StIce | StIce |Skousen
Employee Compensation Payroll, Pensions, and other
Issues
Chapter 17
Intermediate Accounting
16E
Prepared by: Sarita Sheth | Santa Monica College
COPYRIGHT © 2007
Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license.
Learning Objectives
1. Account for payroll and payroll taxes, and
understand the criteria for recognizing a
liability associated with compensated
absences.
2. Compute performance bonuses, and
recognize the issues associated with
postemployment benefits.
3. Understand the nature and
characteristics of employer pension plans,
including a detailed discussion of defined
benefit plans.
Learning Objectives
4.
5.
6.
7.
Use the components of prepaid/accrued pension
costs and changes in the components to
compute the periodic expense associated with
pensions.
Prepare required disclosures associated with
pensions, and understand the accounting
treatment for pension settlements and
curtailments.
Describe the few remaining differences between
U.S. pension accounting standards and the
provisions of IAS 19.
Explain the differences in accounting for
pensions and postretirement benefits other than
pensions.
Employee Compensation Event
Line
Payroll
Compensated
Absences
Stock Options
and Bonuses
Postemployment
Benefits
Pensions and
Postretirement
Benefits Other Than
Pensions
Payroll and Payroll Taxes
Social security and income tax legislation impose
five taxes based on payrolls:
1. Federal old-age,
4. State unemployment
survivors’, and
insurance (tax to
disability (tax to both
employer only)
the employee and
employer)
5. Individual income tax
2. Federal hospital
(tax to employee only
insurance (tax to both
but withheld and paid
employer and
by employer)
employee)
3. Federal
unemployment
insurance (tax to
employer only)
FICA
• Federal Insurance Contributions Act
(FICA) – both the employers and
employees are required to provide
funds.
• Employer is required to withhold FICA
taxes from each employee’s wages.
• In 2005, annual wages up to $90,000
were subject to 6.20% of FICA tax.
FICA
• FICA also includes Medicare tax for
federal hospital insurance.
• This tax is separate from the
previously discussed slide.
• The tax is applied to all wages earned
and there is no upper limit.
• For 2005, the rate was 1.45% for both
employer and employee.
FUTA
• Federal Social Security Act and the Federal
Unemployment Tax Act (FUTA) established
unemployment insurance plans.
• Employers are taxed quarterly; no tax levied
on employees.
• Tax rate since on the first $7,000 of wages
earned is 6.2%.
• Employer can apply for a credit limited to
5.4% for taxes paid on state unemployment
tax.
State Unemployment Insurance
• State unemployment tax laws (SUTA)
differ across states. Most states only
tax employers, but some both.
• As a result of the credit applied for
federal taxes the amount of tax taking
state rates into account does not
exceed 0.8%.
Accounting for Payroll Taxes
• The employee’s gross earnings are an
expense to the employer.
• Withholdings are an expense to the
employee, not to the employer.
• Withholdings become a liability to the
employer only because the employer
keeps money earned by employees
and pays obligations on their behalf.
Accounting for Payroll Taxes
Assume salaries for Jan are $16,000. SUTA is 5.4%.
Withholdings are $1,600 and FICA is 7.65%.
The employer records for payroll and payroll taxes:
Salaries Expense
16,000
FICA Taxes Payable
1,224
Employees Income Taxes Payable
1,600
Cash
13,176
To record payment of payroll and related
employee withholdings.
Accounting for Payroll Taxes
Payroll taxes are:
• An expense to the
employer.
• A liability to the
employer until
they are paid.
Accounting for Payroll Taxes
Assume salaries for Jan are $16,000. SUTA is 5.4%.
Withholdings are $1,600 and FICA is 7.65%.
Employer’s make this entry to record THEIR portion
of FICA and other payroll taxes:
Payroll Tax Expense
0.0765 x
FICA Taxes Payable
$16,000
0.054
x
1,224
0.008 x
$16,000
State Unemployment Taxes Payable
$16,000
FUTA Payable
To record payroll tax liability to the
128
employer.
2,216
864
Compensated Absences
Compensated absences
are payments by
employers for:
• Vacations,
• Holidays,
• Sick days
• Other personal days
Compensated Absences
• At the end of the period, the firm has
a liability for the earned by unused
compensated absences.
• They must match the estimated
amount of liability to current revenue.
• The tricky part comes when
estimating how much should be
accrued.
• FASB 43 provides guidance on this
issue.
Compensated Absences
FASB Statement No. 43 requires a
liability to be recognized for compensated
absences that—
1. Have been earned through services
already rendered
2. Vest or can be carried forward to
subsequent years
3. Are estimable and probable
Compensated Absences
S&N Corporation has 20
employees who are paid an
average of $700 per week.
During 2007, a total of 40
vacation weeks was earned by
all employees, but only 30
weeks of vacation were taken.
They took the remaining 10
weeks of vacation in 2008
when the average rate of pay
was $800 per week.
Compensated Absences
Journal entry for 2007
Wages Expense
7,000
Vacation Wages Payable
7,000
To record accrued vacation wages ($700 x10 weeks).
Journal entry for 2008
Wages Expense
1,000
Vacation Wages Payable 7,000
Cash
8,000
To record payment at current rates of previously earned
vacation time ($800 x 10 weeks).
Stock-Based Compensation and
Bonuses
Photo Graphics, Inc. gives it store managers a 10%
bonus based on individual store earnings. The
bonus is to based on income after deducting the
bonus, but before deduction for income taxes.
Store X has income for the year of $100,000.
Bonus calculation:
B = 0.10($100,000 – B)
B = $10,000 – 0.10B
B + 0.10B = $10,000
1.10B = $10,000
B = $9,091 (rounded)
Postemployment Benefits
• Statement No 112, FASB extends
recognition requirements to benefits
that accrue to former or inactive
employees after employment but
before retirement.
• Examples of the types of benefits:
–
–
–
–
Severance
Benefits,
Disability related benefits,
Job training and counseling
Stop and Think
Which ONE of the
following is NOT a
criterion used in
identifying a
postemployment
benefit obligation?
Accounting for Pensions
•
There are three main categories for
pensions:
1. Government plans, primarily Social
Security
2. Individual plans, such as individual
retirement accounts (IRAs)
3. Employer plans
Nature and Characteristics of
Employer Pension Plans
• Noncontributory- funded entirely by the
employer
• Contributory - employee also contributes to
the cost of the plan
• Defined Contribution -employer pays a
periodic contribution which is administered
by an independent third party.
• Defined Benefit- employee is guaranteed a
specified retirement income.
• Vested Benefits- occurs when an employee
has met certain requirements and is eligible
to receive pension benefits at retirement.
Defined Benefit Plans
Services
Contributions
Employer
Pension
Fund
Wages and Salaries
Defined Benefits
Current
Employees
Retired
Employees
Stop and Think
Many companies are
changing their plans
from defined benefit
to defined
contribution. Why
would employers do
this?
Issues in Accounting for
Defined Benefit Plans
1. The amount of net periodic pension
expense to be recognized on the income
statement.
2. The amount of pension liability or asset to
be reported on the balance sheet.
3. Accounting for pension settlements,
curtailments, and terminations.
4. Disclosures needed to supplement the
amounts reported in the financial
statements.
Simple Illustration of Pension
Accounting
•
•
•
•
•
•
•
•
•
•
Lorien Bach is 35 years old
She has worked for Thakkar for 10 years.
Her salary for 2007 was $40,000.
Pension payments begin after the employee turns 65.
The annual payment is equal to 2% of the highest
salary times the number of years with the company.
Thakkar knows for certainty that Bach will live until
she is 75.
Thakkar uses a discount rate of 10%.
As of January 1, 2008, Thakkar had a pension fund
of $10,000.
During 2008 an additional $1,500 was contributed.
The fund earned $350 and the average return is
12%.
Simple Illustration
#1 Estimate Pension Obligation
(2% x 10 years) x $40,000 = $8,000
The annual amount that
Bach should received on her
retirement
Simple Illustration
Accumulated Benefit Obligation (ABO)
PV of a an
annuity of
$8,000 per
year for ten
years
deferred for
30 years is
$2,817
X
30 years
X
X X X X X X X X
Accumulated benefit
obligation (ABO)
Simple Illustration
Projected Benefit Obligation (PBO)
Assume Thakkar Company expects Bach’s
2007 salary of $40,000 to increase 5%
every year until retirement.
(2% x 10 years) x $172,877 = $34,575 (rounded)
PV = $40,000, N = 30, I = 5%
The PBO is the PV of ten
equal deferred payments
of $34,575 ($12,176).
Simple Illustration
Accrued Pension Liability
PBO, January 1, 2005
Pension fund at fair value,
January 1, 2005
Accrued pension liability
$12,176
(10,000)
$ 2,176
FASB Statement No. 87 stipulates
that these two items be offset against
one another and a single amount be
shown.
Simple Illustration
Interest Cost
PBO,
Beginning of
Period
x
$12,176
x
Discount
Interest
Rate
= Cost
0.10
= $1,218
Simple Illustration
Service Cost
Return on the Pension
Fund
The impact of this
extra year of service
is to increase the
December 31, 2008
PBO by $1,339.
Therefore, the
service cost element
of pension expense
for the year is
$1,339.
Pension expense is
reduced by the return
on the pension fund
for the year. Because
Thakkar expects a
12% rate of return,
the original $10,000
will have a return of
$1,200 in 2008.
Simple Illustration
PBO, End of Year
Service
Retirement
PBO,
cost and
beginning + interest – benefits
paid
of year
cost
Change in
actuarial
±
assumptions
Fair Value of Pension Fund
Fair value
Employer
of
Retirement
Actual return
pension + contribu- – benefits ± on pension
tions
fund,
paid
fund
beginning
of year
Simple Illustration
Accrued Pension Liability
As of December 31, 2008, the PBO for Thakkar
is $14,733 and the total FVPF is $12,700
($10,000 + $1,200 return + $1,500 new
contributions).
PBO, December 31, 2008
Pension fund at fair value,
December 31, 2008
Accrued pension liability
$14,733
(10,000)
$ 2,176
Simple Illustration
Thakkar would make the following entries for
2008:
Prepaid Expense
Prepaid/Accrued Pension Cost
1,357
1,357
Prepaid/Accrued Pension Cost
1,500
Cash
1,500
Service cost ($1,339) + Interest
cost ($1,218) – Expected return
($1,200)
New contributions
to pension fund
Comprehensive Illustration
A Spreadsheet Approach
Net
Pension
Expense
Cash
Prepaid
Accrued
Pension
PBO
The Basic Spreadsheet
Formal Accounts
Net
Pension
Expense Cash
Beginning Balances
(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
(e) PSC Amortization
(g) Deferred Loss
(h) Amort. of Deferred Loss
Summary Journal Entries
(1) Accrual Pension
Expense Accrual
(2) Annual Pension
Contribution
(3) Minimum Liability
Adjustment
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
Memorandum Accounts
PBO
Fair
Value
of Plan
Assets
Unrecognized
Prior Service
Cost
Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Left Side of Work Sheet
Periodic
Pension
Cost
Items
Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records total pension costs
accrued.
• Debited for the sum of all
periodic pension cost items.
Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records cash expended for
contributions to plan assets.
• Debited for actual amount of
cash contributed to pension
fund.
Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Reflects changes in net pension
asset or liability.
• Debited for cash contributions
to pension plan assets.
• Credited for net pension cost.
Formal Accounts
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Cost
Items
• Records noncurrent asset arising
from recognition of additional
pension liability for unfunded
pension plans.
• Account balance should not exceed
the sum of unrecognized transition
loss plus prior service costs.
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
Right Side of Work Sheet
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
Actuarial present value of pension benefits.
Uses the benefits per year of service approach.
Assumes future compensation levels.
Retirement Change in
PBO
Service
Interest
PBO
=
+
+
– Benefits ± Actuarial
BoY
Cost
Cost
EoY
Paid
Assumptions
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
• Amount that could be received from the sale
of plan assets in a current sale between a
willing buyer and seller.
• Increased by employer/employee
contributions.
• Decreased by benefits paid.
Actual
Benefits
FVPF FVPA
=
+ Contributions–
± Return
Paid
BoY
EoY
on Assets
Memorandum Accounts
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
When a pension plan is initially
adopted or amended to provide
increased benefits, employees are
granted additional benefits for services
performed in years prior to the plan’s
adoption or amendment.
Stop and Think
What is the
relationship between
prior service cost and
the measurement of
the projected benefit
obligation (PBO)?
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Balance, 1/1/08
Cash
Prepaid/
Accrued
Pension
Cost
$ (40,000 )
Left Side of Work Sheet
Periodic
Pension
Expense
Items
Thompson Electronics, Inc
Pension Worksheet
Bal.
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
$(1,500,000)
$1,385,000
$75,000
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Activity Info 2008
•
•
•
•
Service cost as reported by actuaries….$75,000
Contributions to pension plan………...$115,000
Benefits paid to retirees………………. $125,000
Fair value of pension fund
at 12/31/08…………………………$1,513,5000
• Settlement interest rate
11.0%
• Long-term expected rate of return
10.0%
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,000 )
Left Side of Work Sheet
$ 75,000
Thompson Electronics, Inc
Pension Worksheet
Projected
Benefit
Obligation
Bal.
(a)
$(1,500,000 )
(75,000 )
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
$1,385,000
Right Side of Work Sheet
$75,000
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
(b) Interest Cost
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,000 )
Left Side of Work Sheet
$ 75,000
165,000
Thompson Electronics, Inc
Pension Worksheet
Bal.
(a)
(b)
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
$(1,500,000 )
(75,000 )
(165,000 )
$1,385,000
Unrecognized
Prior Service
Cost
$75,000
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Worksheet
Actual Return on the
Pension Fund
Fair value of pension fund, 12/31/08 $1,513,500
Fair value of pension fund, 1/1/08
1,385,000
Increase in fair value
$ 128,500
Add benefits paid
125,000
Deduct contributions made
(115,000)
Actual return on the pension fund $ 138,500
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
(b) Interest Cost
(c) Actual Return
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,000 )
Left Side of Work Sheet
$ 75,000
165,000
(138,500 )
Thompson Electronics, Inc
Pension Worksheet
Bal.
(a)
(b)
(c)
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
$(1,500,000 )
(75,000 )
(165,000 )
$1,385,000
Unrecognized
Prior Service
Cost
$75,000
138,500
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,000)
No entry on this side
of work sheet
Left Side of Work Sheet
$ 75,000
165,000
(138,500)
Thompson Electronics, Inc
Pension Worksheet
Projected
Benefit
Obligation
Bal.
(a)
(b)
(c)
(d)
$(1,500,000)
(75,000 )
(165,000 )
125,000
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
$1,385,000
138,500
(125,000 )
Right Side of Work Sheet
$75,000
Thompson Electronics, Inc
Pension Worksheet
Amortization of Unrecognized Prior Service Cost
Ten percent (15 employees) are expected to
retire or quit with vesting privileges.
N(N + 1)
2
x D = Total future years of service
10(10 + 1)
x 15 = 825
2
150
x $75,000 = $13,636
825
15 employees
for 10 years
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
(e) PSC Amortization
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,000 )
Left Side of Work Sheet
$ 75,000
165,000
(138,500)
13,636
Thompson Electronics, Inc
Pension Worksheet
Bal.
(a)
(b)
(c)
(d)
(e)
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
$(1,500,000 )
(75,000 )
(165,000 )
$1,385,000
125,000
Unrecognized
Prior Service
Cost
$75,000
138,500
(125,000 )
(13,636 )
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Worksheet
Left Side of
Work Sheet
Net
Pension
Expense
Bal. 1/1/08
(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
(e) PSC Amortization
(1) Annual Pension
Expense Accrual $115,136
Prepaid/
Accrued
Pension
Cash Cost
Periodic
Pension
Expense
Items
$ (40,000)
$ 75,000
165,000
(138,500)
13,636
(115,136 )
Thompson Electronics, Inc
Pension Worksheet
Left Side of
Work Sheet
Net
Pension
Expense
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
Bal. 1/1/08
$ (40,000)
(a) Service Cost
$ 75,000
(b) Interest Cost
165,000
(c) Actual Return
(138,500)
(d) Benefits Paid
(e) PSC Amortization
13,636
(1) Annual Pension
Expense Accrual
$115,136
(115,136 )
(2) Annual Pension
Contribution
(115,000) 115,000
Thompson Electronics, Inc
Pension Worksheet
Bal.
(a)
(b)
(c)
(d)
(e)
(1)
(2)
Projected
Benefit
Obligation
Fair Value
of Pension
Fund
$(1,500,000 )
(75,000 )
(165,000 )
$1,385,000
125,000
Unrecognized
Prior Service
Cost
$75,000
138,500
(125,000 )
(13,636 )
115,000
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Worksheet
Net
Pension
Expense
Bal. 12/31/08
Cash
Prepaid/
Accrued
Pension
Cost
Periodic
Pension
Expense
Items
$ (40,136)
Only column added
on the left side of
the work sheet
Left Side of Work Sheet
Thompson Electronics, Inc
Pension Worksheet
Projected
Benefit
Obligation
12/31/08
$(1,615,000)
$61,364
Fair Value
of Pension
Fund
Unrecognized
Prior Service
Cost
$1,513,500
Prepaid/Accrued Pension Cost 115,000
Cash
115,000
To record 2005 contribution to the pension
plan.
Right Side of Work Sheet
Thompson Electronics, Inc
Pension Activity Info 2009
•
•
•
•
•
•
•
Service cost as reported by actuaries….$87,000
Contributions to pension plan………....$75,000
Benefits paid to retirees………………. $132,000
Actual return on pension plan……….…$26,350
Actuarial change increasing PBO……...$80,000
Settlement interest rate
11.0%
Long-term expected rate of return
10.0%
Thompson Electronics, Inc
Pension Worksheet 2009
Deferral of Difference between
Actual and Expected Return
Balance
Sheet
Income
Statement
Deferred gain
Debit net pension
expense
Inc pension
expense
Inc net pension
liability
Credit net pension
liability
Deferred loss
Dec net pension
liability
Credit net pension
expense
Debit net pension
liability
Dec net pension
expense
Thompson Electronics, Inc
Pension Activity Info 2010
•
•
•
•
•
•
Service cost as reported by actuaries.$115,000
Contributions to pension plan………....$80,000
Benefits paid to retirees………………. $140,000
Actual return on pension plan………..$175,500
Settlement interest rate
11.0%
Long-term expected rate of return
10.0%
Thompson Electronics, Inc
Pension Worksheet 2010
Corridor Amortization
• Corridor amount- the accumulated
unrecognized pension gain/loss from prior
years that is more than an amount defined
by the FASB.
• Amortization is required only on a portion
of the unrecognized net gain or loss that
exceeds 10% of the greater of:
– PBO, or
– market-related value of plan assets at the
beginning of the year.
Corridor Amortization
• May use any amortization method
that:
– equals or exceeds straight-line
amortization over remaining
expected service years of covered
employees, and
– is consistently applied.
Stop and Think
When would a
company find itself
exceeding the
corridor amount?
Minimum Pension Liability
• Net amount of pension liability that must be
reported for underfunded plans.
• Measured as difference between ABO and Fair
Value of Plan Assets.
Minimum Pension
Liability
=
ABO – FV Plan
Assets
Deferred Pension Cost
• An employer may be required to
record an additional pension liability if
they are applying the minimum
liability provisions.
• FASB Statement No. 87 indicates that
the offsetting charge should be to the
Deferred Pension Cost account, which
is an intangible asset.
Deferred Pension Cost
Clapton Corporation computes the following
balances as of December 31, 2008:
Accumulated benefit obligation
$1,250,000
Fair value of the pension fund
1,140,000
Accrued pension cost
16,000
Unrecognized prior service cost
80,000
•The
minimum
$110,000
Deferred
Pension
Costpension liability is80,000
($1,250,000
– $1,140,000).
Excess of Additional
Pension
Liability
over Unrecognized Prior Service Cost 14,000
•An additional
Additional
Pension pension
Liability liability of $94,000
94,000
($110,000 – $16,000) would be recorded.
To recognize additional pension liability.
Disclosure of Pension Plans
Statement No. 132 requires the
following major disclosure
requirements for most publicly
traded companies:
1. A reconciliation between the beginning
and ending balances for the projected
benefit obligation
2. A reconciliation between the beginning
and ending balances in the fair value of
the pension fund
Disclosure of Pension Plans
3. A disclosure of the accumulated benefit
obligation when the ABO exceeds the fair value
of the pension fund
4. The funded status of the plans, the amounts
not recognized in the balance sheet, and the
amount recognized in the balance sheet
5. The components of pension expense for the
period
6. Any effects on the other comprehensive income
section as a result of changes in the additional
pension liability
Disclosure of Pension Plans
7. The assumptions used relating to (a) discount
rate, (b) rate of compensation increase, and (c)
expected long-term rate of return on the
pension fund
8. Disclosure of the percentage of the different
types of investments held in the pension fund
along with a description of the investment
strategy
9. For each of the next 5 years, disclose an
estimate of the amount of cash to be paid in
benefits and the amount of cash to be
contributed by the company to the pension fund.
10. Certain information about postretirement
benefits
Settlements and Curtailments
• Settlement occurs when an employer takes
an irrevocable action that relieves the
employer of primary responsibility for all or
part of the obligation.
• Curtailment arises from an event that
significantly reduces the benefits that will
be provided for present employees’ future
services.
– Termination of an employee earlier than
expected
– Termination or suspension of a pension plan
International Pension
Accounting Standards
IFRS 19 was revised to require that a company’s
pension obligation be measured using the same
approach as is used under U.S. GAAP.
IFRS 19 does not include any provision for the
recognition of an additional minimum liability.
IFRS 19 does not allow the recognition of a net
pension asset unless the amount is less than the
discounted present value of any employee refunds to
the company plus any anticipated reductions in
future pension contributions.
Postretirement Benefits other
than Pensions
•
•
For some firms, other postretirement
benefits like healthcare for retirees
represent a bigger economic obligation
than pension obligations.
Accounting is similar to the accounting for
a defined benefit pension plan. Some
differences include:
1. Often not a function of salary level.
2. They may not be funded.
3. There is no minimum liability provision.