20-1 After studying this chapter, you should be able to: LEARNING OBJECTIVES LEARNING 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 Describe the amortization of prior service costs. service costs. Accounting for Pensions and Postretirement Benefits 20 20
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20-1 7.Explain the accounting for unexpected gains and losses. 8. Explain the corridor approach to amortizing gains and losses. 9.Describe the requirements.
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20-1
After studying this chapter, you should be able to:
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
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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
20-39
Gains and Losses
LO 8
Illustration 20-15Graphic Illustration 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 $465,000 in accumulated
OCI at January 1, 2014. The average remaining service period of
Shin’s employees is 7.5 years.
Instructions: Compute Shin’s minimum amortization of the
actuarial loss.
Gains and Losses
LO 8
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BE20-7: Compute Shin’s amortization of the loss.
Gains and Losses
Amortization
Projected benefit obligation (3,100,000)$
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
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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%
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
LO 10
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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
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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
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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
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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
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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
LO 11
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Illustrative Accounting Entries
Journal Entry
APPENDIXAPPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
2015 Entries and Worksheet
Illustration 20A-6
LO 11
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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.
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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.”
LO 12
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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.
LO 12
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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
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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
LO 12
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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