Kế toán, kiểm toán - Chapter 17: Pensions and other postemployment benefit plans

© 2013 The McGraw-Hill Companies, Inc.Chapter 17PENSIONS AND OTHER POSTEMPLOYMENT BENEFIT PLANSNature of Pension PlansPension plans provide income to individuals during their retirement years. This is accomplished by setting aside funds during an employee’s working years so that at retirement, the accumulated funds plus earnings from investing those funds are available to replace wages. Nature of Pension PlansFor a pension plan to qualify for special tax treatment it may need to meet the following requirements:Cover a substantial proportion of employees.Cannot discriminate in favor of highly compensated employees.Must be funded in advance of retirement through an irrevocable trust fund.Benefits must vest after a specified period of service.Complies with timing and amount of contributions.Nature of Pension PlansContributions are defined by agreement.Employer deposits an agreed-upon amount into an employee-directed investment fund.Employee bears all risk of pension fund performance.Plan CharacteristicsDefined Contribution PlansDefined Contribution PlansLet’s assume that the annual contribution is to be 3% of an employee’s salary. If an employee earned $110,000 during the year, the company would make the following entry:Defined benefit expense 3,300 Cash 3,300The employee’s retirement benefits are totally dependent upon how well investments perform.Employer is committed to specified retirement benefits.Retirement benefits are based on a formula that considers years of service, compensation level, and age.Employer bears all risk of pension fund performance.Plan CharacteristicsDefined Benefit PlansDefined Benefit PlanA pension formula might define annual retirement benefits as:1 1/2 % x Years of service x Final year’s salaryBy this formula, the annual benefits to an employee who retires after 30 years of service, with a final salary of $100,000, would be:1 1/2 % x 30 years x $100,000 = $45,000Defined Benefit PlanThe key elements of a defined benefit plan are:The employer’s obligation to pay retirement benefits in the future.The plan assets set aside by the employer from which to pay the retirement benefits in the future.The periodic expense of having a pension plan.An actuary assesses the various uncertainties (employee turnover, salary levels, mortality, etc.) and estimates the company’s obligation to employees in connection with its pension plan. Defined Benefit Cost—An OverviewThe annual defined benefit cost reflects changes in both the defined benefit obligation and the plan assets.Components of Defined Benefit Cost+ Service cost ascribed to employee service during the period+ Interest accrued on the defined benefit liability Return on the plan assets* Past service cost attributed to employee service before an amendment to the defined benefit plan+ or (-) Losses or (gains) from revisions in the defined benefit liability or from investing plan assets= Defined Benefit Cost*The actual return is adjusted for any difference between actual and expected return, resulting in the expected return being reflected in defined benefit expense. This loss of gain from investing plan assets is combined with losses and gains from revisions in the defined benefit liability.The Defined Benefit ObligationAccumulated benefit obligation The actuary’s estimate of the total retirement benefits (at their discounted present value) earned so far by employees, applying the pension formula using existing compensation levels.Vested benefit obligation The portion of the accumulated benefit obligation that plan participants are entitled to receive regardless of their continued employment.Projected benefit obligation The actuary’s estimate of the total retirement benefit (at their discounted present value) earned so far by employees, applying the pension formula using estimated future compensation levels. Under the projected credit unit approach, units of benefits increase with each year of service.The Defined Benefit ObligationDefined Benefit ObligationJessica Farrow was hired by Global Communications in 2000. She is eligible to participate in the company's defined benefit pension plan. The benefit formula is: Annual salary in year of retirement × Number of years of service × 1.5% Annual retirement benefits  Farrow is expected to retire in 2039 after 40 years of service. Her retirement period is expected to be 20 years. At the end of 2009, 10 years after being hired, her salary is $100,000. The interest rate is 6%. The company’s actuary projects Farrow’s salary to be $400,000 at retirement.The DBO as a measure of projected benefits is a more meaningful measure because it includes a projection of what the salary might be at retirement. Defined Benefit ObligationStep 1. Use the defined benefit formula to determine the retirement benefits earned to date. $400,000 × 10 × 1.5% $ 60,000 per year Step 2. Find the present value of the retirement benefits as of the retirement date.The present value (n=20, i=6%,) of the retirement annuity at the retirement date is $688,195 ($60,000 × 11.46992).Step 3. Find the present value of the retirement benefits as of the current date.The present value (n=30, i=6%,) of the retirement benefits at 2009 is $119,822 ($688,195 × .17411). This is the PBO. Defined Benefit ObligationStep 1. Use the defined benefit formula to determine the retirement benefits earned to date. $400,000 × 11 × 1.5% $ 66,000 per year Step 2. Find the present value of the retirement benefits as of the retirement date.The present value (n=20, i=6%,) of the retirement annuity at the retirement date is $757,015 ($66,000 × 11.46992).Step 3. Find the present value of the retirement benefits as of the current date.The present value (n=29, i=6%,) of the retirement benefits at 2010 is $139,715 ($757,015 × .18456). This is the PBO. If the actuary’s estimate of the final salary hasn’t changed, the DBO a year later at the end of 2010 would be $139,715.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Service cost is the increase in the DBO attributable to employee service performed during the period.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Interest cost is the interest on the DBO during the period.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Past service cost is the increase in the DBO due to a plan change that provides credit for employee service rendered in prior years.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Remeasurement loss or gain results from revising estimates used to determine the DBO and from changes in returns on plan assets.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Retiree benefits paid reduce the DBO.Defined Benefit ObligationThe Defined Benefits Obligation Changes as a Result of:Cause Effect FrequencyService Cost + Each periodInterest Cost + Each period (except the first period of the plan, when no obligation exists to accrue interest) Past Service Cost + Only if the plan is amended (or initiated) that periodRemeasurement + or - Whenever revisions are made in the defined loss or gain benefit liability estimate or actual returns on plan assets differ from expected returns Retiree benefits paid - Each period (unless no employees have yet retired under the plan)Defined Benefit ObligationThe changes in the DBO for Global Communications during 2011 were as follows: ($ in millions)*DBO at the beginning of 2011† (amount assumed) $400 Service cost, 2011 (amount assumed) 41 Interest cost: $400 x 6% 24 Actuarial loss (gain) on DBO (amount assumed) 23 Less: Retiree benefits paid (amount assumed) (38)DBO at the end of 2011 $450*Of course, these expanded amounts are not simply the amounts for Jessica Farrow multiplied by 2,000 employees because her years of service, expected retirement date, and salary are not necessarily representative of other employees. Also, the expanded amounts take into account expected employee turnover and current retirees.† Includes the past service cost that increased the DBO when the plan was amended in 2010.Plan AssetsThe plan assets are not reported separately in the statement of financial position but are netted together with the DBO to report either a net defined benefit asset (debit balance) or a net defined benefit liability (credit balance).The higher the expected return on plan assets, the less the employer must actually contribute. On the other hand, a relatively low expected return means the difference must be made up by higher contributions.Plan AssetsGlobal Communications funds its defined benefit plan by contributing the year’s service cost plus a portion of the prior service cost each year. Cash of $48 million was contributed to the pension fund in 2011. Plan assets at the beginning of 2011 were valued at $300 million. The expected rate of return on the investment of those assets was 9%, but the actual return in 2011 was 10%. Retirement benefits of $38 million were paid at the end of 2011 to retired employees. The plan assets at the end of 2011 will be: Plan assets at the beginning of 2011 $ 300,000,000 Return on plan assets (10% x $300 million) 30,000,000 Cash contributions 48,000,000 Less: Retiree benefits paid (38,000,000)Plan assets at the end of 2011 $ 340,000,000   Funded Status of the Pension Plan OVERFUNDED Market value of plan assets exceeds the actuarial present value of all benefits earned by participants. UNDERFUNDED Market value of plan assets is below the actuarial present value of all benefits earned by participants.Reporting the Funded Status of Defined Benefit Plan Defined Benefit Obligation (DBO) - Plan Assets at Fair Value Underfunded / Overfunded StatusThe Relationship Between Defined Benefit Cost and Changes in the DBO and Plan AssetsService CostActuaries have determined that Global Communications has service cost of $41,000,000 in 2011. Interest CostInterest cost is calculated as:DBOBeg × Discount rateGlobal had DBO of $400,000,000 on 1/1/11. The actuary uses a discount rate of 6%. 2011 Interest CostDBO 1/1/11 $400,000,000 × 6% = $24,000,000Return on Plan Assets The plan trustee reports that plan assets were $300,000,000 on 1/1/11. The trustee uses an expected return of 6% and the actual return is 10%. Past Service Cost In 2011, Global Communications amended the pension plan, increasing the DBO at that time. For all plan participants, the past service cost was $4 million. Remeasurement gains and LossesDetermining Defined Benefit ExpenseRemeasurement Gains and LossesFor 2011, the actual return on plan assets exceeded the expected return by $12 million. In addition, there was a $23 million loss from changes made by the actuary when it revised its estimate of future salary levels causing its DBO estimate to increase. Global would make the following journal entry to record the gain and loss:OCI = Other comprehensive incomeLoss—OCI 23,000,000 PBO 23,000,000Plan assets 12,000,000 Gain—OCI 12,000,000RECORD DEFINED BENEFIT EXPENSE IN 2011 ($ in millions) Defined benefit expense (calculated above) 51 Plan assets ($18 expected return on assets) 18 DBO ($41 service cost + $24 interest cost 69 + $4 past service cost)  Service cost and interest cost add to Global’s PBO. The return on plan assets adds to the plan assets. Service cost $41Interest cost 24Expected return on plan assets ($30 actual, less $12gain) (18)Past service cost 4 Defined benefit expense $6969 ­ PBO18 ­ Less: plan assets 51 ­ Net defined benefit liability Recording the Funding of Plan AssetsPlan assets 48,000,000 Cash 48,000,000It’s not unusual for the cash contribution to differ from that year’s defined benefit expense. After all, determining the periodic defined benefit expense and the funding of the pension plan are two separate processes.When Global adds its annual cash investment of $48 million to its plan assets, the value of those plan assets increases by $48 million. Recording the Funding of Plan AssetsPBO 38,000,000 Plan assets 38,000,000Global pays $38 million in retirement pension benefits. IFRS vs. U. S. GAAP Require that remeasurement gains and losses be included immediately among OCI items in the statement of comprehensive income.Amortization is not permitted under IFRS.Requires that gains and losses be included among OCI items in the statement of comprehensive income.Gains and losses are amortized over future periods using the “corridor” approach.Differences in accounting for actuarial gains and losses using IFRS and U.S. GAAP.IFRS vs. U. S. GAAP IFRS and U.S. GAAP treat past service cost (PSC) differently. PSC is expensed immediately to the extent it relates to income.PSC is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period. Comprehensive IncomeComprehensive income is a more expansive view of income than traditional net income.($ in millions)Net income $xxxOther comprehensive income: Unrealized holding gains (losses) on investments $x Pension plan: Loss-due to revising a DBO estimate (23) Gain-return on plan assets exceed expected 12Deferred gains (losses) from derivatives xGains (losses) from foreign currency translation x xxComprehensive income $xxxComprehensive IncomeOther comprehensive income (a) is reported periodically as it is created and (b) also is reported as a cumulative amountThere are 2 options for reporting other comprehensive income created during the reporting period. The statement of comprehensive income can be presented:As an expanded version of the income statement (one-statement approach).In a separate statement (two-statement approach)The accumulated amount of other comprehensive income (AOCI) is reported as a separate item of shareholders’ equity in the statement of financial position.As part of a joint project with the FASB, the IASB issued a revised version of IAS No.1, “Presentation of Financial Statements,” that revised the standard to bring international reporting of comprehensiveincome largely in line with U.S. standards. IFRS does not permit reporting other comprehensive income in the statement of shareholders’ equity.IFRS vs. U. S. GAAP PENSION SPREADSHEET Reported Recorded in Accounts Only IFRS vs. U. S. GAAP Under IFRS there is no requirement to present the various components of defined benefit expense as a single net amount. U.S. GAAP requires employers to present the expense as a net amount and prohibits the reporting of separate components on the income statement.Postemployment Benefits Other Than PensionsEstimated medicalcosts in eachyear of retirementEstimated netcost of benefitsRetireeshare ofcostInsurancepaymentsLess:Equals:Net Cost of BenefitsMany companies also furnish other postemployment benefits to their retired employees. Postemployment Benefit ObligationExpected Postemployment Benefit Obligation (EPBO) – The actuary's estimate of the total postemployment benefits (at their discounted present value) expected to be received by plan participants. Defined Benefit Obligation (DBO) – The portion of the EPBO attributed to employee service to date. POSTEMPLOYMENT BENEFIT OBLIGATION  Assume the actuary estimates the net cost of providing health care benefits to a particular employee during her retirement years to have a present value of $10,842 as of the end of 2009. This is the EPBO. If the benefits (and therefore the costs) relate to an estimated 35 years of service and 10 of those years have been completed, the DBO would be:2009 $10,842 x 10/35 = $3,098 EPBO fraction DBO attributed x 1.062010 $11,492 x 11/35 = $3,612 EPBO fraction DBO attributedThe obligation increases by the 6% accrued interestShe now has worked 11 of her estimated 35 yearsHOW THE DBO CHANGED DBO at the beginning of the year $3,098 Interest cost: $3,098 x 6% 186 Service cost: ($11,492 x 1/35) 328 portion of EPBO  attributed to the year DBO at the end of the year $3,612AttributionThe process of assigning the cost of benefits to the years during which those benefits are assumed to be earned by employees.Pension benefitsEmployees earn benefits graduallyOther postemployment benefitsNo benefits until full eligibilityAccounting for Postemployment Benefit Plans Other Than PensionsMeasuring Service CostAttribute a portion of the accumulated postemployment benefit obligation to each yearas the service cost for that year.100 %0%End of Chapter 17