Chapter 13 –Employee Benefits
Chapter 13
Employee Benefits
QUESTIONS FOR REVIEW OF KEY TOPICS
Question 13-1
Pension plans are arrangements designed to provide income to individuals during their
retirement years. Funds are set aside during an employee’s working years so that the accumulated
funds plus earnings from investing those funds are available to replace wages at retirement. An
individual has a pension fund when she or he periodically invests in stocks, bonds, CDs, or other
securities for the purpose of saving for retirement. When an employer establishes a pension plan,
the employer provides some or all of the periodic contributions to the retirement fund.
The motivation for corporations to establish pension plans comes from several sources. Pension
plans provide employees with a degree of retirement security. They may fulfill a moral obligation
many employers feel toward employees. Pension plans often enhance productivity, reduce
turnover, satisfy union demands, and allow employers to compete in the labor market.
Question 13-2
A qualified pension plan gains important tax advantages. The employer is permitted an
immediate tax deduction for amounts paid into the pension fund. Conversely, the benefits to
employees are not taxed until retirement benefits are received. Also, earnings on the funds set aside
by the employer accumulate tax-free. For a pension plan to be qualified for special tax treatment,
these general requirements are often required:
1. It must cover a substantial proportion of employees.
2. It cannot discriminate in favor of highly compensated employees.
3. It must be funded in advance of retirement through contributions to an irrevocable trust fund.
4. Benefits must “vest” after a specified period of service, for example five years.
5. It complies with specific restrictions on the timing and amount of contributions and benefits.
Question 13-3
This is a noncontributory plan because the corporation makes all contributions. When
employees make contributions to the plan in addition to employer contributions, it’s called a
“contributory” plan. This is a defined contribution plan because it promises fixed annual
contributions to a pension fund, without further commitment regarding benefit amounts at
retirement.
Question 13-4
The vested benefit obligation is the defined benefit obligation that is not contingent upon an
employee's continuing service.
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Chapter 13 –Employee Benefits
Answers to Questions (continued)
Question 13-5
The accumulated benefit obligation is the discounted present value of retirement benefits
calculated by applying the pension formula with no attempt to forecast what salaries will be when
the formula actually is applied. The defined benefit obligation is the present value of those benefits
when the actuary includes projected salaries in the pension formula.
Question 13-6
The defined benefit obligation can change due to periodic service cost, accrued interest, revised
estimates resulting in actuarial gains or losses, plan amendments resulting in past service cost, and
the payment of benefits.
Question 13-7
The balance of the plan assets can change due to investment returns, employer contributions,
and the payment of benefits.
Question 13-8
The defined benefit expense reported on the income statement is a composite of periodic
changes that occur in both the defined benefit obligation and the plan assets. These include current
and past service cost, interest cost, and expected return on the plan assets. Remeasurement gains or
losses comprising actuarial gains or losses, and gains or losses on plan assets are taken to other
comprehensive income.
Question 13-9
The service cost in connection with a pension plan is the present value of benefits attributed by
the pension formula to employee service during the period, projecting future salary levels. Under
the projected unit credit approach, each period of service entities the employee to an additional unit
of benefit entitlement.
Question 13-10
The interest cost is the defined benefit obligation outstanding at the beginning of the period
adjusted by settlements during the period multiplied by the actuary's interest (discount) rate. This
is the “interest expense” that accrues on the DBO and is included as a component of defined benefit
expense rather than being separately reported.
Question 13-11
IAS 19 specifies that the actual return be included in the determination of defined benefit
expense. However, the actual return is adjusted for any difference between actual and expected
return, meaning that the expected return is really the amount reflected in the calculation of defined
benefit expense. This “expected return” is deducted as a component of defined benefit expense
rather than being separately reported.
The difference between actual and expected return on plan assets is combined with gains and
losses from actuarial valuations and reported as remeasurement gains or losses in other
comprehensive income.
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Chapter 13 –Employee Benefits
Answers to Questions (continued)
Question 13-12
Past service cost is the change in the present value of the defined benefit obligation for years of
service provided before either the date of an amendment to (or initiation of) a defined benefit plan.
IFRS requires the employer to expose past service cost immediately in net income. Prior service
cost in U.S. GAAP is recognized as other comprehensive income as incurred and then as a
component on accumulated other comprehensive income in the company’s statement of financial
position. The account is allocated (amortized) to defined benefit expense over the service period of
affected employees. The straight-line method allocates an equal amount of the prior service cost to
each year. The service method recognizes the cost each year in proportion to the fraction of the
total remaining “service years” worked in each of these years.
Question 13-13
Gains or losses related to defined benefit plan assets represent the difference between the actual
return on investments and what the return had been expected to be. They are recognized as other
comprehensive income as a component of remeasurement gain or loss. Gains or losses related to the
defined benefit obligation are treated the same way. Actuarial gains or losses are recognized in
other comprehensive income (OCI) as a component of remeasurement gain or loss. In fact, gains
and losses from both sources are combined to determine the net gains or net losses reported in OCI.
Question 13-14
A company’s DBO is not reported among liabilities in the statement of financial position.
Similarly, the plan assets a company sets aside to pay those benefits are not reported among assets
in the statement of financial position. However, firms report the net difference between those two
amounts, as either a defined benefit liability (if underfunded) or a net defined benefit asset (if
overfunded).
Question 13-15
The two components of defined benefit expense that may reduce defined benefit expense are the
return on plan assets (always) and the gain on settlement. A gain may emerge if the settlement
amount is less than the present value of the obligation.
Question 13-16
The components of defined benefit expense that involve delayed recognition in U.S. GAAP are
the prior service cost and gains and losses. These amounts are recognized as other comprehensive
income and then as a component of accumulated other comprehensive income (AOCI). The amount
is amortised to net income only if the net loss-AOCI on net gain-AOCI exceeds an amount equal to
10% of the DBO or 10% of plan assets, whichever is higher. The amount that should be included in
net income is the excess divided by the average remaining service period.
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Chapter 13 –Employee Benefits
Answers to Questions (continued)
Question 13-17
The excess of the actual return on plan assets over the expected return is considered a gain. It
does, in fact, decrease the employer’s defined benefit cost, but not the defined benefit expense. It is
reported as other comprehensive income as it as a component of remeasurement gain or loss. The
difference in returns on the plan assets is offset against actuarial gains or losses and reported as a
single item in OCI.
Question 13-18
The cash contribution is debited to the plan asset. It adds to plan assets, thereby reducing an
underfunded status (DBO > assets) or increasing an overfunded status (assets > DBO). So, if the
plan is underfunded so that a net defined benefit liability exists, the liability is reduced. Otherwise,
if the plan is overfunded so that a net defined benefit asset exists, the asset is increased.
Question 13-19
TFC, Inc. revises its estimate of future salary levels causing its DBO estimate to increase by the
$3 million. The $3 million is considered an actuarial valuation (a component of remeasurement
loss) loss and is reported in the statement of comprehensive income rather than being reported as
part of traditional net income as would occur if included as part of defined benefit expense.
Question 13-20
The difference between the employer’s obligation (DBO) and the resources available to satisfy
that obligation (plan assets) is the funded status of the defined benefit plan. Firms must report the
net difference between those two amounts in the statement of financial position. It’s reported as a
net defined benefit asset if the plan assets exceed the DBO or as a net defined benefit liability if the
DBO exceeds the plan assets.
Question 13-21
The expected postemployment benefit obligation (EPBO) is the actuary's estimate of the total
postemployment benefits (at their discounted present value) expected to be received by plan
participants. When a plan is pay-related, future compensation levels are implicitly assumed. The
defined benefit obligation (DBO) measures the obligation existing at a particular date, rather than
the total amount expected to be earned by plan participants. The DBO is conceptually similar to a
pension plan’s defined benefit obligation. The EPBO has no counterpart in pension accounting.
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13-4
Chapter 13 –Employee Benefits
Answers to Questions (continued)
Question 13-22
The cost of benefits is “attributed” to the years during which those benefits are assumed to be
earned by employees. The attribution period spans each year of service from the employee’s date of
hire to the employee’s “full eligibility date,” which is the date the employee has performed all the
service necessary to have earned all the retiree benefits estimated to be received by that employee.
The approach assigns an equal fraction of the EPBO to each of those years. The attribution period
does not include any years of service beyond the full eligibility date, even if the employee is
expected to work after that date.
Question 13-23
The service cost for pensions reflects additional benefits employees earn from an additional
year’s service, whereas the service cost for retiree health care plans or other postemployment
benefit plans is simply an allocation to the current year of a portion of a fixed total cost.
Question 13-24
The attribution period spans each year of service from the employee’s date of hire to the
employee’s “full eligibility date,” 30 years in this case. The DBO is $10,000 which represents the
portion of the EPBO earned after 15 years of the 30-year attribution period: $20,000 x 15/30 =
$10,000.
Question 13-25
Mid-South Logistics prepares its financial statements according to IFRS. Under U.S. GAAP,
prior service cost 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. On the other hand, under IAS No. 19, it is expensed immediately to the extent it relates to
benefits that have vested. Since Mid-South Logistics is expensing the vested amount, IFRS is
indicated. Furthermore, what’s called prior service cost under U.S. GAAP is called past service
cost under IFRS, and the income statement includes $12 million for vested past service cost.
Question 13-26
U.S. GAAP requires that actuarial gains and losses be included among OCI items in the
statement of comprehensive income, thus subsequently becoming part of AOCI. The net gain or
loss in AOCI in excess of the “corridor” amount is amortised over the remaining service period.
This is not permitted under IAS No. 19. IFRS requires the actuarial gains and losses to be
recognized in full in other comprehensive income. Amortisation and the application of the corridor
threshold is prohibited under IFRS.
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Chapter 13 –Employee Benefits
Answers to Questions (continued)
Question 13-27
The same accounting recognition principle applies to short-term employee benefits as it does to
post-retirement and long-term employment benefits. The timing of expense recognition is the same,
regardless of whether the employee benefits are paid in the current period or future periods.
Employee benefit expense should be recognized during the period of service. If the liability has not
been paid, the employer recognizes a liability.
The difference relates to the measurement of the employee benefit expense and liability. There is
definitely greater complexity in the measurement of the amount of benefits to be recognized under
the post-retirement and long-term employment benefit plans than there is in short-term employee
benefits. Post-retirement and long-term plans require the use of assumptions and estimation.
Further, post-retirement and long-term plans are deferred payments that would be made only over a
very long horizon. Discounting and interest expense recognition is necessary in these long-term
plans. Short-term employee benefits are typically paid within the current period or within 12 months
from the current period. Discounting is not necessary as the time value of money is not material in
the accruals relating to short-term employee benefits.
Question 13-28
Examples of non-accumulating short-term leave arrangements include sick leave, maternity or
paternity leave or military leave. Employees are entitled to take leave only when the qualifying
condition arises (for example, illness or call to military service). The expense is recognized only
when the leave is taken (i.e. as a salary expense during the period of leave) but no liability is
recognized for the unused leave period.
Question 13-29
Accumulating leave arrangements permit the employee to carry forward the unused leave to a
subsequent period. For accumulating paid leave, the employer needs to recognize the expected cost
of paid leave during the period when the employee renders the service. A liability is recognized at
the same time. Accumulated paid leave may be vesting or non-vesting. If vesting, the employee will
be paid off for unused leave when the employee leaves the company. If non-vesting, the employee
will forfeit unused leave on expiry date. In either situation, a liability must be recognized at the end
of the current period for unutilized leave that has not expired. Non-accumulating leave benefits (e.g.
sick leave or maternity leave) are not carried forward to a subsequent period when it is not taken in
the current period. The expense is recognized only when the leave is taken (i.e. as a salary expense
during the period of leave) but no liability is recognized for the unused leave in the current period.
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Chapter 13 –Employee Benefits
Answers to Questions (concluded)
Question 13-30
Accumulated paid leave may be vesting or non-vesting. If vesting, the employee will be paid off
for unused leave when the employee leaves the company. If non-vesting, the employee will forfeit
unused leave on expiry date. In either situation, a liability must be recognized at the end of the
current period for unutilized leave that has not expired. In the case of vested annual leave, the
liability recognizes the monetary value of the full unutilized leave at the end of the reporting period.
It does not matter whether the leave will be used by the employee or not as a cash payment will
have to be made for the unused leave. In the case of non-vested annual leave, the unused leave will
expire at a designated future date (typically, the end of the subsequent financial year end). The
employer has to determine the expected cost which requires an estimate of the amount of leave days
that the employee is likely to utilize in the subsequent period.
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Chapter 13 –Employee Benefits
BRIEF EXERCISES
Brief Exercise 13-1
($ in millions)
Beginning of the year DBO
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of the year DBO
$80
10
4
0
(6)
$88
(5% x $80)
Brief Exercise 13-2
($ in millions)
Beginning of the year DBO
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of the year DBO
$80
?
(5% x $80)
4
0
(6)
$85
Service cost = $85 – 80 – 4 + 6 = $7 million
Brief Exercise 13-3
($ in millions)
Beginning of the year DBO
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of the year DBO
$80
10
4
0
(? )
$85
(5% x $80)
Retiree benefits = $85 – 80 – 4 – 10 = $9 million
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Chapter 13 –Employee Benefits
Brief Exercise 13-4
($ in millions)
Beginning of the year DBO
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of the year DBO
$80
10
4
(5% x $80)
?
(6)
$85
Gain = $85 – 80 – 10 – 4 + 6 = $3 million
Brief Exercise 13-5
($ in millions)
Plan assets
Beginning of the year
Actual return
Cash contributions
Less: Retiree benefits
End of the year
$80
4 (5% x $80)
7
(6)
$85
Brief Exercise 13-6
($ in millions)
Plan assets
Beginning of the year
Actual return
Cash contributions
Less: Retiree benefits
End of the year
$80
4
7
(? )
$83
(5% x $80)
Retiree benefits = $83 – 80 – 4 – 7 = $8 million
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13-9
Chapter 13 –Employee Benefits
Brief Exercise 13-7
($ in millions)
Plan assets
Beginning of the year
Actual return
Cash contributions
Less: Retiree benefits
End of the year
$100
?
(? % x $100)
7
(6)
$104
Return on assets = $104 – 100 – 7 + 6 = $3 million
Rate of return on assets = $3 million ÷ $100 million = 3%
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13-10
Chapter 13 –Employee Benefits
Brief Exercise 13-8
The difference between an employer’s obligation (DBO) and the resources
available to satisfy that obligation (plan assets) is the funded status of the defined
benefit plan. The employer must report the net difference between those two amount
in the statement of financial position. It’s reported as a net defined benefit liability if
the DBO exceeds the plan assets or a net defined benefit asset if the plan assets
exceed the DBO. In the situation described, JDS would report a net defined benefit
liability of $15 million:
($ in millions)
DBO
Plan assets
Net defined benefit liability
$40
25
$15
If the plan assets are $45 million, JDS would report a net defined benefit asset of
$5 million:
($ in millions)
Plan assets
DBO
Net defined benefit asset
$45
40
$5
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13-11
Chapter 13 –Employee Benefits
Brief Exercise 13-9
($ in millions)
Service cost
Interest cost (5% x $80)
Expected return on the plan assets ($5 actual, less $1 gain)
Defined benefit expense
$10
4
(4)
$10
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13-12
Chapter 13 –Employee Benefits
Brief Exercise 13-10
($ in millions)
Service cost
Interest cost
Expected return on the plan assets ($4 actual, plus $2 loss)
Past service cost
Defined benefit expense
$10
4
(6)
20
$28
Actuarial valuation loss
Loss on plan assets ($4 actual, $6 expected)
$3
2
Remeasurement loss reported in OCI
$5
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13-13
Chapter 13 –Employee Benefits
Brief Exercise 13-11
(i)
Defined benefit expense decreases by $10 million as a result of the
expected return on plan assets.
Expected return on plan assets = 10% x $100 million
= $10 million
(ii)
Remeasurement gain in other comprehensive income increases by $20
million as a result of the excess returns on plan assets.
Excess returns on plan assets = Actual returns less expected returns
= $30 million - $10 million
= $20 million
(iii)
Plan assets increase by $30 million as a result of the actual returns on plan
assets.
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13-14
Chapter 13 –Employee Benefits
Brief Exercise 13-12
The net defined benefit liability, which is the difference between the DBO and
plan assets, increases by the combination of the service cost, interest cost, and the
expected return ($70 + 50 – 55 million) as is reflected in the following entry.
To Record Defined benefit Expense
Defined benefit expense (total)................
Plan assets ($55 expected return on assets)
DBO ($70 + 50 + 2) .............................
($ in millions)
67
55
122
The net defined benefit liability (DBO minus plan assets) is affected by the
components of defined benefit expense that change either the DBO or plan assets.
Interest Cost
Expected Return
Past Service Cost
Impact on defined
benefit expense
+
+
Impact on DBO
Impact on plan
assets
+
+
+
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13-15
Chapter 13 –Employee Benefits
Brief Exercise 13-13
Remeasurement gains and losses (either from changing assumptions regarding the
DBO or the return on assets being higher or lower than expected) are not included in
defined benefit expense and net income. They are, however, reported as other
comprehensive income in the period they occur. Accordingly, these gains and losses
are reported in Andrews’s statement of comprehensive income as a gain of $4 million
and a loss of $1 million. Here are the entries:
($ in millions)
Loss–OCI (loss from actual return falling short of expected)
Plan assets ...............................................................
1
DBO ............................................................................
Gain–OCI (gain from change in assumption)....................
4
1
4
The net defined benefit liability in the statement of financial position declines by
the $3 million net effect of the loss and the gain:
($ in millions)
DBO
Less: Plan assets
Net defined benefit liability
$4 
1
$3
The cumulative gain in OCI (equity balance) in the statement of financial position
increases by the net difference of current $1 million Loss–OCI and the current $4
million Gain–OCI, a net increase of $3 million.
($ in millions)
Plus: Loss–OCI
Less: Gain–OCI
Increase in cumulative OCI gains
$1
(4)
$(3)
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13-16
Chapter 13 –Employee Benefits
Brief Exercise 13-14
2021
2022
DBO
$50,000 x 6/30 = $10,000
$54,000 x 7/30 = $12,600
Service Cost
$50,000 x 1 /30 = $1,667
$54,000 x 1 /30 = $1,800
30 year attribution period (age 26-55)
The difference in expected postemployment benefit obligation of $4,000
attributed to past periods ($4000 x 6/30 = $800) is accounted for as an
actuarial valuation loss.
Brief Exercise 13-15
($ in millions)
Beginning of 2021 DBO
Service cost
Interest cost
Gain on DBO
Less: Retiree benefits
End of 2021 DBO
$25
7
2
(1)
(3)
$30
 (8% x $25)
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13-17
Chapter 13 –Employee Benefits
EXERCISES
Exercise 13-1
I
I
D
I
I
1.
2.
3.
4.
5.
D
N
D
I
N
N
6.
7.
8.
9.
10.
11.
Events
Interest cost.
Past service cost.
A decrease in the average life expectancy of employees.
An increase in the average life expectancy of employees.
A plan amendment that increases benefits is made retroactive to
prior years.
An increase in the actuary’s assumed discount rate.
Cash contributions to the pension fund by the employer.
Benefits are paid to retired employees.
Service cost.
Return on plan assets during the year lower than expected.
Return on plan assets during the year higher than expected.
Exercise 13-2
($ in millions)
Beginning of 2021
Current service cost
Interest cost
Loss (gain) on DBO
Past service cost
Less: Retiree benefits
End of 2021
$30
12
3
3
1
(4)
$45
(10% x $30)
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13-18
Chapter 13 –Employee Benefits
Exercise 13-3
I
I
N
D
I
1.
2.
3.
4.
5.
N
N
N
I
N
N
N
6.
7.
8.
9.
10.
11.
12.
Events
Interest cost.
Past service cost.
Excess of the expected return on plan assets over the actual return.
Expected return on plan assets.
A plan amendment that increases benefits is made retroactive to
prior years.
Actuary’s estimate of the DBO is increased.
Cash contributions to the pension fund by the employer.
Benefits are paid to retired employees.
Service cost.
Excess of the actual return on plan assets over the expected return.
Remeasurement loss.
Remeasurement gain.
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13-19
Chapter 13 –Employee Benefits
Exercise 13-4
Requirement 1
($ in millions)
Defined benefit expense (total) .................
12
Remeasurement loss – OCI .....................
2
Plan assets (expected return on assets) ..........
4
DBO ($10 service cost + $6 interest cost + $2 remeasurement loss)
18
Requirement 2
($ in millions)
Defined benefit expense (total) .................
12
Plan assets (expected return on assets) ..........
4
DBO ($10 service cost + $6 interest cost - $2 remeasurement gain)
Remeasurement gain – OCI .................
14
2
Requirement 3
($ in millions)
Defined benefit expense (total) .................
Remeasurement loss – OCI .....................
Plan assets (expected return on assets) ..........
DBO ($10 service cost + $6 interest cost
+ $2 remeasurement loss + $3 past service cost)
15
2
4
21
The remeasurement gain or loss is reported as other comprehensive income in
the statement of comprehensive income.
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13-20
Chapter 13 –Employee Benefits
Exercise 13-5
($ in millions)
Plan assets
Beginning of the year
Actual return
Cash contributions
Less: Retiree benefits
End of the year
$600
48
100
(11)
$737
Exercise 13-6
($ in millions)
DBO:
Beginning of the year
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of the year
$360
?
(10% x $360)
36
0
(54)
$465
Service cost = $465 – 360 – 36 + 54 = $123 million
Exercise 13-7
($ in millions)
Plan assets
Beginning of the year
Actual return
Cash contributions
Less: Retiree benefits
End of the year
$700
77
(11% x $700)
?
(66)
$750
Cash contributions = $750 – 700 – 77 + 66 = $39 million
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13-21
Chapter 13 –Employee Benefits
Exercise 13-8
($ in 000s)
Service cost
Interest cost (6% x $850)
Expected return on the plan assets (6% x $900)
Past service cost
Defined benefit expense
$112
51
(54)
80
$189
* (11% x $900) – (10% x $900)
Exercise 13-9
Under U.S. GAAP, remeasurement loss and prior service cost are not
recognized immediately. A net gain or loss affects pension expense only
if it exceeds an amount equal to 10% of the DBO or 10% of plan assets,
whichever is the higher. In this question the excess of remeasurement
loss of $101,000 over $90,000 is amortised over the remaining service
period from 2022. Likewise, prior service cost of $80,000 is amortised
over the remaining service period from 2022.
($ in 000s)
Service cost
Interest cost
Expected return on plan assets
Pension expense
$112
51
(54)
$109
($ in 000s)
Financing income and expense:
Interest cost (6% x $850)
$ 51
Expected return on the plan assets ($99 actual, less $9 gain*) (90)
Amortization of net loss
1
* (11% x $900) – (10% x $900)
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13-22
Chapter 13 –Employee Benefits
Exercise 13-10
Requirement 1
($ in millions)
Service cost
Interest cost
Expected return on the plan assets (10% x $800)
$20
12
(8)
Defined benefit expense
$24
Requirement 2
Defined benefit expense (calculated above)
Plan assets (expected return on plan assets)
DBO ($20 service cost + $12 interest cost)
Plan assets
Cash (given)
24
8
32
20
20
DBO
Plan assets (given)
9
9
The following entry also would be required although it does not affect the defined
benefit expense or the plan asset funding:
Plan assets
Gain – OCI ($9 actual return, less $8 expected return)
1
1
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13-23
Chapter 13 –Employee Benefits
Exercise 13-11
Requirement 1
($ in 000s)
Service cost
Interest cost (7% x $2,300)
Expected return on the plan assets (7% x $2,400)
Past service cost
$310
161
(168)
325
Defined benefit expense
$628
Requirement 2
Defined benefit expense (calculated above)
628
Plan assets (expected return on assets)
168
DBO ($310 service cost + $161 interest cost + $325 past service cost)
796
Plan assets
48
Gain–OCI ($216 actual return on assets - $168 expected return)
DBO
Gain–OCI (from change in assumption regarding the DBO)
330
Plan assets
Cash (contribution)
245
DBO
Plan assets (retiree payments)
270
48
330
245
270
The gains (excess returns and valuation gains) are reported as other
comprehensive income in the statement of comprehensive income.
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13-24
Chapter 13 –Employee Benefits
Exercise 13-12
Requirement 1
1.2% x service years x final year’s salary =
1.2% x
20
x
$270,000
=
$64,800
Requirement 2
The present value of the retirement annuity at the end of 2044 is
$64,800 x 9.10791* = $590,193
* present value of an ordinary annuity of $1: n=15, i=7% (from Table 4)
Requirement 3
The DBO is the present value of the retirement benefits at the end of 2021:
$590,193 x .18425* = $108,743
*
present value of $1: n=25, i=7% (from Table 2)
Requirement 4
1.2% x 20 x $80,000 = $19,200
$19,200 x 9.10791* = $174,872
$174,872 x .18425** = $32,220
* present value of an ordinary annuity of $1: n=15, i=7% (from Table 4)
** present value of $1: n=25, i=7% (from Table 2)
Requirement 5
1.2% x 21 x $270,000 = $68,040
$68,040 x 9.10791* = $619,702
$619,702 x .19715** = $122,174
* present value of an ordinary annuity of $1: n=15, i=7% (from Table 4)
** present value of $1: n=24, i=7% (from Table 2)
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13-25
Chapter 13 –Employee Benefits
Exercise 13-12 (concluded)
Requirement 6
DBO at the end of 2022
DBO at the end of 2021
Change in DBO
Less: Interest cost: $108,743 x 7%
Service cost:
$122,174
(108,743)
$ 13,431
(7,612)
$ 5,819
The change due to service cost can be verified as follows ($1 difference due to
rounding):
(1.2% x 1yr. x $270,000) x 9.10791 x .19715 =
annual retirement benefits
from 2022 service
to discount
to 2046 *
$5,818
to discount
to 2022 **
* present value of an ordinary annuity of $1: n=15, i=7% (from Table 4)
** present value of $1: n=24, i=7% (from Table 2)
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13-26
Chapter 13 –Employee Benefits
Exercise 13-13
Requirement 1
($ in 000s)
Case 1
Net loss or gain
Less: 10% corridor (threshold)*
Excess
Service period
Amortization
$320
– 331
none
÷ 12
none
Case 2
Case 3
$330
270
$ 60
15
$ 4
$260
170
$ 90
10
$ 9
* 10% times either the DBO or plan assets (beginning of the year), whichever is larger
Case 1
3,310 or 2,800: choose 3,310
Case 2
2,670 or 2,700: choose 2,700
Case 3
1,700 or 1,550: choose 1,700
Requirement 2
($ in 000s)
Case 1
Case 2
Case 3
January 1, 2021 net loss or (gain)
2021 loss (gain) on plan assets
2021 amortization
2021 loss (gain) on DBO
January 1, 2022
$320
(11)
0
(23)
$286
($330)
(8)
4
16
($318)
$260
2
(9)
(265)
($ 12)
Note: The balance in this account is recognized as part of accumulated other
comprehensive income in the statement of financial position.
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13-27
Chapter 13 –Employee Benefits
Exercise 13-14
In the statement of financial position,
Liabilities increase by $274 million:
 The DBO increases by $384 (service cost, interest cost and valuation
loss); plan assets increase by $100 (expected return on assets plus the
gain due to the actual return exceeding expectations). When those
two accounts are reported in the statement of financial position by
netting the two together (DBO less plan assets), the Net defined
benefit liability (underfunded plan) will increase by $284 million.
Shareholders’ equity decreases by $284 million:
Retained earnings:
 Retained earnings decreases by the reduction of earnings by the $292
million expense.
Other comprehensive income:
 Decreases by the $2 million valuation loss and by the $10 million
gain on plan assets.
Retained earnings
OCI
Shareholders’ equity
($292)
8
$284
Journal entries (not required):
To record expense and OCI
($ in 000s)
Defined benefit expense (above)
292
Plan assets (actual return on assets)
100
Actuarial valuation loss – OCI
2
DBO ($224 service cost + $150 interest cost + $8 past service cost + $2 loss) 384
Gain on plan assets – OCI
10
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13-28
Chapter 13 –Employee Benefits
Exercise 13-15
( )s indicate
credits; debits
otherwise
($ in 000s)
DBO
Plan
Assets
Balance,
Jan. 1,
2021
(800)
600
Service
cost
Interest
cost, 5%
Return on
assets
Past service
cost
Actuarial
gain
Cash
funding
Retiree
benefits
Bal., Dec.
31, 2021
OCI
Defined
benefit
Expense
Cash
Net Defined benefit
(Liability) / Asset
(200)
(84)
84
(84)
(40)
40
(40)
(30)
48
120
(120)
48
(18)
(120)
12
(12)
12
68
170
(170)
(862)
546
(30)
214
(68)
68
(68)
(316)
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13-29
Chapter 13 –Employee Benefits
Exercise 13-16
Requirement 1
($ in millions)
Defined benefits expense (calculated below)
Plan assets (expected return on assets)
DBO ($80 service cost + $42 interest cost + $28 past service cost)
* Service cost
Interest cost
Expected return on the plan assets (7% x $400)
Past service cost
Defined benefit expense
122*
28
150
$ 80
42
(28)
28
$ 122
Requirement 2
($ in millions)
Plan assets
Gain–OCI ($32 actual return on assets – $28 expected return)
DBO
Gain–OCI (from change in assumption regarding the DBO)
4
4
14
14
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13-30
Chapter 13 –Employee Benefits
Exercise 13-16 (concluded)
Requirement 3
($ in millions)
Plan assets
Cash (contribution)
90
90
Requirement 4
($ in millions)
DBO
Plan assets (retiree benefit payments)
38
38
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13-31
Chapter 13 –Employee Benefits
Exercise 13-17
List A
List B
d_ 1. Future compensation levels estimated. a. Actual return exceeds expected
f_ 2. All funding provided by the employer. b. Favourable changes in actuarial
assumptions
a_ 3. Credit to OCI and debit to
c. Vested benefit obligation
plan assets.
d. Defined benefit obligation
l_ 4. Retirement benefits specified
e. Choice between DBO and ABO
by formula.
f. Noncontributory pension plan
e_ 5. Trade-off between relevance
g. Accumulated benefit obligation
and reliability.
h. Plan assets
b_ 6. Remeasurement gains - OCI
i. Interest cost
g_ 7. Current pay levels implicitly assumed. j. Delayed recognition in earnings
i_ 8. Created by the passage of time.
k. Defined contribution plan
c_ 9. Not contingent on future employment. l. Defined benefit plan
k_ 10. Risk borne by employee.
m. Past service cost
h_ 11. Increased by employer contributions. n. Remeasurement loss - OCI
m_ 12. Caused by plan amendment.
n_ 13. Loss on plan assets.
j_ 14. U.S. GAAP amortization of prior service costs
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13-32
Chapter 13 –Employee Benefits
Exercise 13-18
Requirement 1
A decrease in the discount rate from 7% to 6% increases the defined benefit
obligation. The lower the discount rate in a present value calculation, the higher the
present value. When the obligation increases, it is reported as a loss.
Requirement 2
Reporting actuarial gains and losses among OCI items in the statement of
comprehensive income is required under IAS No. 19. Gains and losses included in
comprehensive income rather than in the income statement, under IAS No. 19 cannot
subsequently be amortized to expense and recycled or reclassified from other
comprehensive income as is required under U.S. GAAP (if the net gain or net loss
exceeds the 10% threshold).
($ in millions)
Loss–OCI (from change in discount rate)
DBO
13
13
Requirement 3
($ in millions)
Loss–OCI (from change in discount rate)
DBO
13
13
U.S. GAAP requires that actuarial gains and losses be included among OCI items
in the statement of comprehensive income, thus subsequently become part of AOCI.
The amount is subsequently amortised to expense and reclassified from other
comprehensive income (if the net gain or net loss exceeds the 10% threshold)
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13-33
Chapter 13 –Employee Benefits
Exercise 13-19
Requirement 1
($ in millions)
Defined benefit expense (calculated below)
89*
Plan assets (expected return on assets)
25
DBO ($82 service cost + $24 interest cost + $8 past service cost)
114
* Service cost
Interest cost
Expected return on the plan assets
Past service cost
Defined benefit expense
$ 82
24
(25)
8
$ 89
Requirement 2
Journal entries to record gains and losses
($ in millions)
DBO (given) ..............................................
Gain–OCI (from change in assumption regarding the DBO)
Plan assets ................................................
Gain–OCI ($40 actual return on assets – $25 expected return)
Requirement 3
10
10
15
15
($ in millions)
Plan assets
Cash (contribution)
70
Plan assets
Cash (benefit payments)
40
70
40
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13-34
Chapter 13 –Employee Benefits
Exercise 13-19 (continued)
Requirement 4
DBO
New gain
Benefits paid
480 Jan. 1 balance
82 Service cost, 2021
24 Interest cost
8 Past service cost
10
40
_________________
544 Dec. 31 balance
Plan Assets
Jan. 1 balance
Expected return
New gain
Cash funding
500
25
15
70
40 Benefits paid
_________________
Dec. 31 balance 570
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13-35
Chapter 13 –Employee Benefits
Exercise 13-19 (concluded)
SHAREHOLDERS’ EQUITY:
OTHER COMPREHENSIVE INCOME
Gain–OCI
10
15
25
New gain - DBO
New gain – Plan assets
Dec 31 balance
Requirement 5
The defined benefit plan is overfunded. Beale will report a net defined benefit asset
of $26 million in its 2021 statement of financial position:
Plan assets
2020
2021
$500
$570
DBO = Net defined benefit asset
–
–
–
480 =
544 =
$20
$26
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13-36
Chapter 13 –Employee Benefits
Exercise 13-20
( )s indicate
credits; debits
otherwise
($ in millions)
Balance,
Jan. 1, 2021
Service cost
Interest cost,
5%
Expected
return on
assets
Gain on
assets
Past
service
cost
Gain on
DBO
Cash
funding
Retiree
benefits
Balance,
Dec. 31,
2021
DBO
Plan
Assets
OCI
Defined
benefit
Expense
Cash
Net Defined benefit
(Liability) / Asset
(82)
82
20
(82)
(24)
24
(24)
(25)
25
(480)
500
25
15
(15)
15
(8)
8
10
(8)
(10)
10
70
40
(40)
(544)
570
(25)
89
(70)
70
(70)
26
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13-37
Chapter 13 –Employee Benefits
Exercise 13-21
Requirement 1
($ in millions)
Service cost
Interest cost
Expected return on the plan assets (10% x $240)
Past service cost
Defined benefit expense
$ 60
36
(24)
12
$ 84
Requirement 2
($ in millions)
Defined benefit expense (calculated above)
84
Plan assets (expected return on assets)
24
DBO ($60 service cost + $36 interest cost + $12 past service cost)
108
Plan assets
Gain–OCI ($27 actual return on assets – $24 expected return)
3
3
Plan assets
Cash (funding contribution)
60
DBO
Plan assets (retiree benefits)
27
60
27
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13-38
Chapter 13 –Employee Benefits
Exercise 13-22
Under U.S. GAAP, past service cost (known as prior service cost) is included
among other comprehensive income items in the statement of comprehensive
income and thus subsequently becomes part of accumulated other comprehensive
income where it is amortized over the average remaining service period.
Requirement 1
($ in millions)
Service cost
$ 60
Interest cost
36
Expected return on the plan assets ($27 actual, less $3 gain)
(24)
Amortization of prior service cost
0*
Amortization of net gain or net loss
0
Defined benefit expense
$ 72
*Since the amendment was at the end of the year, there is no amortization of prior
service cost in 2021.
Requirement 2
($ in millions)
Defined benefit expense (calculated above)
Plan assets (expected return on assets)
DBO ($60 service cost + $36 interest cost)
Plan assets ...........................................
Gain–OCI ($27 actual return on assets – $24 expected return)
72
24
96
3
3
Prior service cost (from 2021 amendment)
DBO .......................................................
12
Plan assets
Cash (funding contribution)
60
DBO
Plan assets (retiree benefits)
27
12
60
27
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13-39
Chapter 13 –Employee Benefits
Exercise 13-23
B
1.
Change in actuarial assumptions for a defined benefit plan.
C
2.
Determination that the defined benefit obligation under a defined
benefit plan exceeded the fair value of plan assets at the end of the
previous year by $17,000. The only defined benefit-related amount on
the statement of financial position was net defined benefit liability of
$30,000.
B
3.
Plan assets for a defined benefit plan achieving a rate of return in excess
of the amount anticipated.
D
4.
Instituting a defined benefit plan for the first time and adopting IFRS
for employers’ accounting for defined benefits and other
postemployment plans.
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13-40
Chapter 13 –Employee Benefits
Exercise 13-24
Requirement 1
$72,000
EPBO
2021
Requirement 2
$72,000 x 2/[2+28]
EPBO
2021
fraction
earned
= $4,800
DBO
2021
Requirement 3
$72,000 x
EPBO
2021
1.06
to accrue
interest
= $76,320
EPBO
2022
Requirement 4
$76,320 x
EPBO
2022
3/30
fraction
earned
= $7,632
DBO
2022
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13-41
Chapter 13 –Employee Benefits
Exercise 13-25
Requirement 1
$50,000 x
EPBO
3/25
fraction
earned
= $6,000
DBO
Requirement 2
$6,000 (beginning DBO) x 6% = $360
Requirement 3
$53,000 x
EPBO
2021
1/25
attributed
to 2021
= $2,120
service
cost
Requirement 4
Postemployment benefit expense ($360 + 2,120) ...
Postemployment benefit liability ....................
2,480
2,480
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13-42
Chapter 13 –Employee Benefits
Exercise 13-26
Requirement 1
22 years
Requirement 2
$44,000
Requirement 3
$44,000 x
EPBO
?/22
fraction
earned
$44,000 x
EPBO
10/22
fraction
earned
= $20,000
DBO
= $20,000
DBO
10 years before 2020: beginning of 2009 (or end of 2008)
Requirement 4
$
?
x
EPBO
beg.
1.10
interest
multiple
$40,000 x
EPBO
beg.
1.10
interest
multiple
= $44,000
EPBO
end
= $44,000
EPBO
end
or, alternatively:
$
?
x
EPBO
$40,000 x
EPBO
9/22
fraction
earned
9/22
fraction
earned
= $16,364
DBO
= $16,364
DBO
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13-43
Chapter 13 –Employee Benefits
Exercise 13-27
Requirement 1
($ in 000s)
Service cost
Interest cost (7% x $700)
Return on the plan assets (10% x $50)
Postemployment benefit expense
$124
49
(5)
$168
Requirement 2
($ in 000s)
Postemployment benefit expense (calculated above).....................
Plan assets (expected return on assets).............................................
DBO ($124 service cost + $49 interest cost) .................................
Remeasurement loss ...................................................................
Plan assets ($5 actual return - $3.50 expected return) .........................
DBO ......................................................................................
168
5
173
8.50
1.50
10
Plan assets ..................................................................................
Cash (contributions to fund) .......................................................
185
DBO ...........................................................................................
Plan assets (retiree benefits)......................................................
87
185
87
The remeasurement loss reported as other comprehensive income on the statement of
comprehensive income.
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13-44
Chapter 13 –Employee Benefits
Exercise 13-28
Requirement 1
($ in 000s)
Actuarial valuation loss
Excess returns on plan assets ([10% - 9%] x $500)
Remeasurement loss
$39
(5)
$ 34
Requirement 2
($ in 000s)
DBO
Plan assets
Net defined
benefit liability
Balance Jan 1,
2021
(2,800)
500
(2,300)
Postemployment
benefit expense
(257)
45
(212)
5
5
Excess returns
Actuarial
valuation loss
(39)
(39)
Contributions
15
15
Retiree benefits
6
(6)
-
Balance Dec 31,
2021
(3,075)
544
(2,531)
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13-45
Chapter 13 –Employee Benefits
Requirement 3
($ in ‘000s)
Postemployment benefit expense
212
Plan assets (expected return on assets of 9% x $500)
45
DBO
257
Remeasurement loss – OCI
Plan assets
DBO
34
5
39
Plan assets
Cash (contributions to fund)
15
DBO
Plan assets (retiree benefits)
6
15
6
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13-46
Chapter 13 –Employee Benefits
Exercise 13-29
Requirement 1
($ in millions)
Service cost, 2021
Interest cost
Past service cost
Postretirement benefit expense
$34
12  (8% x [$130 + 20])
20
$66
Requirement 2
($ in millions)
Postemployment benefit expense (calculated above).....................
DBO ($34 service cost + $12 interest cost $20 past service cost) ....
66
66
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13-47
Chapter 13 –Employee Benefits
Exercise 13-30
Requirement 1
($ in 000s)
Balance Jan 1, 2021
Service cost, 2021
Past service cost amendment
Interest cost (8% x [$530 – 80])*
Balance Dec 31, 2021
(530)
(114)
80
(36)
$ (600)
*Past service cost amendment arose on Jan 1, 2021.
Requirement 2
Service cost
Interest cost
Return on plan assets
Past service cost amendment
Postretirement benefit expense
$114
36  (8% x [$530 – 80])
(0)
(80)
$70
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13-48
Chapter 13 –Employee Benefits
Exercise 13-31
Requirement 1
Amount of annual retirement benefits for the service years earned to date:
1.2% x service years x final year’s salary
= 1.2% x 10 x $100,000
= 12,000
The present value (n=20, I = 10%) of the retirement annuity at the end of 2030
= $12,000 x 8.51356
= $102,163
The present value (n=10, I = 10%) of the retirement benefits at 2021
= $102,163 x 0.38554
= $39,388
Requirement 2
Amount of annual retirement benefit for the service years earned to date under the
revised formula (applied to 2021 and prior years)
1.5% x service years x final year’s salary
= 1.5% x 10 x $100,000
= 15,000
The present value (n=20, I = 10%) of the retirement annuity at the end of 2030
= $15,000 x 8.51356
= $127,703
The present value (n=10, I = 10%) of the retirement benefits at 2021
= $127,703 x 0.38554
= $49,235
Past service cost
= Difference in the DBO before and after the amendment
= $49,235 - $39,388
= $9,487
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13-49
Chapter 13 –Employee Benefits
Requirement 3
Current service cost in 2022
= (1.5% x 1 year x $100,000) x 8.51356 x 0.42410
= $5,415
Requirement 4
DBO with revised estimate
= (1.5% x 11 year x $120,000) x 8.51356 x 0.42410
= $71,490*
DBO with original estimate
= (1.5% x 11 year x $100,000) x 8.51356 x 0.42410
= $59,575
Loss on DBO
= $71,490 - $59,575
= $11,915
*DBO balance at end 2022 may be substantiated as follows:
DBO balance Jan 1, 2022
$39,388
Past service cost on Jan 1, 2022
9,847
Interest cost (10% x [$39,388 + $9,847])
4,923
Current service cost
5,415
Loss on DBO
11,915
DBO balance Dec 31, 2022
71,488 ($2 rounding up)
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13-50
Chapter 13 –Employee Benefits
Exercise 13-32
Requirement 1
Ms Shin Mr Black
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day)
$2,219
Unused leave from 2020, Dec 31, 2021
2
Liability for 2020 unused leave, Dec 31 2021
(Unused leave x Salary per day)
$740
Ms Hiroko
$1,863
5
$2,521
4
$1,164
$1,008
Requirement 2
Short-term employee benefit expense:
Annual salaries
Accumulating vested paid leave
2,521)
$267,000
6,603*($2,219
+
1,863
+
$273,603
Analysis by individual employee
Employee
Days in annual salary
Days of unused leave
Salary per day
Short-term employee benefit
expense
Ms Shin
365
9
374
$246.58
Mr Black
365
8
373
$233
Ms Hiroko
365
10
375
$252,05
$92,219
$86,863
$94,521
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Chapter 13 –Employee Benefits
Exercise 13-33
Requirement 1
When accumulated leave is non-vesting, the expected cost to the employer is the
number of days that are likely to be utilized by the employee before the leave
expires.
Ms Shin Mr Black
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day
$2,219
x Rate of utilization)
Unused leave from 2020, Dec 31, 2021
3
Liability for 2020 unused leave, Dec 31, 2021
0
(These leaves will be forfeited)
Ms Hiroko
$1,677
$2,395
5
0
4
0
Requirement 2
Short-term employee benefit expense:
Annual salaries
Accumulating non-vested paid leave
2,395)
$267,000
6,290*($2,219
+
1,677
+
$273,290
Analysis by individual employee
Employee
Days in annual salary
Unused leave x Expected usage
Salary per day
Short-term employee benefit
expense
Ms Shin
365
9
374
$246.58
Mr Black
365
7.2
372.2
$233
Ms Hiroko
365
9,5
374.5
$252.05
$92,219
$86,677
$94,395
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Chapter 13 –Employee Benefits
Exercise 13-34
Requirement 1
No liability exists
Requirement 2
Short-term employee benefit expense:
Annual salaries
Non-accumulating leave
$267,000
0
$267,000
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Chapter 13 –Employee Benefits
Exercise 13-35
Requirement 1
The specific citation that describe the guidelines are found in IAS 19 (2011)
Employee benefits
a. What is the objective for attributing expected postretirement benefit
obligations to years of service: IAS 19 paragraph 71
b. When does the attribution period for expected postretirement benefits begin
for an employee: IAS 19 paragraph 72
c. When does the attribution period for expected postretirement benefits end
for an employee: IAS 19 paragraph 73
Requirement 2
Specifically, the guidelines are:
Attribution
Para 71 Attribution is the process of assigning the expected cost of benefits to
periods of employee service. The general objective is to assign to each year
of service the cost of benefits earned or assumed to have been earned in that
year.
Para 72 The beginning of the attribution period generally is the date when
employee service begins and the employer has a constructive obligation to
the employee on account of employee service rendered.
Para 73 Attribution ends when further service by the employee will no longer lead
to a material amount of further benefits.
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Chapter 13 –Employee Benefits
Exercise 13-36
IAS 19 Employee Benefits represents the source of authoritative international
accounting principles on recognition, measurement and disclosures of defined
contribution and defined benefit plans. The specific citation for each of the following
items is:
1. The disclosure required in the notes to the financial statements for plan assets are
found in paragraph 140 to 143 primarily.
2. Recognition of the net defined benefit asset or liability is dealt with in paragraphs
57 and 58 of IAS 19.
3.
Disclosures required in the notes to the financial statements for expense for a
defined contribution plan are found in paragraphs 53 and 54 of IAS 19.
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Chapter 13 –Employee Benefits
PROBLEMS
Problem 13-1
Requirement 1
measurement date

2021
2007
2041
2059
___________________________________________________
15 years
20 years
18 years
Service period
Retirement
Requirement 2
1.6% x 15 x $90,000 = $21,600
Requirement 3
The present value of the retirement annuity as of the retirement date (end
of 2041) is:
$21,600 x 10.05909* = $217,276
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
The ABO is the present value of the retirement benefits at the end of 2021:
$217,276 x .25842* = $56,148
* present value of $1: n=20, i=7% (from Table 2)
Requirement 4
1.6% x 18 x $100,000 = $28,800
$28,800 x 10.05909* = $289,702
$289,702 x .31657** = $91,711
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=17, i=7% (from Table 2)
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Chapter 13 –Employee Benefits
Problem 13-2
Requirement 1
measurement date

2021
2007
2041
2059
___________________________________________________
15 years
20 years
18 years
Service period
Retirement
Requirement 2
1.6% x 15 x $240,000 = $57,600
Requirement 3
The present value of the retirement annuity as of the retirement date (end of
2041) is:
$57,600 x 10.05909* = $579,404
[This is the lump-sum equivalent of the retirement
annuity as of the retirement date]
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
The DBO is the present value of the retirement benefits at the end of 2021:
$579,404 x .25842* = $149,730
* present value of $1: n=20, i=7% (from Table 2)
Requirement 4
1.6% x 18 x $240,000 = $69,120
$69,120 x 10.05909* = $695,284
$695,284 x .31657** = $220,106
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=17, i=7% (from Table 2)
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Chapter 13 –Employee Benefits
Problem 13-3
Requirement 1
1.6% x 14 x $240,000 = $53,760
$53,760 x 10.05909* = $540,777
$540,777 x .24151** = $130,603
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=21, i=7% (from Table 2)
Requirement 2
1.6% x 1 x $240,000 = $3,840
Requirement 3
$3,840 x 10.05909* = $38,627
$38,627 x .25842** = $9,982
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=20, i=7% (from Table 2)
Requirement 4
$130,603 x 7% = $9,142
Requirement 5
DBO at the beginning of 2021 (end of 2020)
Service cost:
Interest cost: $130,603 x 7%
DBO at the end of 2021
Note:
$130,603
9,982
9,142
$149,727
In requirement 3 of the previous problem this same amount is calculated without
separately determining the service cost and interest elements (allowing for a $3
rounding adjustment)
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Chapter 13 –Employee Benefits
Problem 13-4
Requirement 1
DBO Without Amendment
DBO With Amendment
1.6% x 15 yrs. x $240,000 = $57,600
1.75% x 15 yrs. x $240,000 = $63,000
$57,600 x 10.05909* = $579,404
$63,000 x 10.05909* = $633,723
$579,404 x .25842** = $149,730
$633,723 x .25842** = $163,767


$14,037
Past service cost
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=20, i=7% (from Table 2)
Alternative calculation:
0.15% x 15 yrs x $240,000 = $5,400
$5,400 x 10.05909* = $54,319
$54,319 x .25842** = $14,037
Requirement 2
IFRS  The past service cost is of $14,037 is expensed off immediately and
included as a component of defined benefit expense.
U.S. GAAP  The prior service cost is amortized over the expected remaining
service period.
$14,037 ÷ 20 years (expected remaining service) = $702
Requirement 3
1.75% x 1 x $240,000 = $4,200
$4,200 x 10.05909* = $42,248
$42,248 x .27651** = $11,682
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Chapter 13 –Employee Benefits
* present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
** present value of $1: n=19, i=7% (from Table 2)
Requirement 4
$163,767 x 7% = $11,464
Requirement 5
Service cost (from req. 3)
Interest cost (from req. 4)
Return on the plan assets (10% x $150,000 )
Past service cost (from req. 2)
Defined benefit expense
$11,682
11,464
(15,000)
14,037
$22,183
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Chapter 13 –Employee Benefits
Problem 13-5
DBO With Previous Rate
DBO With Revised Rate
1.6% x 15 yrs x $240,000 = $57,600
1.6% x 15 yrs x $240,000 = $57,600
$57,600 x 10.059091 = $579,404
$57,600 x 9.371893 = $539,821
$579,404 x .258422 = $149,730
$539,821 x .214554 = $115,819


$33,911
Gain on DBO
1
2
3
4
present value of an ordinary annuity of $1: n=18, i=7% (from Table 4)
present value of $1: n=20, i=7% (from Table 2)
present value of an ordinary annuity of $1: n=18, i=8% (from Table 4)
present value of $1: n=20, i=8% (from Table 2)
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Chapter 13 –Employee Benefits
Problem 13-6
1.
2.
3.
4.
Defined Benefit Obligation
Balance, January 1, 2021
Service cost
Interest cost (6% x $0)
Benefits paid
Balance, December 31, 2021
Service cost
Interest cost (6% x $150)
Benefits paid
Balance, December 31, 2022
Plan Assets
Balance, January 1, 2021
Actual return on plan assets (10% x $0)
Contributions, 2021
Benefits paid
Balance, December 31, 2021
Actual return on plan assets (10% x $160)
Contributions, 2022
Benefits paid
Balance, December 31, 2022
Defined Benefit Expense – 2021
Service cost
Interest cost (6% x $0)
Expected return on the plan assets (6% x $0)
Defined benefit expense
Defined Benefit Expense – 2022
Service cost
Interest cost (6% x $150)
Expected return on the plan assets (6% x $160)
Defined benefit expense
Net defined benefit asset or net defined benefit liability
DBO
Plan assets
Net defined benefit asset, Dec. 31, 2021
DBO
Plan assets
($ in 000s)
$ 0
150
0
(0)
$150
200
9
(0)
$359
$ 0
0
160
(0)
$160
16
170
(0)
$346
$150
0
0
$150
$200
9
(9.6)
$199.4
$150
160
$ 10
$359
346
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Chapter 13 –Employee Benefits
Net defined benefit liability, Dec. 31, 2022
$ 13
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Chapter 13 –Employee Benefits
Problem 13-7
Requirement 1
($ in 000s)
Actuarial valuation gain
Loss on plan assets ([9% -10%] x $1,100)
Remeasurement gain
Requirement 2
Service cost
Interest cost (10% x $1,400)
Defined benefit expense
$23
(11)
$ 12
$300
140
$440
Requirement 3
Defined Benefit Obligation
Balance, January 1, 2021
Interest cost
Service cost
Actuarial valuation gain
Retiree benefits paid
Balance, December 31, 2021
$1,400
140
300
(23)
(150)
$1,667
Plan Assets
Balance, January 1, 2021
Expected return on plan assets
Retiree benefits paid
Balance, December 31, 2021
$1,100
110
(150)
$1060
Net defined benefit liability
$607
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Chapter 13 –Employee Benefits
Problem 13-8
( )s indicate
credits; debits
otherwise
($ in millions)
Balance, Jan.
1, 2021
Current
service
cost
Interest
cost, 10%
Expected
return on
assets
Loss on
assets
Valuation
loss on
DBO
Past service
cost
Cash
funding
Retiree
benefits
Bal., Dec.
31, 2021
DBO
Plan
Assets
(830)
680
OCI
Defined
Benefit
Expense
Cash
Net Pension
(Liability) / Asset
(150)
(74)
74
(74)
(83)
83
(83)
(68)
68
68
(7)
(13)
7
(7)
13
(13)
(40)
40
84
50
(50)
(990)
775
20
129
(40)
(84)
84
(84)
(215)
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Chapter 13 –Employee Benefits
Problem 13-8 (concluded)
Calculations:
Interest cost = $830 x 10% = $83
Expected return on assets = $680 x 10% = $68
Requirement 2
($ in millions)
Defined benefit expense (total) ..................................................
Plan assets (expected return on plan assets) ....................................
DBO ($74 service cost + $83 interest cost + $40 past service cost) ..
129
68
197
The amortization amounts are reported as other comprehensive income in the
statement of comprehensive income
Requirement 3
Record remeasurement losses
($ in millions)
Loss–OCI ($61 actual return on assets less than $68 expected return)
Plan assets ............................................
7
Loss–OCI (from change in assumption regarding the DBO)
DBO .....................................................................................
13
7
13
Requirement 4
($ in millions)
Plan assets
Cash (contribution to plan assets)
84
DBO
Plan assets (retiree benefits)
50
84
50
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Chapter 13 –Employee Benefits
Problem 13-9
1.
Defined Benefit expense
($ in 000s)
Service cost
$60
Interest cost (5% x $320)
16
Return on the plan assets (5% x $400) (20)
Defined Benefit expense
$56
Remeasurement gain
Excess return on plan assets ([9% -5%] x $400,000)
2.
3.
4.
Defined Benefit Obligation
Balance, January 1
Service cost
Interest cost
Benefits paid
Balance, December 31
$320
60
16
(44)
$352
Plan Assets
Balance, January 1
Actual return on plan assets
Contributions 2021
Benefits paid
Balance, December 31
$400
36
120
(44)
$512
16
16
Net Defined Benefit Asset or Net Defined Benefit Liability
DBO
Plan assets
Net defined benefit asset, Dec. 31, 2021
$352
512
$160
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Chapter 13 –Employee Benefits
Problem 13-9 (concluded)
5. Journal Entries
($ in 000s)
Defined benefit expense (total) ..................................................
Plan assets (expected return on plan assets) ....................................
DBO ($60 service cost + $16 interest cost) ..................................
56
20
Plan assets ([9% - 5%] x $400,000) .........................................
Gain – OCI ............................................................................
16
Plan assets
Cash (contribution to plan assets)
76
16
120
120
DBO
Plan assets (retiree benefits)
44
44
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Chapter 13 –Employee Benefits
Problem 13-10
Requirement 1
($ in millions)
$ 75
45
Service cost
Interest cost
Expected return on the plan assets
(9.375%* x $300)
Past service cost
Defined benefit expense
(28.125)
12
$ 103.875
* Discount rate is inferred from interest cost on DBO (45/480 = 9.375%)
Requirement 2
($ in millions)
Defined benefit expense (calculated above)
103.875
Plan assets (expected return on assets: 9.375% x $300)
28.125
DBO ($75 service cost + $45 interest cost + $12 past service cost) 132
DBO
Gain–OCI* (change in assumption)
22
22
Loss–OCI ($20 actual return– $28.125 expected return)
Plan assets
8.125
8.125
Plan assets
Cash (funding contribution)
60
DBO
Plan assets (retiree benefits)
36
60
36
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Chapter 13 –Employee Benefits
Problem 13-10 (concluded)
Requirement 3
($ in millions)
DBO balance, January 1
$480
Service cost
75
Interest cost
45
Gain from change in actuarial assumption (22)
Past service cost
12
Benefits paid
(36)
DBO balance, December 31
$554
Plan assets balance, January 1
Actual return on plan assets
Contributions 2021
Benefits paid
Plan assets balance, December 31
$300
20
60
(36)
$344
Because the plan is underfunded, Electronic Distribution will report a net defined
benefit liability:
DBO balance, December 31
$554
Plan assets balance, December 31
(344)
Net defined benefit liability
$210
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Chapter 13 –Employee Benefits
Problem 13-11
Requirement 1
($ in millions)
Service cost
Interest cost
Expected return on the plan assets
($20 actual, plus $4 loss)
Amortization of prior service cost
Amortization of net gain or net loss- AOCI
Defined benefit expense
$ 75
45
(24)
0*
0
$96
* Since the amendment was at the end of the year, there is
no amortization of past service cost in 2021.
** 2/3 of PSC that relates to benefits that have vested
Requirement 2
($ in millions)
Pension expense (calculated above)
Plan assets (expected return on assets: 8% x $300)
DBO ($75 service cost + $45 interest cost)
Prior service cost – OCI (From 2021 amendment)
PBO (unvested past service cost)
PBO
Gain - OCI * (change in assumption)
Loss - OCI ($20 actual return – $24 expected return)
Plan assets
96
24
120
4
4
22
22
4
4
Plan assets
Cash (funding contribution)
60
PBO
Plan assets (retiree benefits)
36
60
36
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Chapter 13 –Employee Benefits
Problem 13-11 (concluded)
Requirement 3
($ in millions)
PBO balance, January 1
$480
Service cost
75
Interest cost
45
Gain from change in actuarial assumption (22)
Prior service cost (new)
12
Benefits paid
(36)
PBO balance, December 31
$554
Plan assets balance, January 1
Actual return on plan assets
Contributions 2021
Benefits paid
Plan assets balance, December 31
$300
20
60
(36)
$344
Because the plan is underfunded, Electronic Distribution will report a net pension
liability:
PBO balance, December 31
$554
Plan assets balance, December 31
(344)
Net pension liability
$210
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Chapter 13 –Employee Benefits
Problem 13-12
Requirement 1
($ in millions)
Service cost (given)
Interest on DBO (2021: 10% x $2,200*; 2022: 10% x $2,560*)
Expected return (2021: 10% x $1,600; 2022: 10% x $1,940**)
Past service cost ($400 ÷ 10 years)
Defined benefit expense
*DBO
Balance, 1-1-2021
Past service cost
Balance, 1-2-2021
Interest 10%
Service cost
Payments
Balance, 12-31-2021
Interest 10%
Service cost
Payments
Balance, 12-31-2022
2021
$520
220
(160)
400
$980
2022
$570
256
(194)
0
$632
**Plan Assets
$1,800
400
$2,200
220
520
(380)
$2,560
256
570
(450)
$2,936
Balance, 1-1-2021
2021 contribution
2021 actual return
Payments
Balance, 12-31-2021
2022 contribution
2022 actual return
Payments
Balance, 12-31-2022
$1,600
540
180
(380)
$1,940
590
210
(450)
$2,290
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Chapter 13 –Employee Benefits
Problem 13-12 (continued)
Requirement 2
($ in millions)
2021
Defined benefit expense (total) .................................................. 980
Plan assets (expected return on plan assets) .................................... 160
DBO ($520 service cost + $220 interest cost + $400 past service cost)
1140
2022
Defined benefit expense (total) ..................................................
Plan assets (expected return on plan assets) ....................................
DBO ($570 service cost + $256 interest cost) ...............................
632
194
826.0
Requirement 3
($ in millions)
2021
Plan assets .......................................................
Gain–OCI ($180 actual return on assets less $160 expected return)
2022
Plan assets ................................................................................
Gain–OCI ($210 actual return on assets less $194 expected return)
20
20
16
16
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Chapter 13 –Employee Benefits
Problem 13-12 (concluded)
Requirement 4
($ in millions)
2021
Plan assets
Cash (contribution to plan assets)
540
2022
Plan assets
Cash (contribution to plan assets)
590
2021
DBO
Plan assets (benefit payments)
380
2022
DBO
Plan assets (benefit payments)
450
540
590
380
450
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Chapter 13 –Employee Benefits
Problem 13-13
Balance at Jan. 1
Past service cost
Service cost
Defined Benefit
Defined benefit
Obligation
Plan Assets
Expense
$
0
$
0
2,000,000
2,000,000
250,000
250,000
Interest cost
($2,000,000* x 9%)
Return on plan assets
Actual ($2,000,000** x 11%)
Expected ($2,000,000** x 9%)
Retirement payments
Cash contribution
Balance at Dec. 31
Note:
*
180,000
180,000
220,000
(180,000)
(16,000)
$2,414,000
(16,000)
250,000
$2,454,000 $250,000
The $40,000 gain ($220,000 – 180,000), while not included in defined
benefit expense, is reported as a gain–OCI in the statement of
comprehensive income.
Since the plan was adopted at the beginning of the year, the past service cost
increased the DBO at that time.
** Since the past service cost was funded at the beginning of the year, the plan
assets were increased at that time.
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Chapter 13 –Employee Benefits
Problem 13-14
1. Actual return on plan assets
($ in 000s)
Plan assets
Beginning of 2021
Actual return
Cash contributions
Less: Retiree benefits
End of 2021
$2,400
?
245
(270)
$2,591
Actual return = $2,591 – 2,400 – 245 + 270 = $216
2. Loss or gain on plan assets
Expected return
Actual return
Gain on plan assets
$168 (7% x $2,400)
(216)
$48
3. Service cost
DBO:
Beginning of 2021
Service cost
Interest cost
Loss (gain) on DBO
Less: Retiree benefits
End of 2021
$2,300
?
161 (7% x $2,300)
0
(270)
$2,501
Service cost = $2,501 – 2,300 – 161 + 270 = $310
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Chapter 13 –Employee Benefits
Problem 13-14 (concluded)
4. Defined benefit expense
($ in 000s)
Service cost
Interest cost
Expected return (7% x $2,400)
Defined benefit expense
$310
161
(168)
$303
(7% x $2,300)
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Chapter 13 –Employee Benefits
Problem 13-15
( )s indicate
credits; debits
otherwise
($ in 000s)
Balance, Jan.
1, 2021
Service
cost2
Interest
cost, 7%1
Expected
return on
assets3
Gain on
assets4
Gain on
DBO
Cash
funding
Retiree
benefits
Bal., Dec.
31, 2021
DBO
Plan
Assets
(4100)
4530
Defined
Benefit
Expense
OCI
Cash
Net Defined Benefit
(Liability) / Asset
430
(332)
332
(332)
(287)
287
(287)
(317.1)
317.1
317.1
82.9
44
(82.9)
82.9
(44)
44
340
295
(295)
(4380)
4975
(126.9)
301.9
(340)
340
(340)
595
1 7% x $4,100 = $287
2 $4,380 – 4,100 – 287 + 44 + 295 = $332
3 7% x $4,530 = $317.1 (expected)
4 Derived as a balancing figure
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Chapter 13 –Employee Benefits
Problem 13-16
Requirement 1
Calculation of defined benefit expense:
Service cost (given)
Interest cost (given)
Expected return on the plan assets (8% x $200)
Defined benefit expense
($ in millions)
$48
24
(16)
$56
To record expense
($ in millions)
Defined benefit expense (total) ..................................................
Plan assets (expected return on plan assets) ....................................
DBO ($48 service cost + $24 interest cost) ..................................
56
16
72
To record funding and benefit payment
($ in millions)
Plan assets
Cash (contribution to plan assets)
45
DBO
Plan assets (benefit payments)
20
45
20
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Chapter 13 –Employee Benefits
Problem 13-16 (continued)
Requirement 2
To record gains and losses
($ in millions)
Loss–OCI ($16 – 15 loss due to return on assets being less than expected) 1
Plan assets ............................................
1
DBO .........................................................
Gain–OCI ($2 gain on change of DBO assumption)
2
2
Requirement 3
( )s indicate credits; debits
otherwise
($ in millions)
DBO
Plan
Assets
Bal., Jan. 1, 2021
(300)
200
Service cost
Interest cost, 8%
Expected return on assets
Loss on assets
Gain on DBO
(48)
(24)
16
(1)
2
Cash contributions
Retiree benefits
Bal., Dec. 31, 2021
OCI
Defined
Benefit
Expense
(100)
48
24
(16)
(20)
(350)
240
(48)
(24)
16
(1)
2
1
(2)
45
20
Cash
Net Defined Benefit
(Liability) / Asset
(1)
56
(45)
45
(45)
(110)
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Chapter 13 –Employee Benefits
Problem 13-16 (continued)
Requirement 4
Calculation of defined benefit expense:
Service cost (given)
Interest cost (given)
Expected return on the plan assets (8% x $240)
Defined benefit expense
($ in millions)
$38
28
(19.2)
$46.8
To record expense
($ in millions)
Defined benefit expense (total) ...................................................
Plan assets (expected return on plan assets) ....................................
DBO ($38 service cost + $28 interest cost) ..................................
46.8
19.2
66.0
To record funding and benefit payments
($ in millions)
Plan assets ...........................................................
Cash (contribution to plan assets) ............................
30.0
DBO ....................................................................
Plan assets (benefit payments) ..............................
16.0
30.0
16.0
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Chapter 13 –Employee Benefits
Problem 13-16 (continued)
Requirement 5
To record gains and losses
($ in millions)
Loss–OCI ($5 loss on change of DBO assumption)
DBO .....................................................
5
5
Plan assets ................................................
Gain–OCI ($36 actual return on assets exceeds $19.2 gain expected)
16.8
16.8
Problem 13-16 (concluded)
Requirement 6
( )s indicate credits; debits
otherwise
($ in millions)
DBO
Plan
Assets
OCI
240
42
Bal., Jan. 1, 2022
(350)
Service cost
Interest cost, 8%
Expected return on assets
Gain on assets
Loss on DBO
Cash contributions
Retiree benefits
(38)
(28)
16
30
(16)
Bal., Dec. 31, 2022
(405)
290
19.2
16.8
(5)
Defined
Benefit
Expense
Cash
(110)
38
28
(19.2)
(30)
(38)
(28)
19.2
16.8
(5)
30
(30)
(115)
(16.8)
5
(11.8)
Net Defined Benefit
(Liability) / Asset
46.8
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Chapter 13 –Employee Benefits
Problem 13-17
Requirement 1
To Record Defined Benefit Expense
Deferred tax asset (20% x [$41 + 24 – 18]) .....................................
Defined benefit expense ($41 + 24 – 18) ......................................
Plan assets (expected return on plan assets) ....................................
DBO ($41 service cost + $24 interest cost) ..................................
Income tax expense (20% x $47)
................................................
($ in millions)
9.4
47.0
18.0
65.0
9.4
Although for financial reporting purposes the income is reduced now, only the
actual payments for retiree benefits can be deducted for tax purposes. This creates a
“temporary difference” as described in Chapter 12. We need to record a deferred tax
asset for the future deductible amounts created by the new amounts – service cost,
interest cost, and return on assets. Also, because the annual tax expense should
reflect both the current and deferred tax effects of what occurs each year, the 2021 tax
expense is reduced by the $9.4 million eventual tax savings from the 2021 defined
benefit expense.
Here now is how the new gain and new loss would be recorded if we now include
the tax implications:
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Chapter 13 –Employee Benefits
Problem 13-17 (continued)
To Record New Gains and Losses
Deferred tax asset (20% x $23) ....................
Loss–OCI ($23 loss, net of $4.6 tax benefit) ..
DBO .....................................................
Plan assets ................................................
Gain–OCI ($12 gain, net of $2.4 tax expense)
Deferred tax liability (20% x $12) ...........
($ in millions)
4.6
18.4
23.0
12
9.6
2.4
Global reported a $23 million loss in 2021 from revising an assumption used to
calculate its DBO. That additional cost is recognized now on the statement of
comprehensive income but won’t be deducted until the defined benefits are paid in
the future. This creates a future deductible amount and thus a deferred tax asset for
20% of the loss. In like manner, the $12 million gain creates a future taxable amount
and thus a deferred tax liability for 20% of the gain.
There are no tax effects of the funding and payment of benefits entries:
To Record Funding and Payment of Benefits
Plan assets ................................................
Cash (contribution to plan assets) ..............
DBO .........................................................
Plan assets (retiree benefits) .......................
($ in millions)
48
48
38
38
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Chapter 13 –Employee Benefits
Problem 13-17 (concluded)
Requirement 2
Global Communications
Statement of Comprehensive Income
Year ended December 31, 2021
Net income
$300.0
Other comprehensive income:
Net unrealized holding gain on investments ($30, net of $6 tax)
$ 24.0
Loss on defined benefit–DBO estimate ($23, net of $4.6 tax benefit)
Gain on defined benefit –return on plan assets ($12, net of $2.4 tax)
Comprehensive income
(18.4)
9.6
15.2
$315.2
Note: The statement of comprehensive income can be reported either (a) in a single statement as
an extension of the income statement, or (b) as a separate statement to the income statement.
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Chapter 13 –Employee Benefits
Problem 13-18
Requirement 1
Retirement
Period
5 years
Attribution Period
26 years
age
34
1998
(end)

age
age
60
62
2024 2026
(end) (end)
age
67
2031
(end)
___________________________________________________________________

retirement


date
hired

“full-eligibility”
date
Requirement 2
Year
End
2027
2028
2029
2030
2031
Expected
Net Cost
$4,000
4,400
2,300
2,500
2,800
PV of $1
n=1-5, i=6%
x .94340
x .89000
x .83962
x .79209
x .74726
Present Value
at Dec. 31, 2026
$ 3,774
3,916
1,931
1,980
2,092
$13,693
Requirement 3
$13,693 x .74726* = $10,232
*present value of $1: n=5, i=6% (from Table 2)
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Chapter 13 –Employee Benefits
Problem 13-18 (concluded)
Requirement 4
$10,232 x 23 yrs*/26 yrs** = $9,051
* 1998-2021
** attribution period (1998-2024)
Requirement 5
$13,693 x .79209* = $10,846 (EPBO)
* present value of $1: n=4, i=6% (from Table 2)
$10,846 x 24 yrs*/26 yrs** = $10,012
* 1998-2022
** attribution period (1998-2024)
Requirement 6
$13,693 x .79209* = $10,846 (EPBO)
* present value of $1: n=4, i=6% (from Table 2)
$10,846 x 1 yr/26 yrs = $417
Requirement 7
$9,051 (beginning DBO) x 6% = $543
Requirement 8
DBO at the beginning of 2022 (from req. 4)
Service cost: (from req. 5)
Interest cost: (from req. 6)
DBO at the end of 2022 (agrees with req. 5*)
$9,051
417
543
$10,011
* $1 difference due to rounding
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Chapter 13 –Employee Benefits
Problem 13-19
EPBO
2021
2022
2023
2024
2025
2026
2027
2028
$18,000
19,800 1
21,780
23,958
26,354
28,989
31,888
35,077
fraction
earned
1/8
2/8
3/8
4/8
5/8
6/8
7/8
8/8
DBO
$ 2,250
4,950 2
8,168
11,979
16,471
21,742
27,902
35,077
Totals
Service
Cost
$ 2,250
2,475 3
2,723
2,995
3,294
3,624
3,986
4,385
$25,732
Interest
Expense
Cost
10%
$
0
$ 2,250
225 4
2,700 5
495
3,218
817
3,812
1,198
4,492
1,647
5,271
2,174
6,160
2,790
7,175
$9,346
$35,078
1 $18,000 x 1.10 = $19,800
2 $19,800 x 2/8 = $4,950
3 $19,800 x 1/8 = $2,475
4 $2,250 (DBO) x 10% = $225
5 $2,475 + 225 = $2,700
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Chapter 13 –Employee Benefits
Problem 13-20
Requirement 1
($ in 000s)
DBO:
Beginning of 2021
Service cost
Interest cost
Loss (gain) on APBO
Less: Retiree benefits
End of 2021
$460
?
23
0
(52)
$485
(5% x $460)
Service cost = $485 – 460 – 23 + 52 = $54
Requirement 2
($ in 000s)
Service cost
Interest cost
Return on plan assets
Defined benefit expense
$54
23
(0)
$77
(5% x $460)
Requirement 3
($ in 000s)
Postemployment defined benefit obligation
Plan assets
Net defined benefit liability
$485
75
$410
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Chapter 13 –Employee Benefits
Problem 13-21
Requirement 1
When accumulated leave is vesting resulting in payment of unused leave on
resignation, the expected utilization rate is not important as the leave is either used or
paid eventually.
Ms Gan Ms Chandra Mr Salim
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day)
$2,055 $3,068
$2,301
Unused leave from 2020, Dec 31, 2021
6
5
3
Liability for 2020 unused leave, Dec 31 2021
(Unused leave x Salary per day)
$1,233 $1,096
$2,904
Short-term employee benefit expense:
Annual salaries
Accumulating vested paid leave
Analysis by individual employee
Employee
Days in annual salary
Days of unused leave
Salary per day
Short-term employee benefit
expense
$225,000
7,425
$232,425
Ms Gan
365
10
375
$205.48
Ms Chandra
365
14
379
$219
Mr Salim
365
12
377
$191.18
$77,055
$83,068
$72,301
December 31, 2020
To Record Expense and liability for paid leave
Employee expense ...................................
Liability for paid leave.........................
6,362
6,362
December 31, 2021
To Record Used leave during 2021
Liability for paid leave.............................
Employee expense ...............................
3,458
3,458
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Chapter 13 –Employee Benefits
When the employee does not use the leave, that employee is effectively working
more than expected and the employer has an obligation to compensate the
employee by permitting the leave to be taken in a subsequent year or for the
unused leave to be paid off on resignation.
Requirement 2
When accumulated leave is non-vesting, the expected cost to the employer is the
number of days that are likely to be utilized by the employee before the leave
expires.
Ms Gan Ms Chandra
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day
$1,644
x Rate of utilization)
Unused leave from 2020, Dec 31, 2021
6
Liability for 2020 unused leave, Dec 31, 2021
0
(These leaves will be forfeited)
Short-term employee benefit expense:
Annual salaries
Accumulating non-vested paid leave
1,956)
Mr Salim
$2,762
$1,956
5
0
3
0
$225,000
6,362*($1,644
+
2,762
+
$231,362
Analysis by individual employee
Employee
Days in annual salary
Unused leave x Expected usage
Salary per day
Short-term employee benefit
expense
December 31, 2020
Ms Gan
365
8
373
$205.48
Ms Chandra
365
12.6
377.6
$219
Mr Salim
365
10.2
375.2
$191.18
$76,644
$82,762
$71,956
To Record Expense and liability for paid leave
Employee expense ...................................
Liability for paid leave.........................
6,362
6,362
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Chapter 13 –Employee Benefits
December 31, 2021
To Record Used leave and write-back unused leave at end of entitlement
period
Liability for paid leave.............................
6,362
Employee expense ...............................
6,362
Requirement 3
No entry is required
Short-term employee benefit expense:
Annual salaries
Non-accumulating leave
$225,000
0
$225,000
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Chapter 13 –Employee Benefits
Problem 13-22
Requirement 1
When accumulated leave is vesting resulting in payment of unused leave on
resignation, the expected utilization rate is not important as the leave is either used or
paid eventually.
Ms Shah Mr ChangMs Brown
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day)
$4,192 $4,296
$4,027
Unused leave from 2020, Dec 31, 2021
3
5
4
Liability for 2020 unused leave, Dec 31 2021
(Unused leave x Salary per day)
$838
$1,342
$1,151
Short-term employee benefit expense:
Annual salaries
Accumulating vested paid leave
Analysis by individual employee
Employee
Days in annual salary
Days of unused leave
Salary per day
Short-term employee benefit
expense
$305,000
12,515
$317,415
Ms Shah
365
16
380
$279.45
Mr Chang
365
16
381
$268
Ms Brown
365
14
379
$287.67
$106,192
$102,296
$109,027
December 31, 2020
To Record Expense and liability for paid leave
Employee expense ...................................
Liability for paid leave.........................
11,884
11,884
December 31, 2021
To Record Used leave during 2021
Liability for paid leave.............................
Employee expense ...............................
8,553
8,553
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Chapter 13 –Employee Benefits
When the employee does not use the leave, that employee is effectively working
more than expected and the employer has an obligation to compensate the
employee by permitting the leave to be taken in a subsequent year or for the
unused leave to be paid off on resignation.
Requirement 2
When accumulated leave is non-vesting, the expected cost to the employer is the
number of days that are likely to be utilized by the employee before the leave
expires.
Ms Shah Mr Chang
Liability for 2020 unused leave, Dec 31, 2020
(Unused leave x Salary per day
$4,192
x Rate of utilization)
Unused leave from 2020, Dec 31, 2021
3
Liability for 2020 unused leave, Dec 31, 2021
0
(These leaves will be forfeited)
Short-term employee benefit expense:
Annual salaries
Accumulating non-vested paid leave
3,826)
Ms Brown
$3,866
$3,826
5
0
4
0
$305,000
11,884*($4,192
+
3,866
+
$316,884
Analysis by individual employee
Employee
Days in annual salary
Unused leave x Expected usage
Salary per day
Short-term employee benefit
expense
December 31, 2020
Ms Shah
365
15
380
$279.45
Mr Chang
365
14.4
379.4
$268
Ms Brown
365
13.3
378.3
$287.67
$106,192
$101,866
$108,826
To Record Expense and liability for paid leave
Employee expense ...................................
Liability for paid leave.........................
11,884
11,884
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Chapter 13 –Employee Benefits
December 31, 2021
To Record Used leave and write-back unused leave at end of entitlement
period
Liability for paid leave.............................
11,884
Employee expense ...............................
11,884
Requirement 3
No entry is required
Short-term employee benefit expense:
Annual salaries
Non-accumulating leave
$305,000
0
$305,000
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Chapter 13 –Employee Benefits
Problem 13-23
Corrigendum: The unrecognized net actuarial loss (net loss – AOCI) should be $22 million debit balance at
the beginning of the year (not $270 million).Requirement 1
The difference between an employer’s obligation (PBO) and the resources
available to satisfy that obligation (plan assets) is the funded status of the pension
plan. The employer must report the net difference between those two amounts,
referred to as the “funded status” of the plan in the statement of financial position.
It’s reported as a pension liability if the PBO exceeds the plan assets or a pension
asset if the plan assets exceed the PBO. Toys R Us would report a pension liability of
$38 million:
($ in millions)
PBO
Plan assets
Pension liability
$163
125
$38
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Chapter 13 –Employee Benefits
Problem 13-23 (continued)
Requirement 2
Gains or losses should not be part of pension expense unless and until total net
gains or losses exceed a defined threshold. Specifically, a portion of the excess is
included in pension expense only if it exceeds an amount equal to 10% of the PBO,
or 10% of plan assets, whichever is higher. The amount that should be included is the
excess divided by the average remaining service period of active employees expected
to receive benefits under the plan. Amortization of a net loss is added to pension
expense. Pension expense in this instance is increased by a $1 million amortization
of the net loss:
($ in millions)
Unrecognized net actuarial loss
Less: 10% corridor (threshold)*
Excess
Service period
Amortization
$22
(10)
$12
÷ 10
$ 1.2
* 10% times either the PBO ($148) or plan assets ($123), whichever is larger.
Requirement 3
($ in millions)
Service cost
$4
Interest cost
5
Expected return on plan assets
(5)
Amortization of prior service cost
0
Amortization of net loss
1.2
Pension expense
$ 5.2
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Chapter 13 –Employee Benefits
Problem 13-21 (continued)
Requirement 4
The pension liability, which is the difference between the PBO and plan assets,
increases by the combination of the service cost, interest cost, and the expected return
as is reflected in the following entry.
To Record Defined benefit Expense ..............
($ in millions)
Pension expense (calculated in Req. 3) .......................................
5.2
Plan assets (expected return on assets) .........................................
5
PBO (service cost $4 + interest cost $5).....................................
9
Amortization of net loss–OCI (current amortization) .............
1.2
The net pension liability (PBO minus plan assets) is affected only by the three
components of pension expense that change either the PBO or plan assets. The
pension expense also includes the $1.2 million amortization of net loss but, unlike the
other three components, this amortization amount affects neither the PBO nor the
plan assets and therefore doesn’t change the net pension liability.
The net loss–AOCI is reduced by the $1.2 million amortization. It’s reported as
other comprehensive income in the statement of comprehensive income.
Pension gains and losses (either from changing assumptions regarding the PBO or
the return on assets being higher or lower than expected) are deferred and not
immediately included in pension expense and net income. They are, however,
reported as other comprehensive income in the period they occur. Accordingly, the
actuarial gain that increased the PBO and the gain from the actual return exceeding
the expected return are reported in Toys R Us’s statement of comprehensive income
as a gain of $27 million and a gain of $12 – 5 = $7 million. Here are the entries:
($ in millions)
PBO ...........................................................
Gain–OCI (given) .........................................
27
Plan assets .................................................
Gain–OCI ($12 – 5) .....................................
7
27
7
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Chapter 13 –Employee Benefits
Problem 13-21 (concluded)
Requirement 5
The actuarial loss will not be amortized over the remaining service period but will be
recognized immediately in other comprehensive income under IFRS. The corridor
approach is not permitted under IFRS.
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Chapter 13 –Employee Benefits
CASES
Judgment Case 13-1
Requirement 1
Here is a graphical depiction of your estimated service and retirement periods:
2021
2060
2080
_____________________________________________
40 years
Service period
20 years
Retirement
Salary at retirement:
$100,000 x 3.26204, or
$100,000 x (1.03)40 = $326,204
1.5% x 40 x $326,204 = $195,722
The present value of the retirement annuity as of the retirement date (end of
2060) is:
$195,722 x 11.46992* = $2,244,916
[This is the lump-sum equivalent of the retirement
annuity as of the retirement date]
* present value of an ordinary annuity of $1: n=20, i=6%
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Chapter 13 –Employee Benefits
Case 13-1 (continued)
Requirement 2
The value of your plan assets as of the anticipated retirement date is $1,872,981:
A
B
C
D
End of
Years to
Year:
Retirement
Salary
Contribution
2021
39
100,000
8,000
2022
38
103,000
8,240
2023
37
106,090
8,487
2024
36
109,273
8,742
2025
35
112,551
9,004
2026
34
115,927
9,274
2027
33
119,405
9,552
2028
32
122,987
9,839
2029
31
126,677
10,134
2030
30
130,477
10,438
2031
29
134,392
10,751
2032
28
138,423
11,074
2033
27
142,576
11,406
2034
26
146,853
11,748
2035
25
151,259
12,101
2036
24
155,797
12,464
2037
23
160,471
12,838
2038
22
165,285
13,223
2039
21
170,243
13,619
2040
20
175,351
14,028
2041
19
180,611
14,449
2042
18
186,029
14,882
2043
17
191,610
15,329
2044
16
197,359
15,789
2045
15
203,279
16,262
2046
14
209,378
16,750
2047
13
215,659
17,253
2048
12
222,129
17,770
2049
11
228,793
18,303
2050
10
235,657
18,853
2051
9
242,726
19,418
2052
8
250,008
20,001
2053
7
257,508
20,601
2054
6
265,234
21,219
2055
5
273,191
21,855
2056
4
281,386
22,511
2057
3
289,828
23,186
2058
2
298,523
23,882
2059
1
307,478
24,598
2060
0
316,703
25,336
Lump-sum equivalent of the retirement annuity
E
Future Value
at Retirement
77,628
75,431
73,296
71,222
69,206
67,247
65,344
63,495
61,698
59,952
58,255
56,606
55,004
53,447
51,935
50,465
49,037
47,649
46,300
44,990
43,717
42,479
41,277
40,109
38,974
37,871
36,799
35,757
34,745
33,762
32,806
31,878
30,976
30,099
29,247
28,419
27,615
26,834
26,074
25,336
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Chapter 13 –Employee Benefits
as of the retirement date
1,872,981
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Chapter 13 –Employee Benefits
Case 13-1 (continued)
Your annual retirement pay assuming continuing investment of assets at 6% will be:
$1,872,981 ÷ 11.46992 = $163,295
* present value of an ordinary annuity of $1: n=20, i=6%
Based on the calculations alone, the State’s defined benefit plan offers the larger
retirement annuity and, therefore, lump-sum equivalent of the retirement annuity. Be
aware though that many other factors need to be considered. Plans vary in terms of
the flexibility regarding how you can choose to receive distributions of your
retirement assets. Very often defined benefit plans provide benefits only until you
and/or your spouse dies with no benefits to other beneficiaries; whereas, assets
accumulated under defined contribution plans can be bequeathed to other
beneficiaries.
Also, greater uncertainty is associated with defined contribution plans, in
general. The employee bears the risk of uncertain investment returns and, potentially,
might settle for far less at retirement than at first expected. On the other hand, results
may exceed expectations as well. Risk is reversed in a defined benefit plan. Because
specific benefits are promised at retirement, the employer is responsible for making
up the difference when investment performance is less than expected.
Relatedly, uncertainty regarding mortality significantly affects the equation.
Defined benefit plans pay benefits from retirement to death. Assets accumulated
under defined contribution plans, however, are a fixed amount.
How well that
amount provides for retirement income depends on how many years you live after
retirement.
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Chapter 13 –Employee Benefits
Case 13-1 (concluded)
Your annual retirement pay assuming continuing investment of assets at 6% will be:
$1,985,360 ÷ 11.46992* = $173,093
* present value of an ordinary annuity of $1: n=20, i=6% (from Table 4)
Requirement 3
Based on the calculations alone, the State’s defined benefit plan offers the larger
retirement annuity and, therefore, lump-sum equivalent of the retirement annuity. Be
aware though that many other factors need to be considered. Plans vary in terms of
the flexibility regarding how you can choose to receive distributions of your
retirement assets. Very often defined benefit plans provide benefits only until you
and/or your spouse dies with no benefits to other beneficiaries; whereas, assets
accumulated under defined contribution plans can be bequeathed to other
beneficiaries.
Also, greater uncertainty is associated with defined contribution plans, in
general. The employee bears the risk of uncertain investment returns and, potentially,
might settle for far less at retirement than at first expected. On the other hand, results
may exceed expectations as well. Risk is reversed in a defined benefit plan. Because
specific benefits are promised at retirement, the employer is responsible for making
up the difference when investment performance is less than expected.
Relatedly, uncertainty regarding mortality significantly affects the equation.
Defined benefit plans pay benefits from retirement to death. Assets accumulated
under defined contribution plans, however, are a fixed amount. How well that
amount provides for retirement income depends on how many years you live after
retirement.
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Chapter 13 –Employee Benefits
Communication Case 13-2
Suggested Grading Concepts and Grading Scheme:
Content (80% )
30 The net periodic defined benefit expense measures this compensation
and consists of the following five elements which can vary differently
from changes in employment.(6 each; maximum of 30 for this part)
The service cost component is the present value of the benefits
earned by the employees during the current period.
The interest cost component is the increase in the defined benefit
obligation due to the passage of time.
The return on plan assets reduces the defined benefit expense. The
actual return on plan assets component is the difference between the
fair value of the plan assets at the beginning and the end of the
period, adjusted for contributions and benefit payments. This
amount is adjusted for any gain or loss, so it is the expected return
that actually affects the calculation.
Past service cost is created when a defined benefit plan is amended
and credit is given for employee service rendered in prior years.
This retroactive credit is not recognized as defined benefit expense
entirely in the year the plan is amended.
Gains and losses arise from changes in estimates concerning the
amount of the defined benefit obligation or the return on the plan
assets being different from expected. These are not included in
defined benefit expense as they occur. They are instead reported as
remeasurement gains or losses in other comprehensive income.
10 The projected unit credit approach is an actuarial valuation method
whereby each period of service attributes an additional unit of benefit
to the employee resulting in an increase in the defined benefit
obligation of the employee under a defined benefit plan.
15 Remeasurement gains and losses occur when the DBO or the return
on plan assets turns out to be different than expected. (15 each;
maximum of 15 for this part)
Remeasurement gains and losses are reported as they occur in the
statement of comprehensive income, not as part of defined benefit
expense. They accumulate over time as a net gain or net loss, a
component of equity.
Actuarial gains or losses arise from changes in assumptions and
experience adjustments
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Chapter 13 –Employee Benefits
Differences between the actual and expected returns on plan assets
are required as a loss (if expected returns exceed actual returns) and a
gain (if actual returns exceed expected returns) in other
comprehensive income. Actual returns include dividends, interest,
realized and unrealized gains or losses.
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Chapter 13 –Employee Benefits
Case 13-2 (concluded)
10
DBO and ABO compared (5 each; maximum of 10 for this part)
Both the accumulated benefit obligation and the defined benefit
obligation represent the present value of the benefits attributed by the
defined benefit formula to employee service rendered prior to a
specific date.
The accumulated benefit obligation is based on present salary levels
and the defined benefit obligation is based on estimated future salary
levels.
15 The Defined benefit obligation in excess of plan assets:
This is the funded status of the plan and is reported in the statement
of financial position as a defined benefit liability (10 points)
If the plan assets exceed the DBO, it would be reported as a defined
benefit asset. (5 points)
80 points
Writing (20%)
5
Terminology and tone appropriate to the audience of
assistant controllers.
6
Organization permits ease of understanding.
introduction that states purpose.
paragraphs separate main points.
9
English
word selection.
spelling.
grammar.
20 points
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Chapter 13 –Employee Benefits
Judgment Case 13-3
Requirement 1
Yes, it’s true that the defined benefit expense is calculated as if the statement of
financial position contained certain amounts it doesn’t individually report,
specifically the defined benefit obligation and the defined benefit assets. The
statement of financial position does actually reflect these balances on a “net” basis;
that is, the funded status of the plan is reported as a net defined benefit liability to
the extent the DBO exceeds the defined benefit assets or as a net defined benefit
asset if the defined benefit assets exceed the DBO.
Actually, even the defined benefit expense falls short of reflecting all changes in
the DBO and plan assets due to methods to defer the effect of gains and losses in
other comprehensive income.
Requirement 2
A liability, $528,000, was reported in 2021 because the plan was underfunded by
that amount – the DBO exceeded plan assets.
Requirement 3
No defined benefit asset was reported in 2021 because the plan was underfunded
by that amount – the DBO exceeded the plan assets.
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Chapter 13 –Employee Benefits
Case 13-3 (concluded)
Requirement 4
The amount that the company should report in other comprehensive income for
2021 should be:
Actuarial loss
$302
Gain on plan assets
(74)
Net remeasurement loss $228
Requirement 5
Gains and losses occur when either the DBO or the return on plan assets turns
out to be different than expected. The loss in 2021 indicates the DBO is higher than
previously expected due to some unspecified change in an actuarial assumption.
This loss, as well as any other loss or gain, is reported in the statement of
comprehensive income as it occurs. The gain on plan assets arise from the excess of
actual returns over expected returns.
Requirement 6
Under U.S. GAAP, losses and gains are reported in the statement of
comprehensive income as they occur. These amounts accumulate as a net gain or
net loss in the statement of financial position as part of accumulated other
comprehensive income, one of the components of shareholders’ equity.
A net gain or a net loss affects defined benefit expense only if it exceeds an
amount equal to 10% of the DBO, or 10% of plan assets, whichever is higher. That
appears to be the case with LGD and the amortized portion of the net gain is one
component of the defined benefit expense.
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Chapter 13 –Employee Benefits
Communication Case 13-4
First, this case has no right or wrong answer. The process of developing the
proposed solutions will likely be more beneficial than the solutions themselves.
Students should benefit from participating in the process, interacting first with other
group members, then with the class as a whole.
Solutions should take into account the facts brought out in the solution to the
previous case on which this one is based. Also, it is likely that some of the
suggestions will be variations of the following alternatives:
1. The issue of ensuring adequate funding for the plan assets.
2. Individual recognition of the defined benefit obligation and the plan assets.
3. Recognition of the accumulated benefit obligation rather than the defined
benefit obligation.
It is important that each student actively participate in the process. Domination
by one or two individuals should be discouraged. Students should be encouraged to
contribute to the group discussion by (a) offering information on relevant issues, (b)
clarifying or modifying ideas already expressed, or (c) suggesting an alternative
direction.
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Chapter 13 –Employee Benefits
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Chapter 13 –Employee Benefits
Real World Case 17–5
Requirement 1
Microsoft’s pension plan is a defined contribution plan in the form of a 401(k) plan. It
is described in disclosure note 21:
NOTE 21 — EMPLOYEE STOCK AND SAVINGS PLANS (in part)
We have a savings plan in the U.S. that qualifies under Section 401(k) of the Internal
Revenue Code, and a number of savings plans in international locations. Participating
U.S. employees may contribute up to 75% of their salary, but not more than statutory
limits. We contribute fifty cents for each dollar of the first 6% a participant
contributes in this plan, with a maximum contribution of the lesser of 3% of a
participant’s earnings or 3% of the IRS compensation limit for the given year.
Matching contributions for all plans were $454 million, $420 million, and $393
million in fiscal years 2015, 2014, and 2013, respectively, and were expensed as
contributed.
Requirement 2
Defined contribution plans promise defined periodic contributions to a pension fund,
without further commitment regarding benefit amounts at retirement. Retirement
benefits are entirely dependent upon how well investments perform. Thus, the
employee bears the risk of uncertain investment returns. The employer is free of any
further obligation.
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Chapter 13 –Employee Benefits
Case 17–5 (concluded)
Requirement 3
Microsoft matches contributions fifty cents for each dollar contributed. Also, both
employee and employer contributions vest immediately. So, she is entitled to roll
over $1,540:
Employee contribution
$1,000
Microsoft match
500
Total invested
$1,500
Value increase (2% x $1,500)
30
Vested balance
$1,530
Requirement 4
Microsoft’s plan is a 401(k) plan—named after the Tax Code section that specifies
the conditions for the favorable tax treatment of these plans. 401(k) plans allow
voluntary contributions by employees, which in Microsoft’s case is fifty cents for
each dollar matched up to a set percentage of salary per year. Microsoft simply
records pension expense equal to the cash contribution. Summarized for the year,
Microsoft recorded the following:
($ in millions)
Pension expense ...................................
Cash ..................................................
454
454
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Chapter 13 –Employee Benefits
Ethics Case 13-6
Mr. Maxwell’s apparent motivation for the change in the way contributions are
handled is to have the company benefit from the earning power of the contributed
funds for up to three months, prior to the funds being deposited for the benefit of the
employees. Temporarily diverting defined contribution plans funds this way benefits
the company at the expense of the employee.
There is some question as to whether the practice described is illegal. In practice,
such cases are rarely prosecuted. Regardless of the legality, though, there is the
ethical question of whether the employer should earn dividends, interest, etc. on
funds deducted from employees’ paychecks, prior to the funds being deposited to the
employees’ accounts.
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Chapter 13 –Employee Benefits
Research Case 13-7
Results will vary depending on companies chosen.
Actuarial assumptions are required to be disclosed . Students would benefit from
reading the footnote disclosures to understand the type of assumptions made by
actuaries to determine valuations.
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Chapter 13 –Employee Benefits
Real World Case 17–8
Requirement 1
FedEx sponsors both defined benefit and defined contribution pension plans as
well as a postretirement healthcare plan. These are described in disclosure note 13
(in part) for the years ended May 31, 2015 and 2014:
PENSION PLANS. Our largest pension plan covers certain U.S. employees age 21 and over,
with at least one year of service. Pension benefits for most employees are accrued under a cash
balance formula we call the Portable Pension Account. Under the Portable Pension Account, the
retirement benefit is expressed as a dollar amount in a notional account that grows with annual
credits based on pay, age and years of credited service, and interest on the notional account
balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at
retirement at the election of the employee. The plan interest credit rate varies from year to year
based on a U.S. Treasury index. Prior to 2009, certain employees earned benefits using a
traditional pension formula (based on average earnings and years of service). Benefits under this
formula were capped on May 31, 2008 for most employees. We also sponsor or participate in
nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans
covering certain of our international employees. The international defined benefit pension plans
provide benefits primarily based on earnings and years of service and are funded in compliance
with local laws and practices.
POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental
and vision coverage to eligible U.S. retirees and their eligible dependents. U.S. employees
covered by the principal plan become eligible for these benefits at age 55 and older, if they have
permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to
January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1,
1988. Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected
employer cost, which has been reached and, therefore, these benefits are not subject to
additional future inflation.
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Chapter 13 –Employee Benefits
Case 17–8 (continued)
Requirement 2
A pension plan is underfunded when the obligation (PBO) exceeds the resources
available to satisfy that obligation (plan assets) and overfunded when the opposite
is the case. The PBO exceeds plan assets in both years reported. Thus, a net
pension liability is reported in the balance sheet both years, as FedEx’s defined
benefit plans are underfunded. The amounts of each are reported in the disclosure
note as reproduced below. The postretirement healthcare plan is not just
underfunded; it is unfunded. The funded status reported as a liability, then, is
equal to the postretirement benefit obligation each year.
Pension Plans
2015
2014
Postretirement
Healthcare Plans
2015
2014
PBO/APBO at the end of year
$27,512 $24,578 $929
$883
Fair value of plan assets at the end of year
$23,505 $21,907 $ —
$—
Funded Status of the Plans
$(4,007) $(2,671) $(929) $(883)
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Chapter 13 –Employee Benefits
Case 17–8 (concluded)
Requirement 3
FedEx reports three actuarial assumptions used to determine projected benefit
obligations:
Pension Plans
2015
2014
Discount rate
Rate of increase in future
compensation levels
Expected long-term rate of
return on assets
4.42%
4.60%
4.62%
4.56%
7.75%
7.75%
 The reported decrease in the discount rate from 2014 to 2015 increased
FedEx’s projected benefit obligation. The lower the discount rate in a
present value calculation, the higher the present value.
 FedEx reported an increase in the rate of increase in future compensation
levels. This increased FedEx’s PBO. Higher compensation estimates in the
pension formula result in higher estimates of retirement benefits and thus in
the PV of those benefits.
 The expected long-term rate of return on assets will not directly affect
FedEx’s projected benefit obligation. It affects instead the plan assets and
pension expense.
Real World Case 13-9
Requirement 1
The increase in a company’s DBO attributable to making a plan amendment
retroactive is referred to as the past service cost. Past service cost adds to the cost
of having a pension plan. Amending a pension plan typically is done with the idea
that future operations will benefit from having done so. Thus, the cost is not
recognized as pension expense entirely in the year the plan is amended, but is
recognized as pension expense over the time that the employees who benefited
from the retroactive amendment will work for the company in the future. In GM’s
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Chapter 13 –Employee Benefits
case, that may be a relatively short time. Apparently, a motive for GM’s
amendment was the expectation that employees would retire early and take
advantage of the limited time offer.
Requirement 2
The amendment increased GM’s pension obligation. GM’s pension expense will
be higher each year for as long as the prior service cost is amortized. Presumably,
in this instance, GM expects the bulk, if not all, of the cost to be expensed in the
first year.
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Chapter 13 –Employee Benefits
Analysis Case 13-10
Requirement 1
Normally, a company’s net periodic defined benefit cost represents an expense
and therefore decreases earnings. Often, though, circumstances cause this element
of the income statement to actually increase reported earnings. This occurs when
the “expected return on assets,” a negative component of pension expense, is
higher than the combined total of the other components.
Consider the following disclosure adapted from a pension footnote in a previous
annual report of Qwest Communications that indicated that “the pension plan
contributed” $87 million to reported earnings during the year:
($ in millions)
Service cost
Interest cost
Expected return on plan assets.
Net (credit) cost
$ 170
601
(858)
$ (87)
The major contributor to this effect is the Expected return on plan assets of over
$858 million.
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Chapter 13 –Employee Benefits
Case 13-10 (concluded)
Requirement 2
Companies must report the actuarial assumptions used to make estimates
concerning pension plans, examples include the discount rate, the average rate of
compensation increase , and the expected long-term rate of return on plan assets.
 The expected long-term rate of return on assets directly affects the net defined
benefit expense. The higher the rate, the higher the “expected return on
assets,” a negative component of the net defined benefit cost. The more
aggressive a company is in estimating this return, the lower will be the expense
and the higher reported profits will be. In IFRS, the same rate is also used for
discounting of the defined benefit obligation. This rate is inferred from the
market yield of high quality corporate bonds.
 The discount rate can affect profits, too. The higher the discount rate in a
present value calculation, the lower the present value. A lower present value
will decrease the service cost and interest cost components of the net defined
benefit cost and increase earnings.
 The lower the rate of increase in future compensation levels, the lower will be
the DBO, the service cost, and interest cost. So, the lower the rate of increase
in future compensation levels, the higher earnings will be.
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Chapter 13 –Employee Benefits
Analysis Case 13-11
Air France–KLM Case
Requirement 1
Under IAS No. 19, past service cost is combined with service cost as part of net
periodic pension cost and reported within the income statement. AF reports this
amount within “Plan amendments and curtailments” as part of its Net periodic cost.
Requirement 2
The various components of pension expense are not reported as a single net
amount. AF separately reports service cost (including past service cost) net interest
cost/income, and amortization of remeasurement gains and losses. Service cost and
net interest cost/income would be reported within the income statement.
Remeasurement gains and losses would be reported as other comprehensive income
in the statement of comprehensive income.
Requirement 3
AF used IFRS, and thus reports gains and losses among OCI items
“Remeasurements of defined benefit pension plans” in the statement of
comprehensive income (which AF labels “Consolidated Statement of Recognized
Income and Expenses), which subsequently become part of AOCI. The gains and
losses remain in AOCI (they are not subsequently amortized to expense and recycled
or reclassified from other comprehensive income as is required under U.S. GAAP
(when the accumulated net gain or net loss exceeds the 10% threshold)).
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Chapter 13 –Employee Benefits
AF Case (concluded)
Requirement 4
As shown in Note 23. Pension Assets, AF reported a Net pension asset (rather
than net pension liability) for 2015 of €1,773 million, indicating that its DBO
exceeded its plan assets. Since the high grade corporate bond rate is multiplied by the
difference between those two amounts to determine the net periodic pension cost or
net periodic pension income for the period, AF would report a net periodic pension
cost.
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