION
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