Post on 28-Dec-2015
20-1
Prepared by Coby Harmon
University of California, Santa Barbara
Intermediate Accounting
20-2
Intermediate Accounting
14th Edition
20Accounting for Pensions and Postretirement Benefits
Kieso, Weygandt, and Warfield
20-3
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.
6. Describe the amortization of prior service costs.
7. Explain the accounting procedure 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.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
20-4
Alternative measures of liability
Recognition of net funded status
Components of pension expense
Nature of Pension Plans
Accounting for Pensions
Using a Pension Worksheet
Reporting Pension Plans in
Financial Statements
Defined contribution plan
Defined-benefit plan
Role of actuaries
2012 entries and worksheet
Amortization of prior service cost
2013 entries and worksheet
Gain or loss
2014 entries and worksheet
Within the financial statements
Within the notes to the financial statements
Pension note disclosure
2015 entries and worksheet—a comprehensive example
Special issues
Accounting for Pensions and Postretirement BenefitsAccounting for Pensions and Postretirement BenefitsAccounting for Pensions and Postretirement BenefitsAccounting for Pensions and Postretirement Benefits
20-5
An arrangement whereby an employer provides benefits to employees
after they retire for services they provided while they were working.
Pension PlanAdministrator
Pension PlanAdministrator
ContributionsEmployerEmployer
Retired Employees Benefit Payments Assets &
Liabilities
LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
Nature of Pension PlansNature of Pension PlansNature of Pension PlansNature of Pension Plans
20-6
Pension plans can be:
LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
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 PlansNature of Pension PlansNature of Pension PlansNature of Pension Plans
20-7
Defined-Contribution PlanDefined-Contribution Plan Defined-Benefit PlanDefined-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 estimate the employer contribution by considering mortality
rates, employee turnover, interest and earning rates, early retirement
frequency, future salaries, etc.
Nature of Pension PlansNature of Pension PlansNature of Pension PlansNature of Pension Plans
LO 2 Identify types of pension plans and their characteristics.
20-8
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 PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 3 Explain alternative measures for valuing the pension obligation.
20-9 LO 3 Explain alternative measures for valuing the pension obligation.
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 PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
Illustration 20-3
FASB’s choice
20-10
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Illustration 20-4Components of AnnualPension Expense
20-11
Service Costs ++1.1.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense
Actuarial present value of new benefits earned by
employees during the period.
Effect on Expense
20-12
Interest on the Liability ++2.2.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
Components of Pension Expense
Interest for the period on the projected benefit obligation
outstanding during the period.
Interest rate (settlement rate) should be those based rates of
return on high-quality fixed-income investments currently
available, whose cash flows match the timing and amount of
the expected benefit payments.
LO 4 List the components of pension expense.
Effect on Expense
20-13
Actual Return on Plan Assets +-+-3.3.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
Components of Pension Expense
Actual return on plan assets is the increase in pension funds
from interest, dividends, and realized and unrealized changes
in the fair-market value of the plan assets.
LO 4 List the components of pension expense.
Illustration 20-5
Effect on Expense
20-14
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
Components of Pension Expense
Plan amendments often increase benefits for 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.
LO 4 List the components of pension expense.
Effect on Expense
20-15
Gain or Loss +-+-5.5.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting 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 List the components of pension expense.
20-16
Pension Work SheetGENERAL JOURNAL ENTRIES MEMO RECORD
Prior Pension ProjectedPension Service Asset / Benefit Plan
Items Expense Cash Costs (PSC) Gain/Loss Liability Obligation Assets
Other Comprehensive Income (OCI)
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
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.
20-17
BE20-3: At January 1, 2012, Beaty Company had plan assets
of $280,000 and a projected benefit obligation of the same
amount. During 2012, service cost was $27,500, the settlement
rate was 10%, actual and expected return on plan assets were
$25,000, contributions were $20,000, and benefits paid were
$17,500.
Instructions: Prepare a pension worksheet for Beaty for 2012.
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
20-18
Pension Projected Pension Asset / Benefit Plan
Items Expense Cash PSC Gain/Loss Liability Obligation Assets
Jan. 1, 2010 0 (280,000) 280,000
Service costs 27,500 (27,500)
Interest costs 28,000 (28,000)
Actual return (25,000) 25,000
Contributions (20,000) 20,000
Benefits paid 17,500 (17,500)
Journal entry 30,500 (20,000) (10,500)
Dec. 31, 2010 - - (10,500) (318,000) 307,500
MEMO RECORD GENERAL JOURNAL ENTRIES
OCI
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
BE20-3: Prepare a pension worksheet for Beaty for 2012.
LO 5 Use a worksheet for employer’s pension plan entries.
($280,000 x 10%)($280,000 x 10%)
($10,500) net liability($10,500) net liability
20-19
Note the following about the Work Sheet:
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
The balance in the Pension Asset / Liability column
should equal the net balance in the memo record – this is
the “net funded position” of the pension plan. If a credit
balance, Pension liability; if a debit balance, Pension
asset.
For each transaction or event, the debits must equal the
credits.
20-20
Amortization of Prior Service Cost
Company should not recognize the retroactive benefits as
pension expense entirely 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.
LO 6 Describe the amortization of prior service costs.
Prior Service CostPrior Service CostPrior Service CostPrior Service Cost
Amortization Method:
Board prefers a years-of-service method.
SFAS No. 158 allows use of the straight-line method.
20-21
E20-7: The following defined pension data of Rydell Corp. apply to the year 2012.
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
Projected benefit obligation, 1/1/12 (before amendment)
$560,000Plan assets, 1/1/12
546,200Pension liability
13,800On January 1, 2012, 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 2012
17,000
Instructions: For 2012, prepare a pension work sheet for Rydell Corp. that shows the journal entry for pension expense.
LO 6 Describe the amortization of prior service costs.
20-22
Pension Projected Pension Gain / Asset / Benefit Plan
Items Expense Cash PSC Loss Liability Obligation Assets Dec. 31, 2010 (13,800) (560,000) 546,200
PSC 120,000 (120,000)
Bal. Jan. 1, 2010 (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 -12/31/2011 -
Dec. 31, 2012 103,000 - (135,720) (759,200) 623,480
MEMO RECORD GENERAL JOURNAL ENTRIES
OCI
Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7
($135,720) liability($135,720) liability
20-23
Pension Expense 83,920
Other Comprehensive Income (PSC) 103,000
Pension Asset/Liability 121,920
Cash65,000
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
E20-7: Pension Journal Entry for 2012.
Dec. 31
LO 6 Describe the amortization of prior service costs.
20-24
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 LossesGains and LossesGains and LossesGains and Losses
LO 7 Explain the accounting for unexpected gains and losses.
20-25
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 LossesGains and LossesGains and LossesGains and Losses
LO 7 Explain the accounting for unexpected gains and losses.
20-26
AnswerAnswer
Recorded in Net Gain or Loss account.
Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.
Gains and LossesGains and LossesGains and LossesGains and Losses
Question: What happens to the difference between the expected return and the actual return?
LO 7 Explain the accounting for unexpected gains and losses.
20-27
Gains and LossesGains and LossesGains and LossesGains and Losses
Question: What happens with unexpected gains or losses from changes in the Projected Benefit Obligation (PBO)?
AnswerAnswer
Recorded in Net Gain or Loss account.
Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.
LO 7 Explain the accounting for unexpected gains and losses.
20-28
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 (which may
equal fair value) of the plan assets.
Any accumulated net gain or loss balance above the 10%
must be amortized.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 8 Explain the corridor approach to amortizing gains and losses.
20-29
BE20-7: Shin Corporation had a projected benefit obligation
of $3,100,000 and plan assets of $3,300,000 at January 1,
2012. Shin’s also had a net pension actuarial loss of
$465,000 in accumulated OCI at January 1, 2012. The
average remaining service period of Shin’s employees is 7.5
years.
Instructions: Compute Shin’s minimum amortization of the
actuarial loss.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 8 Explain the corridor approach to amortizing gains and losses.
20-30
BE20-7: Compute Shin’s amortization of the loss.
Gains and LossesGains and LossesGains and LossesGains and Losses
Amortization
Projected benefit obligation (3,100,000)$
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 Explain the corridor approach to amortizing gains and losses.
20-31
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2011, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data are as follows.
2011 2012 2013
Annual service cost 16,000$ 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, 1/1/12) 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 Explain the corridor approach to amortizing gains and losses.
20-32
Pension ProjectedPension Gain / Asset / Benefit Plan
Items Expense Cash PSC Loss Liability Obligation AssetsBal. Jan. 1, 2011 (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 - 12/31/10 -
Dec. 31, 2011 - 2,000 (57,000) (277,000) 220,000
OCI
GENERAL JOURNAL ENTRIES MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: Pension Work Sheet for 2011
($57,000)($57,000)* Expected Return on Plan Assets $200,000 x
10% = $20,000
**
LO 8 Explain the corridor approach to amortizing gains and losses.
20-33
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 Pension Journal Entry for 2011
Pension Expense 21,000
OCI – Gain/Loss 2,000
Pension Asset/Liability 7,000
Cash 16,000
Dec. 31
LO 8 Explain the corridor approach to amortizing gains and losses.
20-34
Pension ProjectedPension Gain / Asset Benefit Plan
Items Expense Cash PSC Loss Liability Obligation AssetsBal. Jan. 1, 2012 2,000 (57,000) (277,000) 220,000
Prior service costs 160,000 (160,000)
Adj Bal., 1/1/12 (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 - 12/31/11 2,000
Dec. 31, 2012 105,600 2,000 (217,700) (483,300) 265,600
GENERAL JOURNAL ENTRIESOCI
MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: Pension Work Sheet for 2012
($217,700) liability($217,700) liability* Actual return = Expected Return
**
LO 8 Explain the corridor approach to amortizing gains and losses.
20-35
Pension Expense 95,100
Other Comprehensive Income (PSC) 105,600
Pension Asset/Liability 160,700
Cash40,000
Dec. 31
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 Pension Journal Entry for 2012
LO 8 Explain the corridor approach to amortizing gains and losses.
20-36
Pension ProjectedPension Gain / Asset / Benefit Plan
Items Expense Cash PSC Loss Liability Obligation AssetsBal. Dec. 31, 2012 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 - 12/31/12 105,600 2,000
Dec. 31, 2013 64,000 (12,070) (203,400) (520,000) 316,600
GENERAL JOURNAL ENTRIESOCI
MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: Pension Work Sheet for 2013
($203,400) liability($203,400) liability* Plug * Plug
**
LO 8 Explain the corridor approach to amortizing gains and losses.
20-37
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 Pension Journal Entry for 2013
LO 8 Explain the corridor approach to amortizing gains and losses.
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
20-38
Within the Financial Statements
Pension expense
Pension Asset / Liability
Components of Accumulated Other Comprehensive
Income
Reporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial Statements
LO 9 Describe the requirements for reporting pension plans in financial statements.
20-39
Within the Notes to the Financial Statements
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).
Reporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial Statements
LO 9 Describe the requirements for reporting pension plans in financial statements.
20-40
Within the Notes to the Financial Statements
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.
Reporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial Statements
LO 9 Describe the requirements for reporting pension plans in financial statements.
20-41
Within the Notes to the Financial Statements
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.
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.
Reporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial Statements
LO 9 Describe the requirements for reporting pension plans in financial statements.
20-42
The Pension Reform Act of 1974
Pension Terminations
Reporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial StatementsReporting Pension Plans in Financial Statements
LO 9 Describe the requirements for reporting pension plans in financial statements.
Special Issues
20-43
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
20-44
Differences Between Pension Benefits and Healthcare Benefits
LO 10 Identify the differences between pensions and postretirement healthcare benefits.
Illustration 20A-1
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
20-45
Differences Between Pension Benefits and Healthcare Benefits
LO 10 Identify the differences between pensions and postretirement 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
20-46
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between pensions and postretirement healthcare benefits.
Attribution Period - period of time over which the
postretirement benefit cost accrue.Illustration 20A-2
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
20-47
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between pensions and postretirement healthcare benefits.
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
20-48
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between pensions and postretirement healthcare benefits.
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
20-49
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.
2012 Entries and Worksheet
Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2012, Quest Company adopts a healthcare benefit plan. The following facts apply to the postretirement benefits plan for the year 2012.
► Plan assets at fair value on January 1, 2012, are zero.
► Actual and expected returns on plan assets are zero.
► Accumulated postretirement benefit obligation (APBO), January 1, 2012, 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
20-50
Illustrative Accounting EntriesIllustration 20A-4
Journal Entry
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2012 Entries and Worksheet
20-51
Recognition of Gains and Losses
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.
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
20-52
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.
Illustration: The following facts apply to the postretirement benefits plan for
Quest Company for the year 2013.
► 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
2013 Entries and Worksheet
20-53
Illustrative Accounting EntriesIllustration 20A-6
Journal Entry
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2013 Entries and Worksheet
20-54
Amortization of Gains and Losses in 2014
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.
Illustration 20A-8
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
20-55
RELEVANT FACTS
IFRS and GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar.
Both IFRS and GAAP compute unrecognized past service costs (PSC) (referred to as prior service cost in GAAP) in the same manner. However, IFRS recognizes any vested amounts immediately and spreads unvested amounts over the average remaining period to vesting. GAAP amortizes PSC over the remaining service lives of employees.
20-56
RELEVANT FACTS
Under IFRS, companies have the choice of recognizing actuarial gains and losses in income immediately (either net income or other comprehensive income) or amortizing them over the expected remaining working lives of employees. GAAP does not permit choice; actuarial gains and losses are reported in “Accumulated other comprehensive income” and amortized to income over remaining service lives.
For defined benefit plans, GAAP recognizes a pension asset or liability as the funded status of the plan (i.e., defined benefit obligation minus the fair value of plan assets). IFRS recognizes the funded status, net of unrecognized past service cost and unrecognized net gain or loss.
20-57
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
20-58
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
20-59
At January 1, 2012, Wembley Company had plan assets of $250,000
and a defined benefit obligation of the same amount. During 2012,
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, 2012?
a. $277,500. c. $27,500.
b. $285,000. d. $302,500.
IFRS SELF-TEST QUESTION
20-60
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