Kế toán, kiểm toán - Chapter 19: Pensions and other post - Employment benefits

CHAPTER 19:PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS2CHAPTER 19: Pensions and Other Post-Employment BenefitsAfter studying this chapter, you should be able to:Understand the importance of pensions from a business perspective.Identify and account for a defined contribution benefit plan.Identify and explain what a defined benefit plan is and the related accounting issues.Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.Identify transactions and events that change benefit plan assets, and calculate the balance of the assets.Explain what a benefit plan’s surplus or deficit is, calculate it, and identify what transactions and events change its amount.Identify the components of pension expense, and account for a defined benefit pension plan under IFRS and ASPE.Account for defined benefit plans with benefits that vest or accumulate other than pension plans.Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.Identify differences between the IFRS and ASPE accounting for pensions and other post-employment benefits and what changes are expected in the near future.3Benefit PlansThree examples of benefit plans:Pension and other post-retirement plans (e.g., health care and life insurance)Post-employment benefit plans (e.g., severance benefits and long-term disability benefits)Compensated absences (e.g., parental leaves, unrestricted sabbatical leaves)4Nature of Pension PlansA pension plan provides benefits (payments) to retirees for services provided during employmentThe employer sponsors and contributes to the fund and incurs the cost of the pension planRequires accounting for the employerThe pension plan receives the contributions, administers pension assets and makes pension payments to the beneficiariesRequires accounting for the pension plan5Pension Fund Stream EMPLOYERPENSION FUNDCash paid to pension plan (contributions)$Fund AssetsPension recipients (benefits)6Pension TerminologyFundedEmployer sets aside money for future pension benefits in a separate legal entityContributoryEmployee and employer make contributions to the plan Non-contributoryEmployers bear the full cost of the pension planNo contributions made by employee7Pension PlansThe two most common types of pension plans are:Defined contribution (DC) plansDefined benefit (DB) plans8Defined Contribution PlansEmployer contributes a defined sum (either a fixed sum or related to salary) to a third partyOwnership of plan assets assumed by plan trusteeTrustee is responsible for investment and distribution of plan assetsEmployee assumes the economic riskNo guarantee made by employer as to benefits paidPlan does not specify the benefits the employees will receive or the method used to determine benefitsCost of the plan in the current year is known with certainty9Defined Contribution PlansAccounting is straightforward:Liability reported if contributions for the period have not been made in fullAsset reported if the amount contributed is more than required for the periodThe benefit cost (pension expense) is the amount the company is required to contribute to the planIf the company has accrued contributions required to be made in future periods for employee services provided in the current or prior periods, interest should be recognized on the accrued contributions10Defined Benefit Pension PlansPension benefits received by employee after retiring are specified (i.e., defined)Pension benefits are based on a formula with key variables such as years of service and expected salary level at retirementThe trust’s main goal is to ensure there will be enough pension assets to pay the employer’s obligation to employees when they retireThe employer assumes the economic riskAssets are legally owned by the trust but in substance belong to the employer (the beneficiary of the trust)The employer is responsible for making the defined benefit payments no matter what happens in the trustCost of plan not known with certainty, as it depends on uncertain future variables (e.g., employee turnover, mortality, inflation)11Defined Benefit Pension PlansCan be vesting or non-vestingVested amounts plan become the legal property of the employeeEmployees are entitled to receive vested benefits even after leaving the employ of the corporationAccounting for defined benefit plans is not easy to measure:The pension expense is not same as cash funding contribution Actuarial assumptions must be used extensively12Defined Benefit Pension PlansThree methods of measuring the pension obligation valuationVested benefit methodBased on current salary levelsIncludes only vested benefitsProjected Unit Credit or Accumulated Benefit MethodBased on current salary levelsIncludes both vested and non-vested service3. Projected benefit methodBased on future salary levelsIncludes both vested and non-vested service13Defined Benefit Pension PlansProjected benefit method is considered the best measure for accounting purposesPresent value of vested and non-vested benefits earned as at the reporting date (using future salary levels) is called defined benefit obligation (DBO) ASPE also allows the defined benefit obligation (DBO) for funding purposes which is based on different variables and often uses a different discount rate14Defined Benefit Obligation (DBO) Defined benefit obligation, beginning+ Current service cost+ Interest costBenefits paid to retirees+/- Past service costs of plan amendments during period+/- Actuarial gains (-) or losses (+) = Defined benefit obligation, end of period15Current Service CostThe cost of benefits that will be provided in the future in exchange for current servicesThese costs are prorated on service:Annual expense is based on the total estimated benefit being allocated evenly over the years of service of the employee 16Interest CostInterest accrues on the DBO as time passesSimilar to discounted debtCurrent market rateDetermined by reference to current yield on high-quality debt instrument (e.g., corporate bonds)Required by IFRS and ASPESettlement rateImplied rate on insurance contract that would effectively settle pension obligation Allowed under ASPE17Benefits Paid to RetireesPension benefits are paid to retirees (former employees)Like all liabilities, the amount owing is decreased as these payments are made18Past Service CostsSimilar to DC plans, when a plan is started or amended, credit is often given for past years of serviceThis amount is included in the pension benefit cost on the income statement in the year it is incurredNote that companies can also amend plans to reduce the benefits receivedResults in a decreased DBO and a past service benefit19Actuarial Gains and LossesThese gains and losses can occur because of:Changes in actuarial assumptionsA change in assumptions about future eventsExperience gains and lossesDifference between what actually happened and the actuarial assumption that was made20Plan Assets Plan assets, fair value at beginning of period + Contributions +/- Actual return - Benefits paid to retirees = Plan assets, fair value at end of period21ContributionsContributions are made each year by:The employerThe employees (if applicable)Federal and provincial law dictate the funding requirementsThe Canadian Revenue Agency (CRA) also dictates regulations as well as what contributions are tax deductible22Return on Plan AssetsThe income generated on the assets less administration costsDue to year over year volatility, a long-term rate of return is estimatedThis is referred to as the expected returnUnder both IFRS and APSE, rate used must be the same as the discount rate used to calculate interest cost23Surplus or DeficitDefined Benefit Obligation (DBO) (end of period)- Fair Value of plan assets (end of period) = Plan’s surplus or deficit, (end of period) DBO > Plan assets = underfunded = deficitDBO < Plan assets = overfunded =surplus24Accounting for PensionsPension cost should be accrued and recognized in accounting periods that benefit from employees’ service The deferral and amortization approach has been eliminated both with respect to past service costs or benefits and actuarial gain or losses All components of the defined benefit cost are to be recognized in income, except under IFRS, where gains and losses from remeasurements are in OCI25Statement of Financial Position PresentationStatement of Financial Position PresentationNeither the DBO nor the fund assets are recognized directly in the sponsoring company’s accounts They are both off-balance sheet or memo accounts26Components of Defined Benefit CostPension expense is made up of:Current service costNet Interest on the net defined benefit liability or assetGains and losses from remeasurements relating to return on plan assetsUnder IFRS, this amount is allocated between net income (interest amounts) and OCI (remeasurements); under ASPE these are included in income and are disclosed separatelyPast service costActuarial gains and lossesUnder IFRS, these are included in OCI; under ASPE, these are included in income as a remeasurement and are disclosed separately27The Pension WorksheetUsed to accumulate information needed for the formal journal entries and to keep track of the relevant pension plan items and components reported off-balance sheet28Pension Work Sheet 201629Journal Entries for 2016To record expense:Pension Expense 9,000 Net Defined Benefit Liability/Asset 9,000To record contribution:Net Defined Benefit Liability/Asset 8,000 Cash 8,00030Pension Work Sheet 201731Journal Entries for 2017To record expense:Pension Expense 97,600 Net Defined Benefit Liability/Asset 97,600To record contribution:Net Defined Benefit Liability/Asset 20,000 Cash 20,00032Pension Work Sheet 2018 (APSE)33Journal Entries 2018 (APSE)To record expense:Pension Expense 50,800 Net Defined Benefit Liability/Asset 50,800To record contribution:Net Defined Benefit Liability/Asset 24,000 Cash 24,00034Pension Work Sheet 2018 (IFRS)35Journal Entries 2018 IFRSTo record expense:Pension Expense 19,660Remeasurement Loss (OCI) 31,140 Net Defined Benefit Liability/Asset 50,800To record contribution:Net Defined Benefit Liability/Asset 24,000 Cash 24,00036Valuation of Accrued Benefit AssetNet defined benefit asset cannot exceed expected future benefits (valuation allowance may be necessary to reduce the value on statement of financial position)Referred to as the asset ceiling testChange in valuation allowance is generally recognized through pension expense in net income37Other Defined Benefit Plans withBenefits that Vest or AccumulateAccrual accounting is appropriate for post-retirement benefits, post-employment benefits and long-term compensated absencesExample: post-retirement health care benefits Since the right to the benefit is earned by rendering service, the cost and related liability are accrued as employee provides serviceIFRS generally follows the same approach as for pension plans, except that actuarial gains/losses and past service costs are reflected in OCIUnder ASPE, defined benefit plans where benefits vest or accumulate based on service are accounted for in same way as defined benefit pension plans38Defined Benefit Plans with Benefits that Do Not Vest or AccumulateFor example, parental leave plans (in excess of what government provides), long-term disability plansUse “event accrual” method to accrue full costWhen event occurs that obligates entity: Benefit Expense xx Benefit Liability xxWhen the compensated absence is taken: Benefit Liability xx Cash xx39PresentationDefined benefit assets/liabilitiesGenerally reported separately for each benefit plan (unless all plans result in asset or liability)Generally classified as long-termBenefit costsComponents of benefit costs may be reported together or separately on the income statement40Disclosure RequirementsDisclosures under ASPE include:Description of each plan and any major changes in terms during the yearEffective date of the most recent actuarial valuation for funding purposesThe year end surplus or deficit (including FV of plan assets and DBO)Explanation of differences between amounts recorded on balance sheet and the plans’ surplus or deficit41Disclosure RequirementsAdditional disclosure requirements under IFRS include:Characteristics of defined benefit plans and related risksAmounts included in statements arising from the plansHow the plans help users assess cash flow managementReconciliations of beginning to ending balances of PV of the net defined benefit liability/asset, plan assets and DBOAmounts included in periodic net income and OCIUnderlying assumptions and sensitivity informationMany others, such as the estimate of following year’s expected funding contributions 42AnalysisAnalysis generally focuses on predicting future cash flow obligationsIt is very important to validate the major assumptions underlying the fund status and future cash requirements, especiallyDiscount rate used to measure DBOCurrent service costInterest costSmall changes in key variables can have a very significant impact43Looking AheadBoth ASPE and IFRS agree on the objective to recognize a liability and a cost in the reporting period in which an employee has provided the service that gives rise to the benefitsThere are only minor differences in how these are applied under ASPE and IFRS44