Understanding
Financial Accounting
Third Canadian Edition
By Christopher D. Burnley
Prepared by Debbie Musil, FCPA, FCMA
Chapter 10
Long-Term Liabilities
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Learning Objective 4
Identify the long-term liabilities that arise from
transactions with employees and explain how they are
accounted for.
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Pensions
• Agreements between employers and employees that
provide employees with specified benefits (income)
upon retirement
• Represents an estimated future obligation for the
services that the employee is rendering to the
company presently,
• Makes sense to include the costs of this obligation in
the same period as the benefits received
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3
Defined Contribution Pension Plans
• Employer agrees to make a pre-defined contribution
to a retirement fund for the employee
• Risk of increases or decreases to the plan’s market
value is borne by the employee
o
The employer is only responsible for funding its
contribution and has no ongoing responsibility
• Pension expense is generally equal to the
contribution
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Accounting for Defined Contribution
Pension Plans
Entries to recognize pension expense:
Pension Expense
XXX
Pension Obligation
Pension Obligation
XXX
XXX
Cash
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XXX
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Defined Benefit Pension Plans
• Employee is guaranteed a certain amount during
each year of retirement
• Risk of increases or decreases to the plan’s market
value is borne by the employer
o
The employer is responsible for providing employees
with the agreed-upon benefit upon retirement
• Employer must continually assess plan assets to
determine if the current contributions to the plan will
be sufficient to meet the future obligation
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Accounting for Defined Benefit Pension
Plans
• Pension obligation is determined as the present value
of the future obligation
• Pension expense consists of both the current pension
expense (determined by an actuary) plus/minus any
adjustments or contributions required to fund plan
assets in order to meet the present value of the
future obligation
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Pension Plan Disclosure
• For a defined contribution plan, the contributed
amounts must be disclosed.
• For a defined benefit plan disclosure is usually
extensive and can be complex.
o
Generally, in order to determine whether the pension
plan is underfunded, overfunded, or fully funded, it is
necessary to read the notes to the financial
statements
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Hybrid Pension Plans
• Also known as target benefit plans
• With hybrid pension plans:
o
No guaranteed benefit levels, only agreed upon
targets
o
Target goals can provide employees with better
information for planning
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Comparing Pension Plans
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Copyright
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