Kế toán, kiểm toán - Accounting for pensions and postretirement benefits

Prepared by Coby Harmon University of California, Santa BarbaraIntermediate AccountingIntermediate Accounting14th Edition20Accounting for Pensions and Postretirement BenefitsKieso, Weygandt, and Warfield Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.Identify types of pension plans and their characteristics.Explain alternative measures for valuing the pension obligation.List the components of pension expense.Use a worksheet for employer’s pension plan entries.Describe the amortization of prior service costs.Explain the accounting procedure for unexpected gains and losses.Explain the corridor approach to amortizing gains and losses.Describe the requirements for reporting pension plans in financial statements.Learning ObjectivesAlternative measures of liabilityRecognition of net funded statusComponents of pension expenseNature of Pension PlansAccounting for PensionsUsing a Pension WorksheetReporting Pension Plans in Financial StatementsDefined contribution planDefined-benefit planRole of actuaries2012 entries and worksheetAmortization of prior service cost2013 entries and worksheetGain or loss2014 entries and worksheetWithin the financial statementsWithin the notes to the financial statementsPension note disclosure2015 entries and worksheet—a comprehensive exampleSpecial issuesAccounting for Pensions and Postretirement BenefitsAn arrangement whereby an employer provides benefits to employees after they retire for services they provided while they were working.Pension PlanAdministratorContributionsEmployerRetired EmployeesBenefit PaymentsAssets & LiabilitiesLO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.Nature of Pension PlansPension 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 PlansDefined-Contribution PlanDefined-Benefit PlanEmployer contribution determined by plan (fixed)Risk borne by employeesBenefits based on plan valueBenefit determined by planEmployer contribution varies (determined by Actuaries)Risk borne by employerActuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc.Nature of Pension PlansLO 2 Identify types of pension plans and their characteristics.Two questions:What is the pension obligation that a company should report in the financial statements? What is the pension expense for the period?Accounting for PensionsLO 3 Explain alternative measures for valuing the pension obligation.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 LiabilityAccounting for PensionsIllustration 20-3FASB’s choiceAccounting for PensionsLO 4 List the components of pension expense.Illustration 20-4Components of AnnualPension ExpenseService Costs+1.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseActuarial present value of new benefits earned by employees during the period. Effect on ExpenseInterest on the Liability+2.Accounting for PensionsComponents of Pension ExpenseInterest 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 ExpenseActual Return on Plan Assets+-3.Accounting for PensionsComponents of Pension ExpenseActual 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 20-5Effect on ExpenseAccounting for PensionsComponents of Pension ExpensePlan 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.LO 4 List the components of pension expense.Effect on ExpenseGain or Loss+-5.Accounting for PensionsComponents of Pension ExpenseEffect on ExpenseVolatility 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.Using a Pension Work SheetLO 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.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 SheetLO 5 Use a worksheet for employer’s pension plan entries.Using a Pension Work SheetBE20-3: Prepare a pension worksheet for Beaty for 2012.LO 5 Use a worksheet for employer’s pension plan entries.($280,000 x 10%)($10,500) net liabilityNote the following about the Work Sheet:Using a Pension Work SheetLO 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.Amortization of Prior Service CostCompany 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 CostAmortization Method:Board prefers a years-of-service method. SFAS No. 158 allows use of the straight-line method.E20-7: The following defined pension data of Rydell Corp. apply to the year 2012.Using a Pension Work SheetProjected 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 17,000Instructions: 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.Using a Pension Work Sheet – E20-7($135,720) liabilityPension Expense 83,920Other Comprehensive Income (PSC) 103,000 Pension Asset/Liability 121,920 Cash 65,000Using a Pension Work SheetE20-7: Pension Journal Entry for 2012.Dec. 31LO 6 Describe the amortization of prior service costs.Gain or LossUnexpected swings in pension expense can result from:Sudden and large changes in the fair value of plan assets, and Changes in actuarial assumptions that affect the amount of the projected benefit obligation.Gains and LossesLO 7 Explain the accounting for unexpected gains and losses.Question: What is the potential negative impact on Net Income of these unexpected swings?VolatilityThe profession decided to reduce the volatility with smoothing techniques.Gains and LossesLO 7 Explain the accounting for unexpected gains and losses.AnswerRecorded 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 LossesQuestion: What happens to the difference between the expected return and the actual return?LO 7 Explain the accounting for unexpected gains and losses.Gains and LossesQuestion: What happens with unexpected gains or losses from changes in the Projected Benefit Obligation (PBO)?AnswerRecorded 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.Corridor AmortizationFASB 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 LossesLO 8 Explain the corridor approach to amortizing gains and losses.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 LossesLO 8 Explain the corridor approach to amortizing gains and losses.BE20-7: Compute Shin’s amortization of the loss.Gains and Losses÷LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2: 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.LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2: Pension Work Sheet for 2011($57,000)* Expected Return on Plan Assets $200,000 x 10% = $20,000 *LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2 Pension Journal Entry for 2011Pension Expense 21,000OCI – Gain/Loss 2,000 Pension Asset/Liability 7,000 Cash 16,000Dec. 31LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2: Pension Work Sheet for 2012($217,700) liability* Actual return = Expected Return *LO 8 Explain the corridor approach to amortizing gains and losses.Pension Expense 95,100Other Comprehensive Income (PSC) 105,600 Pension Asset/Liability 160,700 Cash 40,000Dec. 31Using a Pension Work SheetP20-2 Pension Journal Entry for 2012LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2: Pension Work Sheet for 2013($203,400) liability* Plug *LO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2 Pension Journal Entry for 2013LO 8 Explain the corridor approach to amortizing gains and losses.Pension Expense 89,370Pension Asset/Liability 14,300 Other Comprehensive Income (G/L) 14,070 Other Comprehensive Income (PSC) 41,600 Cash 48,000Dec. 31Within the Financial StatementsPension expensePension Asset / LiabilityComponents of Accumulated Other Comprehensive IncomeReporting Pension Plans in Financial StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.Within the Notes to the Financial StatementsMajor components of pension expense.Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed. 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 StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.Within the Notes to the Financial StatementsA 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. 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 StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.Within the Notes to the Financial StatementsThe nature and amount of changes in plan assets and benefit obligations recognized in net income and in other comprehensive income of each period.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.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 StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.The Pension Reform Act of 1974Pension TerminationsReporting Pension Plans in Financial StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.Special IssuesAccounting GuidanceIn 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.APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSDifferences Between Pension Benefits and Healthcare BenefitsLO 10 Identify the differences between pensions and postretirement healthcare benefits.Illustration 20A-1APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSDifferences Between Pension Benefits and Healthcare BenefitsLO 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.Many postretirement plans do not set a limit on healthcare benefits. 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.APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSPostretirement Benefits Accounting ProvisionsLO 10 Identify the differences between pensions and postretirement healthcare benefits.Attribution Period - period of time over which the postretirement benefit cost accrue.Illustration 20A-2APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSPostretirement Benefits Accounting ProvisionsLO 10 Identify the differences between pensions and postretirement healthcare benefits.Obligations Under Postretirement BenefitsExpected 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.APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSPostretirement Benefits Accounting ProvisionsLO 10 Identify the differences between pensions and postretirement healthcare benefits.Postretirement ExpenseService CostInterest CostActual Return on Plan AssetsAmortization of Prior Service CostsGains and LossesAPPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSIllustrative Accounting EntriesLO 11 Contrast accounting for pensions to accounting for other postretirement benefits.2012 Entries and WorksheetIllustration: 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.APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSIllustrative Accounting EntriesIllustration 20A-4Journal EntryAPPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITS2012 Entries and WorksheetRecognition of Gains and LossesIllustrative Accounting EntriesLO 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 ApproachAmortization MethodsAPPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSIllustrative Accounting EntriesLO 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.APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITS2013 Entries and WorksheetIllustrative Accounting EntriesIllustration 20A-6Journal EntryAPPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITS2013 Entries and WorksheetAmortization of Gains and Losses in 2014Illustrative Accounting EntriesLO 11 Contrast accounting for pensions to accounting for other postretirement benefits.Illustration 20A-8APPENDIX 20AACCOUNTING FOR POSTRETIRMENT BENEFITSRELEVANT FACTSIFRS 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.RELEVANT FACTSUnder 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.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?$5,000.$90,000.$85,000.$20,000.IFRS SELF-TEST QUESTIONAt 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?Pension Liability and $74,300.Pension Liability and $90,000.Pension Asset and $233,300.Pension Asset and $110,000.IFRS SELF-TEST QUESTIONAt 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?$277,500. c. $27,500.$285,000. d. $302,500.IFRS SELF-TEST QUESTIONCopyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. 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