FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Module 7: Pension Costs and Obligations
Part 3:
Questions: (Chapter 18, page 1137)
Question 10.
Continuing components of net pension expense:
(a) Current service cost—The cost (using the projected benefit method) of future pension
benefits earned by employees during the current accounting period.
(b) Interest cost—The beginning balance of the accrued pension obligation multiplied by
the interest rate used by the actuary. This component increases pension expense.
(c) Expected earnings on plan assets—The expected return on the pension plan
investments. Actual earnings are occasionally used. This component decreases
pension expense.
(d) Amortization of past service cost—Past service cost is caused by pension entitlements
given for service before the plan was in force or when plans are improved after their
inception. The cost is not recognized immediately but is amortized over future
periods as expense.
(e) Actuarial gains or losses—Due to (a) experience and (b) changes in actuarial
assumptions. If outside a 10% corridor, the cost must be amortized to pension
expense. Companies may also elect to amortize a greater amount, or include the entire
amount in pension expense in the year of origin.
Question 17.
Experience gains and losses are caused when actual (past) experience is different
from the assumptions made in the measurement process. As a result, the pension
benefit obligation is different (higher or lower; loss or gain).
A change in assumptions causes the accrued pension obligation to change (higher or
lower; loss or gain) because of a different view of the future.
Actuarial gains and losses must be included in pension expense (amortized over the
ARSP) if they are outside a 10% corridor. The company may choose to amortize a
higher amount. Alternatively, they may be included in pension expense in the year in
which they arise.
The 10% corridor rule works as follows: accumulated actuarial gains and losses (the
total of both experience and changes in assumptions) are calculated as of the
beginning of the year. The amount is compared to 10% of the larger of opening
pension assets or the pension obligation. Any excess over the 10% is amortized to
pension expense over the ARSP in a rational and systematic manner.
1
FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Part 4:
Assignment A18-7 (Chapter 18, page 1145)
Requirement 1
Projected benefit obligation, 1 January 20X1.............................
Current service cost, 20X1.........................................................
Interest ($96,000 × 11%) ...........................................................
Benefit payments for 20X1........................................................
Projected benefit obligation, 31 December 20X1 .......................
$ 96,000
6,000
10,560
(12,000)
$100,560
Requirement 2
Pension plan assets, 1 January 20X1 ..........................................
Contributions ............................................................................
Actual return on plan assets for 20X1 ........................................
Benefit payments in 20X1 .........................................................
Pension plan assets, 31 December 20X1 ....................................
$ 90,000
9,000
9,000
(12,000)
$ 96,000
Requirement 3
Projected benefit obligation, 31 December 20X1 .......................
Pension plan assets, 31 December 20X1 ....................................
Underfunded status, 31 December 20X1....................................
Unrecognized past service cost [$45,000 – ($45,000 ÷ 30)] ......
Prepaid pension cost, 31 December 20X1 ..................................
$100,560
96,000
4,560
43,500
$ 38,940
Cr.
Dr.
Cr.
Dr.
Dr.
Deferred Pension cost would appear on the Balance Sheet under assets
2
FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Assignment 18-8 (Chapter 18, pages 1145-1146)
Requirement 1
Pension expense ...................................................................
Deferred pension cost/liability ..............................................
Cash ...............................................................................
3,149
51
Current service cost ..............................................................
Interest cost ..........................................................................
Expected return on plan assets ($10,840 × 7%) .....................
Amortization of past service cost ($1,100 ÷ 12) ....................
Amortization of transition cost ($360 ÷ 12)...........................
Amortization of unrecognized losses ($1,820-$1,752) ÷ 12))
Pension expense ...................................................................
$ 2,380
1,400
(759)
92
30
6
$ 3,149
3,200
Requirement 2
Projected benefit obligation, 1 January .................................
Value of plan assets ..............................................................
Unrecognized past service cost .............................................
Unrecognized transition cost.................................................
Unrecognized losses .............................................................
Deferred pension cost/liability ..............................................
$17,520
(10,840)
(1,100)
(360)
(1,820)
$ 3,400
3
FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Part 5:
Assignment 18-16 (Chapter 18, page 1149)
Requirement 1
Pension expense/cost
Current service cost................................................... $48,000
Interest cost...............................................................
6,432
Interest revenue......................................................... (2,560)
Prior service cost ($8,000/4)......................................
2,000
Total expense........................................................ $53,872
Corridor test for actuarial gain or loss amortization:
Unrecognized actuarial gain .............................................
10% of opening obligation (larger) ($80,000 x 10%) ........
No amortization needed
$4,800
8,000
Requirement 2
Unrecognized prior service cost ($8,000 - $2,000)............ $6,000
Unrecognized actuarial gains/losses ($4,800 gain - $400 loss
- $160 loss ($2,560 - $2,400 experience)) ....................... (4,240) (net gain)
Requirement 3
Pension expense ................................................... 53,872
Cash..............................................................
Deferred pension liability..............................
51,200
2,672
Requirement 4
Pension expense
Current service cost................................................... $48,000
Interest cost...............................................................
6,432
Interest revenue......................................................... (2,560)
Prior service cost ($8,000/4)......................................
2,000
Actuarial loss ($400 + $160) .....................................
560
Total expense........................................................ $54,432
4
FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Assignment 18-17 (Chapter 18, pages 1149-1150)
Beginning balances
Current service cost
Interest - 7%
Actual return on assets
Expected return – 6%
PSC amortization
Benefit payments
Funding contribution
Projected
obligation
dr./(cr.)
Plan
assets
dr./(cr.)
$(262,500)
(30,000)
(18,375)
$225,000
$(298,875)
Pension
expense
dr./(cr.)
$48,600
Deferred
pension
cost
(liability)
$11,100 (2)
$30,000
18,375
12,000
12,000
Unrecognized
pension
Cost(1)
(12,000)
108,000
$333,000
(12,000)
13,500
(5,400)
(13,500)
5,400
$40,275
$44,700
(40,275)
108,000
$78,825
(1) Unamortized past service cost and unamortized gains and losses
(2) Sum of first three columns
PSC amortization = $48,600/9 years = $5,400
Pension expense ................................................... 40,275
Deferred pension cost/liability.............................. 67,725
Cash..............................................................
108,000
Reconcile balance sheet amount of $78,825 on December 31:
Pension obligation
Plan assets
Unrecog. PSC
Deferred cost/liab
298,875 CR
333,000 DR
34,125 DR
44,700 DR
78,825 DR
5
FA3 Class notes
Barbara Wyntjes, B.Sc., CGA
Part 6:
Assignment 18-18 (Chapter 18, page 1150)
Requirement 1
Pension expense, 20x5
Current service cost .............................................. $67,000
Interest, opening liability ($200,000 x .05)............ 10,000
Past service cost ($200,000/14)............................. 14,286
Total expense........................................................ $91,286
Deferred pension cost ($99,500 - $91,286) ....................... $8,214 DR
Pension expense ................................................... 91,286
Deferred pension cost/liability.............................. 8,214
Cash ...........................................................................
99,500
Requirement 2
Pension Plan Spreadsheet
Pension
Obligation
20x5
Beg
CSC
Interest
PaSC
Amort
Plan
Assets
($200,000)
(67,000)
(10,000)
Memorandum Accounts
Unrecognized
Actuarial G/L
PaSC/PrSC
0
0
Pension
Expense
Statement Accounts
Deferred
Cost (Liab)
200,000
(14,286)
$67,000
10,000
14,286
$91,286
Funding
($277,000)
99,500
$99,500
0
$185,714
($91,286)
99,500
$8,214
Reconcile balance sheet amount of $8,214 on December 31:
Pension obligation
Plan assets
Unrecog. PSC
Deferred cost/liab.
277,000 CR
99,500 DR
177,500 CR
185,714 DR
8,214 DR
THE END
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