Kế toán tài chính - Chương 20: Accounting for pensions and postretirement benefits

C H A P T E R 20ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITSIntermediate Accounting13th EditionKieso, 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 unrecognized prior service costs.Explain the accounting procedure for recognizing unexpected gains and losses.Explain the corridor approach to amortizing unrecognized 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 actuaries2010 entries and worksheetAmortization of prior service cost2011 entries and worksheetGain or loss2012 entries and worksheetWithin the financial statementsWithin the notes to the financial statementsPension note disclosure2013 entries and worksheet—a comprehensive exampleSpecial issuesAccounting for Pensions and Postretirement BenefitsA Pension Plan is an arrangement whereby an employer provides benefits (payments) 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 Plans                                     Some pension plans are: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.Types 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.The employer’s pension obligation is the deferred compensation obligation it has to its employees for their service under the terms of the pension plan.FASB’s choiceAlternative measures of the LiabilityAccounting for PensionsIllustration 20-3Recognition of the Net Funded StatusCompanies must recognize on their balance sheet the full overfunded or underfunded status of their defined-benefit pension plan. The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation.Accounting for PensionsLO 3 Explain alternative measures for valuing the pension obligation.Service CostsInterest on the LiabilityActual Return on Plan AssetsAmortization of Prior Service CostsGain or Loss+++-++-Accounting for PensionsLO 4 List the components of pension expense.Components of Pension Expense1.2.3.4.5.Effect on ExpenseService Costs+1.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseActuarial present value of benefits attributed by the pension benefit formula to employee service during the period. Interest on the Liability+2.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseInterest for the period on the projected benefit obligation outstanding during the period.The interest rate (settlement rate) should reflect the rate at which companies can effectively settle pension benefits.Actual Return on Plan Assets+-3.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseThe 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.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseEffect on ExpensePlan amendments often increase benefits for service provided in prior years.The cost (prior service cost) of providing these retroactive benefits is allocated to pension expense over the remaining service-years of the affected employees.Amortization of Prior Service Costs+4.Gain or Loss+-5.Accounting for PensionsLO 4 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseVolatility in pension expense can result from sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation.Companies do not recognize two main items in the accounts and in the financial statements:Pension Items Not RecognizedLO 5 Use a worksheet for employer’s pension plan entries.Some items are recognized in other comprehensive income; changes in these items are amortized into expense through smoothing techniques. Prior service costs. Actuarial gains and losses.A company must disclose in notes to the financial statements, but not in the body of the financials.Projected benefit obligation.Pension plan assets.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, 20100, KRC Company had plan assets of $280,000 and a projected benefit obligation of the same amount. During 2010, 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 KRC for 2010.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 KRC for 2010.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 2010.Using a Pension Work SheetProjected benefit obligation, 1/1/10 (before amendment) $560,000Plan assets, 1/1/10 546,200Pension liability 13,800On January 1, 2010, 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 2010 17,000Instructions: For 2010, 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) liabilitySolution on notes pagePension Expense 83,920OCI - PSC 103,000 Pension Liability 121,920 Cash 65,000Using a Pension Work SheetE20-7: Pension Journal Entry for 2010.Dec. 31LO 6 Describe the amortization of prior service costs.Gain or LossUnexpected swings in pension expense can result from:Changes in the market 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.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.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, 2010. Shin’s also had a net pension actuarial loss of $465,000 in accumulated OCI at January 1, 2020. 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 LossesLO 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, 2009, 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 2009($57,000)* Expected Return on Plan Assets $200,000 x 10% = $20,000 *Solution on notes pageLO 8 Explain the corridor approach to amortizing gains and losses.Using a Pension Work SheetP20-2 Pension Journal Entry for 2009Pension 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 2010($217,700) liability* Actual return = Expected Return *LO 8 Explain the corridor approach to amortizing gains and losses.Solution on notes pageUsing a Pension Work SheetP20-2 Pension Journal Entry for 2010Pension Asset/Liability 160,700Pension Expense 95,100Dec. 31Cash 40,000LO 8 Explain the corridor approach to amortizing gains and losses.OCI - PSC 105,600Using a Pension Work SheetP20-2: Pension Work Sheet for 2011($203,400) liability* Plug *LO 8 Explain the corridor approach to amortizing gains and losses.Solution on notes pageUsing a Pension Work SheetP20-2 Pension Journal Entry for 2011Pension Expense 89,370Pension Asset/Liability 14,300 OCI - Gain/Loss 14,070 OCI - PSC 41,600 Cash 48,000Dec. 31LO 8 Explain the corridor approach to amortizing gains and losses.Within 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. Amounts recognized in accumulated other comprehensive income that have not yet been recognized in pension expense, showing separately the net gain or loss and prior service costs, and the amounts to be recognized is pension expense in 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 StatementsDisclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plan assets, rate of compensation).Table indicating the allocation of pension plan assets by category (e.g., types of investments).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.Reporting Pension Plans in Financial StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.Special IssuesThe Pension Reform Act of 1974Pension TerminationsReporting Pension Plans in Financial StatementsLO 9 Describe the requirements for reporting pension plans in financial statements.iGAAP and U.S. GAAP separate pension plans into defined-contribution plans and defined-benefit plans. The accounting for defined-contribution plans is similar.For defined-benefit plans, both iGAAP and U.S. GAAP recognize the net of the pension assets and liabilities on the balance sheet. Unlike U.S. GAAP, which recognizes prior service cost on the balance sheet (as an element of “Accumulated other comprehensive income”), iGAAP does not recognize prior service costs on the balance sheet. Both GAAPs amortize prior service costs into income over the expected service lives of employees.Another difference in defined-benefit recognition is that under iGAAP companies have the choice of recognizing actuarial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees. U.S. GAAP does not permit choice.The IASB has recently issued a discussion paper on pensions proposing: (1) elimination of smoothing via the corridor approach, (2) a different presentation of pension costs in the income statement, and (3) a new category of pensions for accounting purposes—so-called “contribution-based promises.”Accounting 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.Differences Between Pension Benefits and Healthcare BenefitsLO 10 Identify the differences between pensions and postretirement healthcare benefits.Illustration 20A-1Differences 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.Postretirement 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-2Postretirement 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.Postretirement 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 LossesIllustrative Accounting EntriesLO 11 Contrast accounting for pensions to accounting for other postretirement benefits.2010 Entries and WorksheetIllustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2010, Quest Company adopts a healthcare benefit plan. The following facts apply to the postretirement benefits plan for the year 2010.Plan assets at fair value on January 1, 2010, are zero.Actual and expected returns on plan assets are zero.Accumulated postretirement benefit obligation (APBO), January 1, 2010, 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.Illustrative Accounting Entries2010 Entries and WorksheetIllustration 20A-4Journal EntryRecognition 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 MethodsIllustrative Accounting EntriesLO 11 Contrast accounting for pensions to accounting for other postretirement benefits.2011 Entries and WorksheetIllustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2011.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.Illustrative Accounting Entries2011 Entries and WorksheetIllustration 20A-6Journal EntryAmortization of Gains and Losses in 2012Illustrative Accounting EntriesLO 11 Contrast accounting for pensions to accounting for other postretirement benefits.Illustration 20A-8Copyright © 2009 John Wiley & Sons, Inc. 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