Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
CHAPTER 19
PENSIONS AND OTHER EMPLOYEE FUTURE
BENEFITS
ASSIGNMENT CLASSIFICATION TABLE
Topics
Brief
Writing
Exercises Exercises Problems Assignments
1.
Pensions from a
business perspective.
1
2.
Defined contribution
plans.
2, 3
3.
Defined benefit plans.
3
4.
Employer’s benefit
obligation.
4
5.
Transactions and events 5, 6
that change benefit plan
assets.
3, 4, 5, 6, 7,
8
6.
Funded status.
9, 10, 11,
12
7.
Pension expense and 2, 9, 10,
accounting for a defined 11, 12, 13,
benefit pension plan
14
under immediate
recognition approach.
3, 4, 5, 9, 3, 4, 5, 8,
10, 11, 13, 10, 11
14, 15, 20,
21
8.
Defined benefit plans
15
with benefits that vest or
accumulate other than
pension plans.
14, 17, 18, 2, 13
19
6, 7, 8
1, 2, 3, 4, 5
1, 2
1, 2, 3, 6,
10, 13
3, 4, 5
3, 6, 7, 9
4, 5, 9
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ASSIGNMENT CLASSIFICATION TABLE (CONTINUED)
Topics
9.
Brief
Writing
Exercises Exercises Problems Assignments
Presentation and
disclosure.
3, 7, 8, 12, 4, 6, 7
20
10. Differences between
IFRS and ASPE.
9, 10, 11, 5, 8, 10
15, 16, 21
*11. One-person plan.
16
22
1, 6
14
*12. Deferral and
7, 8, 11, 13,5, 7, 8, 9, 2, 4, 5, 6, 7,
amortization approach. 14, 16, 17 10, 11, 12, 8, 9, 10, 11,
15, 16, 20, 12
21, 23
3
*This material is dealt with in an Appendix to the chapter.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
ASSIGNMENT CHARACTERISTICS TABLE
Item
E19-1
E19-2
E19-3
E19-4
E19-5
E19-6
E19-7
E19-8
E19-9
E19-10
E19-11
E19-12
E19-13
E19-14
E19-15
E19-16
E19-17
E19-18
E19-19
E19-20
E19-21
*E19-22
E19-23
Description
Defined Contribution Plan.
Defined Contribution Plan.
Calculation of pension expense – IFRS.
Preparation of work sheet for E19-3.
Defined benefit plan – Immediate Recognition
versus Deferral and Amortization.
Calculation of actual return.
Deferral and Amortization.
Pension work sheet for E19-7.
Immediate Recognition..
Calculation of pension expense.
Calculation of pension expense and journal
entries.
Calculation of pension expense, journal entries
and disclosures.
Calculation of pension expense.
Post-retirement benefit expense.
Calculation of pension expense.
Actuarial gains and losses..
Post-retirement benefit expense..
Post-retirement benefit work sheet.
Post-retirement benefit reconciliation schedule.
Pension calculations and disclosures.
Accounting for past service costs.
Calculation of current service cost and ABO –
one person plan.
Corridor approach.
Level of
Time
Difficulty (minutes)
Simple
Simple
Moderate
Moderate
Moderate
5-10
10-15
15-20
15-25
25-30
Simple
Moderate
Moderate
Moderate
Simple
Moderate
10-15
35-45
30-35
30-35
10-15
25-35
Moderate
20-25
Simple
Moderate
Moderate
SImple
SImple
Simple
Simple
Moderate
Moderate
Moderate
5-10
30-35
20-30
15-20
10-12
15-20
10-15
25-35
25-30
25-30
Moderate
20-25
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ASSIGNMENT CHARACTERISTICS TABLE (Continued)
Item
P19-1
P19-2
P19-3
P19-4
P19-5
P19-6
P19-7
P19-8
P19-9
P19-10
P19-11
P19-12
P19-13
*P19-14
Description
Journal entries for a long-term disability benefit.
Defined benefit plan for sabbatical leave.
Immediate Recognition Approach under IFRS Three-year continuity schedules, journal entries,
and statement presentation.
Comparison of Deferral and Amortization
Approach under ASPE vs. Immediate
Recognition Approach under IFRS.
ASPE versus IFRS – DPB analysis.
DPB – ASPE deferral and amortization approach
Deferral and Amortization Approach - Pension
expense, journal entries, note disclosure and
worksheet.
Calculation of past service cost amortization,
journal entries, net gain or loss and amortization,
and determination of funded status under
Deferral and Amortization versus Immediate
Recognition Approach.
Deferral and Amortization versus Immediate
Recognition Approach – options available for
actuarial gains/losses.
Funded status for DPB under Immediate
Recognition (IFRS) versus Deferral and
Amortization (ASPE) versus Immediate
Recognition Approach (ASPE).
Comprehensive work sheet and journal entries.
Comprehensive pension work sheet and journal
entries.
Post-retirement benefit expense, amortization of
transitional amount, and continuity of ABO and
plan assets.
Calculation of DBO and past service cost – one
person plan
Level of
Time
Difficulty (minutes)
Moderate
Complex
Complex
20-25
35-45
45-55
Moderate
40-50
Complex
Complex
Complex
40-50
45-55
45-55
Complex
45-60
Moderate
35-45
Complex
45-60
Complex
Moderate
40-45
30-35
Moderate
30-35
Complex
40-45
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 19-1
(a)
With $6 million in total assets less $6.5 million in total
liabilities, the company’s statement of financial position as
of December 31, 2014 shows total shareholders’ equity of
$(0.5 million). With annual pension expense of $2 million in
2014, it appears that the pension plan caused profit and
retained earnings to decrease by $2 million in 2014, and
caused retained earnings to decrease to a deficit and
shareholders’ equity to become negative. The pension plan
is underfunded by $1.5 million ($7.5 million obligation less
$6 million fair value of plan assets) as of December 31,
2014, resulting in a net defined benefit liability of $1.5
million. The net defined benefit liability represents 23% of
total liabilities, and will affect the company’s solvency
ratios such as debt to total assets ratio.
(b)
In addition to the cash contributions the company makes
to the plan, the company incurs the cost of administering
the plan, the opportunity cost of using the cash for other
purposes in the business, and the potentially higher
financing costs due to higher solvency risk as a result of
the underfunded pension plan.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-2
(a)
IFRS
Past service cost recognized immediately in expense
Current service cost ($2,732,864 * 3%)
$845,350
81,986
Pension expense for 2014
$927,336
(b)
ASPE
Past service cost amortized over five years
($845,350 / 5 years)
Current service cost ($2,732,864 * 3%)
$169,070
81,986
Pension expense for 2014
$251,056
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BRIEF EXERCISE 19-3
A Defined Contribution Plan (DC)
A defined contribution (DC) plan is a post-employment benefit
plan that specifies how the entity’s contributions or payments
into the plan are determined, rather than identifying what
benefits will be received by the employee or the method of
determining those benefits.
For a DC pension plan, the amounts that are contributed are
usually turned over to an independent third party or trustee who
acts on behalf of the beneficiaries (the participating employees).
The trustee assumes ownership of the pension assets and is
responsible for their investment and distribution. The trust is
separate and distinct from the employer.
The ultimate risks and rewards of the DC pension plan rests with
the employees as the employer’s involvement is essentially
limited to making the annual contribution each year.
Therefore, the accounting for a DC pension plan is relatively
straight-forward. The employer’s obligation is dictated by the
amounts to be contributed. Therefore, a liability is reported on
the employer’s statement of financial position only if the
required contributions have not been made in full, and an asset
is reported if more than the required amount has been
contributed.
The annual benefit cost (i.e., the pension expense) is simply the
amount that the company is obligated to contribute to the plan.
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BRIEF EXERCISE 19-3 (Continued)
A Defined Benefit (DB) Plan
A defined benefit (DB) plan is any benefit plan that is not a
defined contribution plan. It is a plan that specifies either the
benefits to be received by an employee or the method of
determining those benefits.
Similar to a DC plan, for a DB pension plan, the amounts that are
contributed are usually turned over to an independent third
party or trustee who acts on behalf of the beneficiaries.
The ultimate risks and rewards of the DB pension plan rests with
the employer since the employer must guarantee that a set
retirement benefit will be paid to the employees. The benefits
typically are a function of an employee’s years of service and
compensation level in the years approaching retirement.
To ensure that appropriate resources are available to pay the
benefits at retirement, there is usually a requirement that funds
be set aside during the service life of the employees.
Therefore, accounting for a DB pension plan is much more
complex. The pension cost and defined benefit obligation
depends on many factors such as employee turnover, mortality,
length of service, and compensation levels, as well as
investment returns that are earned on pension assets, inflation,
and other economic conditions over long periods of time.
Because the cost to the company is affected by a wide range of
uncertain future variables, it is not easy to measure the pension
cost and liability that have to be recognized each period as
employees provide services to earn their pension entitlement.
Note: This is not intended to be a comprehensive discussion of
all issues associated with the DB pension plan, but rather, to
highlight some of the key differences between a DB and DC
pension plan.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-4
Defined benefit obligation, opening balance
Interest cost
Current service cost
Benefits paid to retirees
Past service cost
Defined benefit obligation, ending balance
$92
9
21
(8)
13
$127
BRIEF EXERCISE 19-5
Ending plan assets
Beginning plan assets
Increase in plan assets
Deduct: Contributions
Less: benefits paid
Actual return on plan assets
$1,750,000
1,350,000
400,000
$170,000
(140,000)
(30,000)
$ 370,000
BRIEF EXERCISE 19-6
Plan assets, opening balance
Actual return on plan assets
Contributions from employer
Benefits paid to retirees
Plan assets, ending balance
Defined benefit obligation (BE 19-4)
Plan assets at fair value
Plan’s funded status
$100
11
20
(8)
$123
$(127)
123
$ (4)
Since the defined benefit obligation exceeds the plan assets, the
plan is underfunded.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-7
Accrued benefit obligation
Fair value of plan assets
Funded status – net liability
Unrecognized past service cost (debit)
Net defined benefit (liability)/asset
$3,400,000
2,420,000
980,000
990,000
$ 10,000
BRIEF EXERCISE 19-8
Current service cost
Interest on ABO
Expected return on plan assets
Amortization of unrecognized prior service cost
Amortization of unrecognized net actuarial loss
Pension expense
$29,000
22,000
(20,000)
15,200
500
$46,700
BRIEF EXERCISE 19-9
Past service cost
Current service cost
Interest cost
Expected return on plan assets using discount rate
$35
19
11
(11)
Pension expense
$54
Remeasurement gain or loss (OCI):
Actuarial loss on fund assets ($11 - $9)
Actuarial loss on DBO
$2
15
Total remeasurement loss – OCI
$17
Under IFRS, the pension plan results in total pension expense
and decrease in net income and shareholders’ equity of $54, and
total remeasurement loss – OCI and decrease in accumulated
other comprehensive income of $17.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-10
Current service cost
Interest cost ($210,000 X 10%)
Expected return on plan assets using discount rate
[$200,000 + ($77,000 X 6/12)] X 10%
(23,850)
Pension expense
$55,150
Remeasurement gain or loss (OCI):
Actuarial gain on fund assets ($25,000 - $23,850)
Actuarial loss on DBO
Total remeasurement loss – OCI
$58,000
21,000
$(1,150)
14,000
$12,850
Under IFRS, the pension plan results in total pension expense
and a related decrease in net income and shareholders’ equity of
$55,150, and a total remeasurement loss – OCI and decrease in
accumulated other comprehensive income of $12,850.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-11
(a) IFRS
UDDIN CORPORATION
General Journal Entries
Memo Record
RemeasuNet Def.
rement
Annual
Benefit
Defined
(Gain)
Pension
Liability/
Benefit
Plan
Loss- OCI Expense
Cash
Asset
Obligation Assets
-0250,000 Cr 250,000 Dr
27,500 Dr
27,500 Cr
25,000 Cr
25,000 Dr
25,000 Cr
25,000 Dr
Items
1/1/13
Service cost
Interest cost
Exp. return
Remeasurement
5,000 Cr
gain
5,000 Dr
29,000 Cr
Past svce cost
29,000 Dr.
20,000 Dr
Contributions
20,000 Cr
17,500 Dr 17,500 Cr
Benefits Paid
000 Dr29,
51,500 Cr
Exp. Entry
5,000 Cr 56,500 Dr
Contr. entry
20,000 Cr 20,000 Dr
Bal. 12/31/13
31,500 Cr 314,000 Cr 282,500 Dr
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BRIEF EXERCISE 19-11 (Continued)
(b) ASPE
UDDIN CORPORATION
General Journal Entries
Memo Record
Net Def.
Annual
Benefit
Accrued
Liability/
Pension
Benefit
Plan
Items
Expense
Cash
Asset
Obligation Assets
1/1/13
250,000 Cr 250,000 Dr
Service cost
27,500 Dr
27,500 Cr
25,000 Cr
Interest cost 25,000 Dr
Exp. return
25,000 Cr
25,000 Dr
Asset gain
5,000 Dr
29,000 Cr
0
Past svce cost
0,0
20,000 Dr
Contributions
20,000 Cr
17,500 Dr 17,500 Cr
Benefits Paid
00 Dr
Exp. Entry
000
000,
27,500 Dr 00,000 Dr 27,500 Cr
Contr. entry
,000 Cr
000 Cr
20,000 Cr 20,000 Dr
Bal. 12/31/13
7,500 Cr 314,000 Cr 282,500 Dr
Unrecog- Unamornized
tized
Past Svce. Actuarial
Cost
Gain
5,000 Cr
29,000 Dr
29,000 Dr
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Chapter 19
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5,000 Cr
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-12
Current service cost
Interest on ABO
Actual return on plan assets
Pension expense
$27,500
25,000
(30,000)
$22,500
BRIEF EXERCISE 19-13
(a)
Under IFRS, only the immediate recognition approach is
permitted and past service costs are recognized immediately in
net income. Therefore, the entire $1,125,000 will be included in
pension expense for 2013.
(b)
Under the ASPE deferral and amortization approach, the
$1,125,000 of past service costs is amortized to expense over 15
years, which is the expected period of benefit from the time of
adoption or amendment until the employees are eligible for the
plan’s full benefits. Therefore, the portion of past service costs
included in the 2013 pension expense is $75,000 ($1,125,000 /
15).
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-14
Based on the actuarial report, there is a $31,300 actuarial loss.
(a)
Under IFRS, the entire $31,300 actuarial loss is recognized
immediately in other comprehensive income.
(b)
Under ASPE, there are two options available to account for
the actuarial loss:
•Deferral and amortization approach: the $31,300
actuarial loss can remain unrecognized until the total
unrecognized gain/(loss) exceeds the corridor
amount; however, a larger amount can be
recognized, even to the extent of immediate
recognition.
•Immediate recognition approach: the entire $31,300
actuarial loss is recognized immediately in net
income.
BRIEF EXERCISE 19-15
Current service cost
Interest cost
Expected return on plan assets
Post-retirement expense
$80,000
65,500
(48,000)
$97,500
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
BRIEF EXERCISE 19-16
Pension expense for 2013 related to past service costs:
Past service costs
Average years full eligibility of employee group
Amortization per year
$775,000
÷
17.5
$ 44,286
BRIEF EXERCISE 19-17
Unrecognized net actuarial loss
Corridor (10% X $3,300,000)
Excess
Average remaining service life
Minimum amortization
$475,000
330,000
145,000
÷
7.5
$ 19,333
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SOLUTIONS TO EXERCISES
EXERCISE 19-1 (5-10 minutes)
(a) Pension Contributions Payable ...................... 26,300
Cash .........................................................
26,300
(b) Pension Expense for December 2014:
$276,100 x 5% = $13,805
(c) Current liability:
Pension Contributions Payable ($13,805 x 2)
$ 27,610
This assumes amounts for previous months were remitted
as required each month. At December 31, 2014 all that
remains payable is the amount withheld from employees in
December and the required employer matching amount.
EXERCISE 19-2
(a) Pension Expense ............................................. 135,000
([$2,000 x 40] + [$1,000 x 55]) = $135,000
(b) Pension Expense ............................................. 135,000
Employee Pension Contributions Payable
35,000
Cash .........................................................
170,000
Employer portion: ([$2,000 x 40] + [$1,000 x 55]) = $135,000
Employee contribution: ([$2,000 x 10] + [$1,000 x 15]) = $35,000
(the $35,000 would have been included as a payable at the time
that the related Salaries and Wages Expense was calculated).
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-3 (15-20 minutes)
(a) Defined benefit obligation, 1/1/14
Interest cost ($2,000,000 x 10%)
Current service cost
Past service cost
Benefits paid out
DBO, 12/31/14
$2,000,000
200,000
225,000
25,000
(100,000)
$2,350,000
(b) Plan assets, 1/1/14
Actual return on plan assets
Contributions
Benefits paid out
Plan assets, 12/31/14
$1,600,000
160,000
262,500
(100,000)
$1,922,500
(c) Pension expense 2014:
Current service cost
Interest cost on DBO ($2,000,000 x 10%)
Actual return on plan assets
Past service cost
Pension expense for 2014
$225,000
200,000
(160,000)
25,000
$290,000
(d) Pension Expense ......................................... 290,000
Net Defined Benefit Liability/Asset ......
290,000
Net Defined Benefit Liability/Asset ............. 262,500
Cash........................................................
262,500
(e) Net defined benefit liability/(asset), 1/1/14
Contributions
Pension expense
Net defined benefit liability/(asset), 12/31/14
$ 400,000
(262,500)
290,000
$ 427,500
Alternatively, the amount could also be reconciled as follows:
Defined benefit obligation
$(2,350,000)
Plan assets at fair value
1,922,500
DBO in excess of plan assets (funded status) or
Net defined benefit (liability)/asset
$(427,500)
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-4 (15-25 minutes)
(a)
Rebek Corporation
Pension Work Sheet—2014
General Journal Entries
Annual
Net Def.
Pension
Benefit
Expense
Cash
Liab/Asset
Balance, 01/01/2014
Service cost
*Interest cost
Actual return
Past service cost
Contributions
Benefits paid
Journal entry
Balance, 01/31/2014
*
400,000 Cr.
225,000 Dr.
200,000 Dr.
160,000 Cr.
25,000 Dr.
000,000 Dr.
290,000 Dr.
Memo Record
Defined
Benefit
Plan
Obligation
Assets
2,000,000 Cr.
225,000 Cr.
200,000 Cr.
160,000 Dr.
25,000 Cr.
262,500 Cr.
000,000 Dr.
262,500 Cr.
27,500 Cr.
427,500 Cr.
100,000 Dr.
000,000 Dr.
2,350,000 Cr.
$200,000 = $2,000,000 X 10%.
Calculation of funded status
Defined benefit obligation
Plan assets at fair value
Funded status
1,600,000 Dr.
$(2,350,000)
1,922,500
$(427,500)
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Chapter 19
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262,500 Dr.
100,000 Cr.
000,000 Dr.
1,922,500 Dr.
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EXERCISE 19-4 (Continued)
(b) Pension Expense ......................................... 290,000
Net Defined Benefit Liability/Asset ......
290,000
Net Defined Benefit Liability/Asset ............. 262,500
Cash........................................................
262,500
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-5 (25-30 minutes)
(a) Assume that the company uses the immediate recognition approach under IFRS:
Defined
benefit
obligation
Pension plan
assets
Funded
status*
Pension
expense
Current service cost
Actual return on plan
assets
I
NE
NE
I or D,
depending
on whether it
is positive (I)
or negative
(D)
Expected return on plan
assets
Past service costs on date
of plan revision (inception)
Actuarial gain
Actuarial loss
Employer contributions
Benefits paid to retirees
An increase in the average
life expectancy of
employees.
NE
NE
D
I
I or D,
NE
depending
on
whether it
is positive
(I) or
negative
(D)
NE
D
I
NE
D
I
D
I
NE
D
I
NE
NE
I
D
NE
I
D
I
NE
D
NE
NE
NE
NE
NE
Remeasurement
Gain
(Loss) OCI
NE
NE
NE
NE
I
D
NE
NE
D as this
is an
actuarial
loss
*Assumes an increase in the DBO decreases the funded status and that an increase in
the pension plan assets increases the funded status.
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19-22
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-5 (Continued)
(b) Assume that the company uses the deferral and amortization approach under
ASPE:
Current service cost
Actual return on plan assets
Expected return on plan
assets
Past service costs on date of
plan revision (inception)
Amortization of past service
costs
Actuarial gain/loss
Amortization of actuarial gain
or loss
Employer contributions
Benefits paid to retirees
An increase in the average
life expectancy of employees.
Accrued
benefit
obligation
I
NE
Pension plan
assets
Funded
status*
Pension
expense
D
I or D,
depending
on whether
it is positive
(I) or
negative (D)
NE
I
NE
NE
NE
I or D,
depending
on whether it
is positive (I)
or negative
(D)
NE
I
NE
D
NE
NE
NE
NE
I
D/I
NE
NE
NE
I/D
NE
NE
D
I
I
D
NE
I
NE
D
NE
D (gain)
I (loss)
NE
NE
NE
D
*Assumes an increase in the ABO decreases the funded status and that an increase in
the pension plan assets increases the funded status.
Solutions Manual
19-23
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-6 (10-15 minutes)
Calculation of Actual Return on Plan Assets
Fair value of plan assets at 12/31/14
$1,596,875
Fair value of plan assets at 1/1/14
1,418,750
Increase in fair value of plan assets
178,125
Deduct: Contributions to plan during 2014 $212,500
Less: benefits paid during 2014
218,750
6,250
Actual return on plan assets for 2014
$ 184,375
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-7 (35-45 minutes)
(a) Actual = (Ending – Beginning) – (Contributions – Benefits)
Fair value of plan assets,
December 31, 2013
$2,096
Deduct: Fair value of plan assets,
January 1, 2013
1,360
Increase in fair value of plan assets
736
Deduct: Contributions
$640
Less: benefits paid
160
480
Actual return on plan assets in 2013
$ 256
(b) Calculation of pension liability gains and losses and pension
asset gains and losses.
1.
Difference between 12/31/13 actuarially calculated ABO and
12/31/13 recorded Accrued benefit obligation (ABO):
ABO at end of year
$2,916
ABO per memo records:
1/1/13 ABO
$2,240
Add interest (10%)
224
Add service cost
320
Less benefit payments
(160)
2,624
Liability loss
$292
2.
Difference between actual fair value of plan
assets and expected fair value:
12/31/13 actual fair value of plan assets
$2,096
Expected fair value
1/1/13 fair value of plan assets $1,360
Add expected return
($1,360 X 10%)
136
Add contributions
640
Less benefits paid
(160)
1,976
Asset gain
(120)
Unrecognized net actuarial (gain) or loss
$ 172
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-7 (Continued)
(c) Because no net actuarial gain or loss existed at the beginning
of the period, no actuarial gain or loss amortization occurs.
Therefore, the corridor calculation is not needed.
In 2014, the amortization of the actuarial loss will be as follows:
Beginning-of-the-Year
Year
ABO
Plan
Assets
(FV)
2014
$2,916
$2,096
10%
Corridor
Unrecognized
Net Loss
Loss
Amortization
$292
$172
–0–
(d) Past service cost amortization:
$880 X 1/20 = $44 per year.
(e) Pension expense for 2013:
Service cost
Interest cost ($2,240 X 10%)
Expected return on plan assets ($1,360 X 10%)
Amortization of past service cost
Pension expense for 2013
(f)
Reconciliation schedule:
Accrued benefit obligation
Fair value of plan assets
Funded status
Unrecognized past service cost
($880 – $44)
Unrecognized net actuarial (gain) or loss
Net defined benefit (liability)/asset
$320
224
(136)
44
$452
$(2,916)
2,096
(820)
(836
172
$ 188
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-8 (30-35 minutes)
(a)
Berstler Limited
Pension Work Sheet—2013
General Journal Entries
Items
Balance, Jan. 1, 2013
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Unexpected gain
(e) Amortization of PSC
(f) Contributions
(g) Benefits paid
(h) Liability loss
(increase)
Expense entry—2013
Contributions
Balance, Dec. 31, 2013
(b)
(c)
(d)
(e)
(h)
Annual
Pension
Expense
Cash
Net Def.
Benefit
Liability/
Asset
Memo Record Entries
Accrued
Benefit
Obligation
2,240 Cr.
320 Cr.
224 Cr.
320 Dr.
224 Dr.
136 Cr.
Plan
Assets
1,360 Dr.
Unrecognized
Past
Service Cost
Unrecognized
Net Actuarial
Gain
or Loss
880 Dr.
136 Dr.
120 Dr.
120 Cr.
44 Dr.
44 Cr.
640 Cr.
000 Dr. 000 Dr.
452 Dr.
640 Cr.
452 Cr.
640 Dr.
188 Dr.
160 Dr.
640 Dr.
160 Cr.
292 Cr.
0,000 Cr.
0,000 Cr.
0,000 Cr.
292 Dr.
000 Dr.
2,916 Cr.
2,096 Dr.
836 Dr.
172 Dr.
$2,240 X 10%
$136 = $1,360 X 10%
$120 = $2,096 – ($1,360 + $136 + $640 - $160)
$880 X 1/20 = $44
$292 = $2,916 – ($2,240 + $320 + $224 – $160)
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19-27
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-8 (Continued)
(b)
Journal entries 12/31/13
Pension Expense....................................................
Net Defined Benefit Liability/Asset ................
452
Net Defined Benefit Liability/Asset .......................
Cash .................................................................
640
(c) Reconciliation schedule:
Accrued benefit obligation
Fair value of plan assets
Funded status
Unrecognized past service cost
($880 – $44)
Unrecognized net actuarial (gain) or loss
Net defined benefit (liability)/asset
452
640
$(2,916)
2,096
(820)
(836
172
$ 188
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19-28
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-9 (30-35 minutes)
(a) Accrued benefit obligation, 1/1/13
Past service cost
Interest cost ($330,000 x 9%)
Current service cost
Benefits paid out
ABO, 12/31/13
$280,000
50,000
330,000
29,700
29,000
(20,000)
$368,700
(b) Plan assets, 1/1/13
Actual return on plan assets
Contributions
Benefits paid out
Plan assets, 12/31/13
$273,100
26,140
27,500
(20,000)
$306,740
(c) Pension expense 2013:
Current service cost
Interest cost ($330,000 x 9%)
Actual return on plan assets
Past service cost
$ 29,000
29,700
(26,140)
50,000
$ 82,560
Pension Expense .........................................
Net Defined Benefit Liability/Asset.......
82,560
82,560
Additionally, though not required, the entry to record the
company’s 2013 contribution:
Net Defined Benefit Liability/Asset .............
Cash........................................................
27,500
(d) Plan’s Funded Status
ABO, 12/31/13
Plan assets, 12/31/13
Balance of Net Defined Benefit Liability/(Asset)
on the statement of financial position
27,500
$368,700
306,740
$ 61,960
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19-29
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-9 (Continued)
(e) Pension expense 2013:
Current service cost
Interest cost ($330,000 x 9%)
Expected return on plan assets (9% of $273,100)
Amortization of past service cost ($50,000 / 5)
$29,000
29,700
(24,579)
10,000
$44,121
(f) Deferral and amortization pension expense:
Deduct: amortization of past service cost
Add: 100% of past service cost
Add: Expected return on plan assets
Deduct: Actual return on plan assets
$44,121
(10,000)
50,000
24,579
(26,140)
$82,560
(g) Under the immediate recognition approach, pension
expense increases and net income decreases by $82,560,
and net defined benefit liability increases by $55,060
($82,560 - $27,500). Under the deferral and amortization
approach, pension expense increases and net income
decreases by $44,121, and net defined benefit liability
increases by $16,621 ($44,121 - $27,500). In this case, the
immediate recognition approach will result in lower
profitability ratios (such as return on assets and return on
equity), and weaker solvency ratios (such as debt to total
assets and cash debt coverage ratio), compared to the
deferral and amortization approach. A creditor should
review the notes to the financial statements describing the
company’s accounting policies related to its pension plan,
and note the effect of the accounting policies on the
company’s financial statements and ratios.
Solutions Manual
19-30
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-10 (10-15 minutes)
(a) Calculation of pension expense under IFRS using the
immediate recognition approach:
Service cost
$65,000
Interest cost ($500,000 X .10)
50,000
Expected return on plan assets (discount rate)
(15,000)
Pension expense for 2013
$100,000
Pension Expense ............................................ 100,000
Remeasurement Gain - OCI ....................
2,000*
Net Defined Benefit Liability/Asset ........
98,000
*Actuarial gain on assets = $17,000 - $15,000
Net Defined Benefit Liability/Asset ................ 95,000
Cash .........................................................
95,000
(b) Calculation of pension expense under ASPE using the
deferral and amortization approach:
Service cost
$ 65,000
Interest cost ($500,000 X .10)
50,000
Expected return on plan assets
(15,000)
Pension expense for 2013
$100,000
Pension Expense ............................................ 100,000
Net Defined Benefit Liability/Asset ........
100,000
Net Defined Benefit Liability/Asset ................ 95,000
Cash .........................................................
95,000
Solutions Manual
19-31
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-11 (25-35 minutes)
(a) Accrued benefit obligation, 1/1/13
Past service cost
Interest cost ($455,400 x 10%)
Current service cost
Benefits paid out
ABO, 12/31/13
$315,000
140,400
455,400
45,540
63,000
(43,200)
$520,740
Plan assets, 1/1/13
$297,000
Actual return on plan assets ($297,000 x 8%)
23,760*
Contributions
79,200
Benefits paid out
(43,200)
Plan assets, 12/31/13
$356,760
*Note: expected return = 7%X $297,000 = $20,790, therefore
there is an actuarial gain on the assets of $23,760 - $20,790 =
$2,970.
Amount of Net Defined Benefit Liability/Asset on the balance
sheet:
Accrued benefit obligation
Plan assets at fair value
ABO in excess of plan assets
Unrecognized past service cost
$112,320
Unrecognized actuarial gain
( 2,970)
Net defined benefit (liability)/asset
(b) Pension expense 2013:
Current service cost
Interest cost ($455,400 x 10%)
Expected return on plan assets (7% of $297,000)
Amortization of past service cost ($140,400 / 5)
$(520,740)
356,760
(163,980)
109,350
($54,630)
$ 63,000
45,540
(20,790)
28,080
$115,830
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19-32
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-11 (Continued)
(c) Accrued benefit obligation, funding basis, 1/1/13
Past service cost
Interest cost ($395,400 x 10%)
Current service cost
Benefits paid out
ABO, 12/31/13
$255,000
140,400
395,400
39,540
63,000
(43,200)
$454,740
Plan assets, 1/1/13
Actual return on plan assets ($297,000 x 8%)
Contributions
Benefits paid out
Plan assets, 12/31/13
$297,000
23,760
79,200
(43,200)
$356,760
Amount Reported on the balance sheet:
Accrued benefit obligation
Plan assets at fair value
Funded status and Net defined benefit
(liability)/asset
(d) Pension expense 2013:
Current service cost
Interest cost ($395,400 x 10%)
Actual return on plan assets
Past service cost
$(454,740)
356,760
($97,980)
$ 63,000
39,540
(23,760)
140,400
$219,180
Solutions Manual
19-33
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-12 (20-25 minutes)
(a) Pension expense for 2013 comprised the following:
Current service cost
$ 56,000
Interest on accrued benefit obligation
90,000
(9% X $1,000,000)
(54,000)
Expected return on plan assets
Amortization of past service cost
40,000
Pension expense
$132,000
(b) Pension Expense ............................................ 132,000
Net Defined Benefit Liability/Asset ........
132,000
Net Defined Benefit Liability/Asset ................ 145,000
Cash .........................................................
145,000
(c) Accrued benefit obligation (credit) (1)
$(1,146,000)
Plan assets at fair value (debit) (2)
799,000
ABO in excess of plan assets (or funded status)
(347,000)
Unrecognized past service cost (debit):
Beginning balance, 1/1/13
$400,000
Less amortization
(40,000)
360,000
Net defined benefit asset
$ 13,000
(1) Accrued benefit obligation 31/12/13: $1,000,000 +
$56,000 + $90,000 = $1,146,000
(2) Plan assets 31/12/13: $600,000 + $54,000 + $145,000
= $799,000
Solutions Manual
19-34
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-12 (Continued)
(d) Income Statement:
Pension expense
Balance Sheet:
Assets
Net defined benefit asset
$132,000
$13,000
Note X: The company sponsors a defined benefit pension
plan covering the following group of employees and
providing the following benefits.
For the year ending December 31, 2014, the net expense for
the company’s pension plan is $132,000. The present value
of the accrued benefit obligation at December 31, 2014, is
$1,146,000 and the market related value of the fund assets is
$799,000 based on the fair market value of the assets on that
date. This results in an underfunded obligation of $347,000.
Employer and employee contributions during 2014
amounted to $145,000 and no benefits were paid out. At
December 31, 2014, the accrued pension cost asset is
$13,000.
Other information to be disclosed:
assumptions that
underlie the plan such as the discount rate, the rate of
increase in compensation levels, and the expected longterm rate of return on plan assets, as well as significant
accounting policies governing the pension plan.
(e) Accrued benefit obligation 1/1/13 (credit)
$(1,000,000)
Plan assets at fair value 1/1/13 (debit)
600,000
ABO in excess of plan assets (or funded status)
(400,000)
Unrecognized past service cost 1/1/13 (debit)
400,000
Net defined benefit liability/asset, 1/1/13
$
0
Solutions Manual
19-35
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-13 (5-10 minutes)
Pension expense 2014 – to net income:
Current service cost
$ 13,000
Interest on ABO (10% of $176,000 + $34,000)
21,000
Expected return on plan assets (10% of $155,000) (15,500)
Past service cost
34,000
$ 52,500
Solutions Manual
19-36
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-14 (30-35 minutes)
(a) Service cost
Interest on defined post-retirement benefit
obligation (10% X $110,000)
Expected return on plan assets – 10%
Post-retirement benefit expense 2014
$ 57,000
11,000
(4,200)
$63,800
(b) Actuarial loss on assets (3,000 – 4,200)
Actuarial loss on obligation
Post-retirement benefit remeasurement
loss – OCI
$1,200
31,000
$32,200
(c) Plan assets, 1/1/14
Actual return on plan assets
Contributions
Benefits paid out
Plan assets, 12/31/14
$42,000
3,000
22,000
(6,000)
$61,000
Defined post-retirement benefit obligation, 1/1/14
$110,000
Interest cost ($110,000 x 10%)
11,000
Service cost
57,000
Actuarial loss
31,000
Benefits paid out
(6,000)
Defined post-retirement benefit obligation,12/31/14 $203,000
Defined post-retirement benefit obligation,12/31/14 $(203,000)
Plan assets at fair value
61,000
Defined post-retirement benefit obligation in
excess of plan assets (funded status)
$(142,000)
(d) Net post-retirement benefit liability/(asset), 1/1/14
$ 68,000
Post-retirement benefit expense 2014
63,800
Remeasurement loss –OCI
32,200
Contributions (funding) during 2014
(22,000)
Net post-retirement benefit liability/(asset),12/31/14 $142,000
(e) There is no need to reconcile – these two now have the
same balance.
Solutions Manual
19-37
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
Solutions Manual
19-38
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-15 (20-30 minutes)
(a)
Yorke Inc.
Pension Work Sheet—2013
General Journal Entries
Items
Balance, January 1, 2013
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Gain on plan assets
(e) Contributions
(f) Benefits
Journal entry, December 31
Balance, Dec. 31, 2013
Annual
Pension
Expense
Cash
Net Def.
Ben. Liab/
Asset
40,000 Dr.
41,650 Dr.
41,650 Cr.
00,000 Dr.
40,000 Dr.
30,000 Cr.
00,000 Dr.
30,000 Cr.
10,000 Cr.
10,000 Cr.
Memo Record
Defined
Benefit
Obligation
490,000 Cr.
40,000 Cr.
41,650 Cr.
33,400 Dr.
000,000 Dr.
538,250 Cr.
Plan
Assets
490,000 Dr.
41,650 Dr.
8,050 Dr.
30,000 Dr.
33,400 Cr.
000,000 Dr.
536,300 Dr.
Unrecognized
Gain
(Loss)
8,050 Cr.
0,000
8,050 Cr.
(b) $41,650 = $490,000 X .085.
(c) $41,650 = $490,000 X .085.
(d) $8,050 = $49,700 – $41,650.
Yorke Inc.
Pension Work Sheet—2008
General Journal Entries
Solutions Manual
19-39
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1.1.1.1 Items
Annual
Pension
Actuarial
Gain in
Pension
Funded
Status
Memo Record
Chapter 19
Accrued
Benefit
Plan
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-15 (Continued)
Pension expense 2013:
Service cost
Interest on defined benefit obligation
(8.5% X $490,000)
Expected return on plan assets (8.5% X $490,000)
$ 40,000
41,650
(41,650)
$ 40,000
Pension Expense.................................................
Net Defined Benefit Liability/Asset .............
40,000
Net Defined Benefit Liability/Asset ....................
Cash ..............................................................
30,000
40,000
30,000
These calculations could be completed through a worksheet as
shown on the previous page.
(b) If the immediate recognition approach was used under IFRS,
the following changes to the calculation of pension expense in
part (a) would be required:
1. The $8,050 difference between the actual return on plan
assets of $49,700 and the return on the asset portion of
the net interest cost of 8.5% X $490,000 or $41,650, would
be recorded in the books of the company as a credit to
Remeasurement (Gain) Loss – OCI and a debit to Net
Defined Benefit Liability/Asset. Therefore, the pension
expense included in net income under IFRS is still
$40,000, but there is also a $8,050 remeasurement gain
recognized in OCI.
2. The Net Defined Benefit Liability/Asset under IFRS is
$8,050 less than under ASPE as the $8,050 benefit is
“booked.” The balance of the Net Defined Benefit
Liability/Asset is therefore $10,000 - $8,050 = $1,950
credit.
Solutions Manual
19-40
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-15 (Continued)
Note: In addition, under IFRS the discount rate used for the
obligation is also used for the reduction in benefit expense
due to the return on plan assets. i.e., it is used to calculate the
net interest cost. In this case, co-incidentally, the expected
rate of 8.5% is the same as the discount rate, but often would
not be.
Solutions Manual
19-41
Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-16 (15-20 minutes)
(a) The excess of cumulative net gain or loss over the corridor
amount is amortized by dividing the excess by the average
remaining service period of employees.
Amortization of Net (Gain) or Loss
Year
2013
2014
2015
2016
Minimum
Accrued
Cumulative
Amortization
Benefit
Plan
Unrecognized
of (Gain)
Obligation (a) Assets (a) Corridor (b) (Gain) Loss (a)
Loss
$4,000,000
$2,400,000 $400,000
$
0 (d)
$
0 (c)
4,520,000
2,200,000
452,000
480,000 (d)
2,333 (c)
4,980,000
2,600,000
498,000
777,667 (d) (
23,306 (e)
4,250,000
3,040,000
425,000
544,361 (f)
9,947 (g)
(a) As of the beginning of the year.
(b) The corridor is 10% of the greater of accrued benefit obligation or plan
assets.
(c) $480,000 – $452,000 = $28,000; $28,000/12 = $2,333
(d) $480,000 + $300,000 – $2,333 = $777,667
(e) $777,667 – $498,000 = $279,667; $279,667/12 = $23,306
(f) $777,667 – $23,306 – $210,000 = $544,361
(g) $544,361 – $425,000 = $119,361; $119,361/12 = $9,947
(b) IFRS requires the immediate recognition approach to
account for actuarial gains or losses. The actuarial gains or
losses are recognized in other comprehensive income
instead of net income.
(c) The ASPE deferral and amortization approach provides an
option to recognize actuarial gains or losses immediately as
well; however, unlike IFRS, the actuarial gains or losses
must be recognized in net income as opposed to other
comprehensive income. In addition, under ASPE, the
approach in part (a) determined the minimum amount to
include in expense. The company could have a policy that
recognizes more than the minimum, but less than all of the
gains or losses.
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-17 (10-12 minutes)
Current service cost
Interest on defined post-retirement benefit
obligation (9% X $1,822,500)
Expected return on plan assets (9% X $1,597,500)
Post-retirement benefit expense
$ 202,500
164,025
(143,775)
$222,750
Remeasurement gain or loss – OCI:
Actuarial loss on fund assets
$143,775 - $141,750 ......................................
$2,025
Post-Retirement Benefit Expense ............... 222,750
Net Retirement Benefit
Liability/Asset .................................
222,750
Remeasurement Loss (OCI).........................
Net Retirement Benefit
Liability/Asset ................................
Net Retirement Benefit
Liability/Asset ........................................
Cash .................................................
2,025
2,025
47,250
47,250
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-18 (15-20 minutes)
(a) See work sheet on next page.
(b) Retirement Benefit Expense ........................ 222,750
Net Retirement Benefit
Liability/Asset .................................
222,750
Remeasurement Loss (OCI).........................
Net Retirement Benefit
Liability/Asset ................................
Net Retirement Benefit
Liability/Asset ........................................
Cash .................................................
2,025
2,025
47,250
47,250
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-18 (a) (Continued)
(a) Opsco Corp. Post-retirement Benefit Plan Worksheet 2013
Remeas.
Benefit
Cash
Defined
(Gain)/Loss Expense
Benefit
OCI
Liab/Asset
Opening
balance
Service cost
225,000 Cr. 1,822,500 Cr. 1
202,500
Dr.
164,025
Dr.
143,775
Cr.
Interest cost
Expected return
Remsmt. loss
Contributions
Benefits paid
Expense entry
Funding entry
Total
DBO
202,500 Cr.
164,025 Cr.
2,025 Dr.
47,250
Cr.
90,000 Dr.
2,025 Dr.
222,750
Dr.
224,775 Cr.
47,250
Cr.
47,250 Dr.
402,525 Cr. 2,099,025 Cr. 1
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-19 (10-15 minutes)
(a) Accrued post-retirement benefit obligation
(Credit)
Plan assets at fair value (Debit)
Funded status (Credit)
Unrecognized past service cost (Debit) *
Accrued Benefit Liability/Asset (Credit)
$(190,000)
130,000
(60,000)
(
11,000
$ (49,000)
* $12,000 – $1,000 (amortization)
(b)
Defined post-retirement benefit obligation
(Credit)
Plan assets at fair value (Debit)
Funded status (Credit) and Net Defined Benefit
Liability/Asset (Credit)
$(190,000)
130,000
$ (60,000)
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-20 (25-35 minutes)
(a) Note A: Significant Accounting Policies
Employee Benefit Plans
The company accrues its obligations under employee
benefit plans and the related costs, net of plan assets, using
the deferral and amortization approach. The company has
adopted the following policies:
• The cost of pensions earned by employees is actuarially
determined using the accrued benefit method prorated on
service and management's best estimate of expected plan
investment performance, salary escalation, retirement ages
of employees.
• For the purpose of calculating the expected return on plan
assets, those assets are valued at fair value.
• Past service costs from plan amendments are amortized
on a straight-line basis over the average remaining service
period of employees active at the date of amendment.
• The excess of the net actuarial gain (loss) over 10% of the
greater of the benefit obligation and the fair value of plan
assets is amortized over the average remaining service
period of active employees. The average remaining service
period of the active employees covered by the pension
plan is 16 (assumed) years (2012) and 15 (assumed) years
(2013).
Note X: The company sponsors a defined benefit pension
plan covering the following group of employees and
providing the following benefits.
As of December 31, 2013, the net expense for the company’s
pension plan is $171,320 ($94,000 + $253,000 – $175,680).
The present value of the accrued benefit obligation at
December 31, 2013, was $2,737,000 and the market related
value of the fund assets was $2,278,329 based on the fair
market value of the assets on that date. This results in an
underfunded obligation of $458,671. Employer contributions
during 2013 amounted to $92,329 and benefits paid
amounted to $140,000. At December 31, 2013, the accrued
pension liability is $(412,991).
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-20 (Continued)
Other information to be disclosed:
assumptions that
underlie the plan such as the discount rate, the rate of
increase in compensation levels, and the expected longterm rate of return on plan assets.
(b)and (c)
Note A: Significant Accounting Policies
Employee Benefit Plans
The company accrues its obligations under employee
defined benefit plans and the related costs, net of plan
assets, using the immediate recognition approach.
Note X: The company sponsors a defined benefit pension
plan covering the following group of employees and
providing the following benefits.
Information about the company’s defined benefit plan is as
follows:
Defined benefit obligation:
Balance at beginning of year, therefore
Interest cost—given
Current service cost—given
Benefits paid—given
Balance at end of year—given
$2,530,000
253,000
94,000
(140,000)
$2,737,000
Plan assets:
Fair value at beginning of year, therefore
Actual return on plan assets—given
Employer contributions—given
Benefits paid—given
Fair value at end of year—given
$2,196,000
130,000
92,329
(140,000)
$2,278,329
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-20 (Continued)
Net defined benefit (liability)/asset:
Defined benefit obligation
Plan assets at fair value
Funded status and
Net defined benefit (liability)/asset
Pension expense:
Current service cost—given
Interest cost—given
Expected return on plan assets—given
Pension expense
Remeasurement (Gain) Loss - OCI:
Actuarial loss on fund assets:
$175,680 - $130,000 =
Remeasurement (Gain) Loss - OCI
$(2,737,000)
2,278,329
$(458,671)
$ 94,000
253,000
(175,680)
$ 171,320
$ 45,680
$ 45,680
Other information to be disclosed:
assumptions that
underlie the plan such as the discount rate, the rate of
increase in compensation levels, what type of assets make
up the pension fund assets, the dates of the most recent
actuarial revaluations, etc.
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-20 (Continued)
(c) The beginning balances of defined benefit obligation, and
pension plan assets are shown in part (b) on the previous page.
Net defined benefit liability/(asset):
Defined benefit obligation, 1/1/13
Plan assets at fair value, 1/1/13
Funded status liability/(asset) and
Net defined benefit liability/(asset), 1/1/13
$2,530,000
2,196,000
$334,000
Alternatively,
Net defined benefit liability/(asset), 12/31/13
Pension expense
Employer contributions
Remeasurement Gain (Loss) - OCI
Net defined benefit liability/(asset), 1/1/13
$458,671
(171,320)
92,329
(45,680)
$334,000
Solutions Manual
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-21 (25-30 minutes)
(a) Past service costs under ASPE are amortized on a straightline basis over the period the firm expects to realize the
economic benefits from the change in the plan.
Calculation of Service-Years
Expected Years of
Employee
Service
Brandon
3
Chiara
5
Mikayla
6
Angela
5
Paolo
4
Erminia
7
Total
Total
3
5
6
5
4
7
30
Expected average remaining service life
= 30 ÷ 6 employees = 5 years
Past service cost 2013 through 2017 = $340,000 ÷ 5 = $68,000
Past service cost amortization would be complete at the end of
2017, therefore, there would be no amortization in 2018.
(b) Past service costs under IFRS are expensed immediately in
net income. Therefore, the $340,000 of past service costs will
be expensed immediately in 2013, resulting in no
amortization in 2014 and beyond.
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
*EXERCISE 19-22 (25-30 minutes)
(a) The employee’s expected final salary in 2032 would be
calculated as follows:
$40,000 X (1.04)26 = $110,899
(in 27 years there would be 26 raises)
(b) Step 1: Calculate annual pension benefit on retirement from
working in 2014:
Annual pension benefits on retirement
= 2.5% X $110,899 X 1 year
= $2,772 per year of retirement
Step 2: Discount the present value of the annuity of $2,772
for 21 years at 6% to December 31, 2032.
Present value of an annuity of $2,772 discounted at 6% for
21 periods:
($2,772 X 11.76408) = $32,610
Using a financial calculator:
PV
I
N
PMT
FV
Type
$
$ ?
6%
21
(2,772)
$ 0
0
Yields $32,610
Excel formula: =PV(rate,nper,pmt,fv,type)
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
*EXERCISE 19-22 (Continued)
Step 3: Discount the present value of the annuity in 2032 to
its present value at 2014:
Present value of $32,610 discounted at 6% for 18 years
($32,610 X .35034) = $11,425
(18 years = 2013 to 2032)
Using a financial calculator:
PV
I
N
PMT
FV
Type
$ ?
6%
18
$ 0
$ (32,610)
0
Yields $11,425
Excel formula: =PV(rate,nper,pmt,fv,type)
The current service cost relative to this plan for 2014 would
be $11,425.
(c) Pension benefits earned from January 1, 2009 to December
31, 2014
= 2.5% X $110,899 X 6 years = $16,635 per year of retirement.
Present value at December 31, 2032 of an annuity of $16,635
discounted at 6% for 21 periods:
($16,633 X 11.76408) =
$195,676
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*EXERCISE 19-22 (Continued)
Using a financial calculator:
PV
I
N
PMT
FV
Type
$
$ ?
6%
21
(16,633)
$ 0
0
Yields $195,676
Excel formula: =PV(rate,nper,pmt,fv,type)
The defined benefit obligation represents the present value of
this amount discounted at 6% for 18 years:
Present value of $195,676 discounted at 6% for 18 years
($195,676 X .35034) = $68,558
Using a financial calculator:
PV
I
N
PMT
FV
Type
$ ?
6%
18
$ 0
$ (195,676)
0
Yields $68,558
Excel formula: =PV(rate,nper,pmt,fv,type)
The defined benefit obligation at December 31, 2014 would
be $68,558.
Solutions Manual
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
EXERCISE 19-23 (20-25 minutes)
Corridor and Minimum Loss Amortization
Accrued
Benefit
Obligation
Year
(a)
2012 $3,500,000
2013 4,200,000
2014 5,075,000
2015 6,300,000
(a)
(b)
(c)
(d)
(e)
(f)
Plan
Asset
Value (a)
10%
Corridor
$3,325,000 $350,000
4,375,000 437,500
4,550,000 507,500
5,250,000 630,000
Unrecognized
Cumulative
Net Loss in
(a)
$
0(
490,000 (
642,250 (c)
648,521 (e)
Minimum
Amortization
of Loss
$
0(
5,250 (b)
11,229 (d)
1,543(f)
As of the beginning of the year.
($490,000 – $437,500) ÷ 10 years = $5,250
$490,000 – $5,250 + $157,500 = $642,250
($642,250 – $507,500) ÷ 12 years = $11,229
$642,250 – $11,229 + $17,500 = $648,521
($648,521 – $630,000) ÷ 12 years = $1,543
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
TIME AND PURPOSE OF PROBLEMS
Problem 19-1 (Time 20-25 minutes)
Purpose—to provide the student with an opportunity to determine the appropriate
accounting for the costs of a long-term disability benefit and prepare the journal
entries.
Problem 19-2 (Time 35-45 minutes)
Purpose—to provide a problem that requires calculation of the liability for a
vested benefit plan for sabbatical leave. This is a challenging problem that
requires the student to apply the principles of vested benefit plans to a new
situation.
Problem 19-3 (Time 45-55 minutes)
Purpose—to provide a problem that requires a comparison of the immediate
recognition approach under IFRS versus the immediate recognition approach
under ASPE, and preparation of continuity schedules for defined benefit obligation,
fund assets and pension expense for three years’ pension transactions, three
years of general journal entries for the pension plan, and reconciliation schedules
at the end of each year.
Problem 19-4 (Time 40-50 minutes)
Purpose—to provide a problem that requires a detailed analysis of the reporting
standards (and differences) for accounting for a defined benefit plan under both
the deferral and amortization approach versus the immediate recognition
approach.
Problem 19-5 (Time 40-50 minutes)
Purpose—to provide a problem that requires a detailed analysis of the reporting
standards (and differences) for accounting for a defined benefit plan between the
immediate recognition approach under IFRS and the deferral and amortization
approach under ASPE.
Problem 19-6 (Time 40-50 minutes)
Purpose—to provide a problem that requires calculation of the annual pension
expense, preparation of the pension journal entries, measurement of
unrecognized gains and losses and their amortization, and reconciling the funded
status to the liability on the statement of financial position.
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 19-7 (Time 45-55 minutes)
Purpose—to provide a problem that requires calculation of pension expense,
preparation of the pension journal entries, and note disclosure. Amounts required
in the note disclosure must be calculated using information for two consecutive
years. The calculations are complicated by missing information that must be
deduced. The pension worksheet must also be prepared.
Problem 19-8 (Time 50-60 minutes)
Purpose—to provide a problem that requires calculation of the pension expense
and continuity of the accrued benefit obligation and plan assets for three
separate years. The preparation of the worksheet for the three consecutive years
is also required. The application of the corridor approach to the amortization of
gains and losses is required.
Problem 19-9 (Time 45-60 minutes)
Purpose—to provide a problem that requires calculation and amortization of past
service cost, calculation of pension expense, calculation and amortization
(corridor approach) of actuarial gains or losses, preparation of pension journal
entries, and reconciliation of the plan’s funded status to the liability.
Problem 19-10 (Time 35-45 minutes)
Purpose—to provide a problem that requires preparation of a work sheet. The
journal entries for pension-related amounts are also required.
Problem 19-11 (Time 40-45 minutes)
Purpose—to provide a problem that requires the preparation of a worksheet and
journal entries. The problem is complicated by the employee contributions to the
pension plan. A challenging problem.
Problem 19-12 (Time 30-35 minutes)
Purpose—to provide a problem that requires calculation of the amortization of
past service cost, preparation of a pension work sheet and preparation of journal
entries.
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Intermediate Accounting, Tenth Canadian Edition
TIME AND PURPOSE OF PROBLEMS (CONTINUED)
Problem 19-13 (Time 30-35 minutes)
Purpose—to provide a problem that requires the calculation of post-retirement
benefit expense, the preparation of a continuity schedule for accrued obligation
and plan assets and a reconciliation schedule for post-retirement benefit
expense. In addition, the student is required to discuss differences in accounting
for post-retirement benefits and pension benefits.
*Problem 19-14 (Time 40-45 minutes)
Purpose—to provide a complex problem that requires the calculation of postretirement benefit obligation by factoring in changes to the discount rate and
salary assumptions for a one-person plan. The student must also analyze the
change in DBO for a 1% increase and decrease in the discount rate and the past
service costs given the revised assumptions.
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 19-1
This is partly a defined benefit plan because the plan specifies
the benefits to be received by employees – full salary for the first
three months. To the extent that the insurance company
assumes the risk for the long-term portion of the salary
continuation plan for a fixed premium of $18,000, this portion of
the benefit plan is a defined contribution plan.
2014:
Payment of premium to insurance company:
Long-term Disability Benefits Expense ..................... 12,000
Long-term Disability Benefits Payable ...................... 6,000
Cash......................................................................
18,000
Late October, 2014:
Long-term Disability Benefits Expense ..................... 16,200
Long-term Disability Benefits Payable ($5,400 X 3)
16,200
(based on the “event accrual” approach discussed in
Chapter 13)
November 2014:
Long-term Disability Benefits Payable ...................... 5,400
Cash......................................................................
5,400
December, 2014:
Long-term Disability Benefits Payable ...................... 5,400
Cash......................................................................
5,400
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-1 (Continued)
2015:
January 2015 – payment of third month’s waiting period:
Long-term Disability Benefits Payable ...................... 5,400
Cash......................................................................
5,400
Payment of premium to insurance company:
Long-term Disability Benefits Expense ..................... 12,000
Long-term Disability Benefits Payable ...................... 6,000
Cash......................................................................
18,000
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-2
(a)
Because the professors have to do something that benefits
the university while they are on sabbatical, their salary
while on sabbatical is simply recognized as expense in the
year they take it. No amount needs to be recognized over
the 7 year period leading up to it.
(b) The following calculations assume that none of the benefits
vest prior to earning the full sabbatical.
Current
salary
Salary
when
eligible*
Salary
during
sabbatical
(80%)
Portion
earned
in
current
year
(1/7)
$60,000 $67,570
70,000 78,831
100,000 112,616
$54,056
63,065
90,093
$7,722
9,009
12,870
Present
value**
Number
of
professors
Amount
earned in
current year
55
40
5***
$282,480
239,680
42,795
$564,955
$5,136
5,992
8,559
* Salary in 2013 X (1.02)6
* A rate of 6% is assumed.
**Using a financial calculator:
PV
$ ?
I
6%
N
7
PMT
$ 0
FV
$(7,722)
Type
0
Yields $5,136
Excel formula: =PV(rate,nper,pmt,fv,type)
*** Since five of the professors in the $100,000 salary grouping
will retire, they will not have worked the necessary seven
years for the benefit to vest.
Solutions Manual
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-2 (Continued)
Journal entry required:
Compensation Expense .............................................. 564,955
Liability for Compensated Absence ...................
564,955
(c)
Liability for Compensated Absence ........................... 367,000
Cash......................................................................
367,000
Note: This entry would be made proportionately for each pay
period throughout the fiscal year during which the employees
are paid while on sabbatical.
(d) 1. If the sick leave is allowed to be carried over into the
next fiscal period and employees are eligible to receive
a cash payment upon discharge, termination of
employment or retirement, (i.e., the benefits are vested)
then the amounts related to sick leave represent a
liability that should be accrued.
However, if employees are only permitted to take the
paid sick days if they are actually sick, difficulties in
measuring the liability combined with the immateriality
of the amount may mean that the University recognizes
the expense as the sick days are actually taken.
2. If unused sick time is not eligible to be carried over,
there is no future obligation and no entry is required.
Solutions Manual
19-62
Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-3
(a) IFRS Immediate Recognition Approach – 2014
Remeas. Pension
Cash
Net
DBO
Gain/
Expense
Defined
Benefit
Loss
(Liab)
OCI
Asset
Opening
0 460,000
balance
Cr.
Service cost
36,800 Dr.
36,800
Cr.
Interest cost
46,000 Dr.
46,000
Cr.
Expected
46,000 Cr.
return
Remeasure6,900 Dr.
ment loss
Contributions
36,800
Cr.
Benefits paid
32,200
Dr.
Expense
6,900 Dr. 36,800 Dr.
43,700
entry
Cr.
Funding entry
36,800 36,800
Cr.
Dr.
Total
(b)
6,900 510,600
Cr.
Cr.
Plan
Assets
460,000
Dr.
46,000
Dr.
6,900 Cr.
36,800
Dr.
32,200
Cr.
503,700
Dr.
Continuity of Defined Benefit Obligation – 2014
Defined benefit obligation, 1/1/14
Current service cost
Interest cost ($460,000 x 10%)
Benefits paid out
Defined benefit obligation, 12/31/14
$460,000
36,800
46,000
(32,200)
$510,600
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-3 (Continued)
Continuity of Defined Benefit Obligation – 2015
Defined benefit obligation, 1/1/15
Past service cost, 1/1/15
Current service cost
Interest cost ($878,600 x 10%)
Benefits paid out
Defined benefit obligation, 12/31/15
$510,600
368,000
878,600
43,700
87,860
(37,720)
$972,440
Continuity of Defined Benefit Obligation – 2016
Defined benefit obligation, 1/1/16
$972,440
Current service cost
59,800
Interest cost ($972,440 x 10%)
97,244
Benefits paid out
(48,300)
Actuarial loss
114,816*
Defined benefit obligation, 12/31/16
$1,196,000
*$114,816 = $1,196,000 - $972,440 - $59,800 - $97,244 + $48,300
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PROBLEM 19-3 (Continued)
(c)
Continuity of Fund Assets – 2014
Plan assets, 1/1/14
Actual return on plan assets
Contributions
Benefits paid out
Plan assets, 12/31/14
$460,000
39,100
36,800
(32,200)
$503,700
Continuity of Fund Assets – 2015
Plan assets, 1/1/15
Actual return on plan assets
Contributions ($43,700 + $69,000)
Benefits paid out
Plan assets, 12/31/15
$503,700
50,370
112,700
(37,720)
$629,050
Continuity of Fund Assets – 2016
Plan assets, 1/1/16
Actual return on plan assets
Contributions ($59,800 + $80,500)
Benefits paid out
Plan assets, 12/31/16
$629,050
55,200
140,300
(48,300)
$776,250
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PROBLEM 19-3 (Continued)
(d)
Pension expense – 2014
Current service cost
Interest on defined benefit obligation
Expected return on plan assets ($460,000 x 10%)
$ 36,800
46,000
(46,000)
$ 36,800
Pension expense – 2015
Current service cost
Interest on defined benefit obligation
Expected return on plan assets ($503,700 x 10%)
Past service cost
$ 43,700
87,860
(50,370)
368,000
$449,190
Pension expense – 2016
Current service cost
Interest on defined benefit obligation
Expected return on plan assets ($629,050 x 10%)
$ 59,800
97,244
(62,905)
$94,139
(e) Journal entries:
2014
Pension Expense ............................................. 36,800
Remeasurement (Gain) Loss – OCI ................ 6,900*
Net Defined Benefit Liability/Asset .........
43,700
Net Defined Benefit Liability/Asset ................. 36,800
Cash ..........................................................
36,800
*$6,900 = ($460,000 X 10%) – $39,100; expected return
exceeds actual
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-3 (Continued)
2015
Pension Expense ............................................. 449,190
Net Defined Benefit Liability/Asset .........
449,190
Net Defined Benefit Liability/Asset ................. 112,700
Cash ..........................................................
112,700
2016
Pension Expense ............................................. 94,139
Remeasurement (Gain) Loss - OCI ................. 122,521**
Net Defined Benefit Liability/Asset .........
216,660
Net Defined Benefit Liability/Asset ................. 140,300
Cash ..........................................................
140,300
**$122,521 = ($629,050 X 10%) – $55,200 + $114,816;
expected return exceeds actual + actuarial loss
(f)
Reconciliation Schedule 2014
Defined benefit obligation
$(510,600)
Fair value of plan assets
503,700
Defined benefit obligation in excess of plan
assets (funded status), and net defined benefit
(liability)/asset
$(6,900)
Reconciliation Schedule 2015
Defined benefit obligation
$(972,440)
Fair value of plan assets
629,050
Defined benefit obligation in excess of plan
assets (funded status), and net defined benefit
(liability)/asset
$(343,390)
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-3 (Continued)
Reconciliation Schedule 2016
Defined benefit obligation
$(1,196,000)
Fair value of plan assets
776,250
Defined benefit obligation in excess of plan
assets (funded status), and net defined benefit
(liability)/asset
$(419,750)
(g)
Pension expense – 2014
Current service cost
Interest on defined benefit obligation
Actual return on assets
$36,800
46,000
(39,100)
$43,700
Pension expense – 2015
Current service cost
Interest on defined benefit obligation
Actual return on plan assets
Past service cost
$ 43,700
87,860
(50,370)
368,000
$ 449,190
Pension expense – 2016
Current service cost
Interest on defined benefit obligation
Actual return on plan assets
Actuarial loss on DBO
$ 59,800
97,244
(55,200)
114,816
$ 216,660
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-4
(a)
ASPE—defer and amortize:
At January 1, 2013, note that the balance of the net defined benefit
liability on the opening statement of financial position must be =
the funded status because there is no information about
unrecognized amounts at that date. The net defined benefit
liability, therefore, was $175,000 - $165,000 = $10,000 cr.
2013
Accrued benefit obligation, 1/1/13
Past service cost, 1/1/13
Interest cost ($253,000 x 7%)
Current service cost
Benefits paid out
ABO, 12/31/13
$175,000
78,000
253,000
17,710
35,000
(24,000)
$281,710
Plan assets, 1/1/13
Actual return on plan assets ($165,000 x 8%)
Contributions
Benefits paid out
Plan assets, 12/31/13
$165,000
13,200
44,000
(24,000)
$198,200
Net actuarial gain in 2013 = the difference between the actual
return of $13,200 and the expected return of $11,550 (or 7% X
$165,000) = $1,650.
Accounts reported on the statement of financial position:
Accrued benefit obligation
Plan assets at fair value
ABO in excess of plan assets
Unrecognized past service cost
$78,000 – ($78,000/3)
Unrecognized net actuarial gain
Net defined benefit (liability)/asset
$(281,710)
198,200
(83,510)
52,000
(1,650)
($33,160)
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PROBLEM 19-4 (Continued)
2014
Accrued benefit obligation, 1/1/14
Interest cost ($281,710 x 7%)
Current service cost
Benefits paid out
ABO, 12/31/14
Plan assets, 1/1/14
Actual return on plan assets ($198,200 x 6%)
Contributions
Benefits paid out
Plan assets, 12/31/14
$281,710
19,720
47,250
(26,000)
$322,680
$198,200
11,892
44,000
(26,000)
$228,092
Net actuarial loss in 2014 = the difference between the actual
return of $11,892 and the expected return of $13,874 (or 7% X
$198,200) = $1,982. Accumulated unrecognized actuarial loss +
$1,982 - $1,650 = $332.
Accounts reported on the statement of financial position:
Accrued benefit obligation
Plan assets at fair value
ABO in excess of plan assets
Unrecognized past service cost:
$78,000 – ($78,000 X 2/3)
Unrecognized net actuarial loss:
Net defined benefit (liability)/asset
2015
Accrued benefit obligation, 1/1/15
Interest cost ($322,680 x 7%)
Current service cost
Benefits paid out
ABO, 12/31/15
$(322,680)
228,092
(94,588)
26,000
332
($68,256)
$322,680
22,588
52,500
(28,000)
$369,768
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-4 (Continued)
Plan assets, 1/1/15
Actual return on plan assets ($228,092 x 7%)
Contributions
Benefits paid out
Plan assets, 12/31/15
$228,092
15,966
44,000
(28,000)
$260,058
Expected and actual returns are the same in 2015. All of the past
service cost has been amortized by Dec. 31/15.
Accounts reported on the statement of financial position:
Accrued benefit obligation
Plan assets at fair value
ABO in excess of plan assets
Unrecognized net actuarial loss (assets)
Net defined benefit (liability)/asset
(b) Pension expense 2013:
Current service cost
Interest on accrued benefit obligation
Expected return on plan assets (7% of $165,000)
Amortization of past service cost ($78,000 / 3)
$(369,768)
260,058
(109,710)
332
($109,378)
$ 35,000
17,710
(11,550)
26,000
$67,160
Pension expense 2014:
Current service cost
Interest on accrued benefit obligation
Expected return on plan assets
Amortization of past service cost ($78,000 / 3)
$47,250
19,720
(13,874)
26,000
$ 79,096
Pension expense 2015:
Current service cost
Interest on accrued benefit obligation
Expected return on plan assets
Amortization of past service cost ($78,000 / 3)
$52,500
22,588
(15,966)
26,000
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$85,122
PROBLEM 19-4 (Continued)
Note that the statement of financial position net defined benefit
liability account can be proved as follows:
Opening balance + expense – contributions = ending balance
2013: 10,000 + 67,160 – 44,000 = 33,160
2014: 33,160 + 79,096 – 44,000 = 68,256
2015: 68,256 + 85,122 – 44,000 = 109,378
(c)
2013
Defined benefit obligation, 1/1/13
Past service cost, 1/1/13
Interest cost ($253,000 x 7%)
Current service cost
Benefits paid out
DBO, 12/31/13
$175,000
78,000
253,000
17,710
35,000
(24,000)
$281,710
Plan assets, 1/1/13
Actual return on plan assets ($165,000 x 8%)
Contributions
Benefits paid out
Plan assets, 12/31/13
$165,000
13,200
44,000
(24,000)
$198,200
Account reported on the statement of financial position:
Defined benefit obligation
$(281,710)
Plan assets at fair value
198,200
Net defined benefit (liability)/asset
($83,510)
2014
Defined benefit obligation, 1/1/14
Interest cost ($281,710 x 7%)
Current service cost
Benefits paid out
$281,710
19,720
47,250
(26,000)
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DBO, 12/31/14
Intermediate Accounting, Tenth Canadian Edition
$322,680
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-4 (Continued)
Plan assets, 1/1/14
Actual return on plan assets ($198,200 x 6%)
Contributions
Benefits paid out
Plan assets, 12/31/14
$198,200
11,892
44,000
(26,000)
$228,092
Accounts reported on the statement of financial position:
Defined benefit obligation
$(322,680)
Plan assets at fair value
228,092
Net defined benefit (liability)/asset
($94,588)
2015
Defined benefit obligation, 1/1/15
Interest cost ($322,680 x 7%)
Current service cost
Benefits paid out
DBO, 12/31/15
Plan assets, 1/1/15
Actual return on plan assets ($228,092 x 7%)
Contributions
Benefits paid out
Plan assets, 12/31/15
$322,680
22,588
52,500
(28,000)
$369,768
$228,092
15,966
44,000
(28,000)
$260,058
Accounts reported on the statement of financial position:
Defined benefit obligation
Plan assets at fair value
Net defined benefit (liability)/asset
$(369,768)
260,058
$(109,710)
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-4 (Continued)
(d)
Pension expense 2013:
Current service cost
Interest on defined benefit obligation
Expected return on plan assets
Past service cost
$ 35,000
17,710
(11,550)
78,000
$119,160
Remeasurement (gain) loss - OCI 2013:
Expected return on plan assets
Actual return on plan assets
$ 11,550
(13,200)
$(1,650)
Pension expense 2014:
Current service cost
Interest on defined benefit obligation
Expected return on plan assets
$47,250
19,720
(13,874)
$53,096
Remeasurement (gain) loss - OCI 2014:
Expected return on plan assets
Actual return on plan assets
$ 13,874
(11,892)
$1,982
Pension expense 2015:
Current service cost
Interest on defined benefit obligation
Expected return on plan assets
$52,500
22,588
(15,966)
$59,122
Remeasurement (gain) loss - OCI 2015:
Expected return on plan assets
Actual return on plan assets
$ 15,966
(15,966)
$0
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-4 (Continued)
(e) The deferral and amortization approach results in a more
stable expense number on the income statement. The deferral
and amortization approach may result in increased expense
each year, yet the expense under the immediate recognition
approach is much more volatile. Note that the total expense is
very close over the three year period under both methods.
(f) The immediate recognition approach results in a better
measure of the company’s net obligation on the statement of
financial position in terms of expected future cash flows.
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-5
(a)
Immediate Recognition Approach (IFRS)
Pension Expense
2013
12,000
6,000
(6,000)
75,000
87,000
2014
13,000
7,440
(7,480)
0
12,960
2015
12,500
8,755
(9,160)
0
12,095
Remeasurement (Gain) Loss - OCI
2013
Expected return (8% x 75,000; 93,500; 114,500)
6,000
Actual return
(6,500)
Total
(500)
2014
7,480
(10,000)
(2,520)
2015
9,160
(8,000)
1,160
93,500
15,000
10,000
(4,000)
114,500
114,500
12,000
8,000
(5,000)
129,500
Current service cost
Interest cost (8% x 75,000; 93,000; 109,440)
Expected return (8% x 75,000; 93,500; 114,500)
Past service cost
Total
Plan Assets
Opening balance
Contributions ($75,000 original + $12,000)
Actual return
Benefits paid
Ending balance
Balance January 1
Past service cost
Current service cost
Interest cost
Benefits paid
Ending balance
0
87,000
6,500
0
93,500
Defined Benefit Obligation
0
75,000
12,000
6,000
0
93,000
Funded Status
Defined benefit obligation
93,000 CR
Plan Assets
93,500 DR
Funded status and Net Defined Benefit
500 DR
Asset on statement of financial position
(net asset)
93,000
109,440
13,000
7,440
(4,000)
109,440
12,500
8,755
(5,000)
125,695
109,440 CR
114,500 DR
5,060 DR
125,695 CR
129,500 DR
3,805 DR
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PROBLEM 19-5 (Continued)
(b)
Deferral and Amortization Approach (ASPE)
Pension Expense
Current service cost
Interest cost (8% x 75,000; 93,000; 109,440;)
Expected return (8% x 75,000;93,500;114,500 )
Amortization of past service costs (75,000/4)
Total
Plan Assets
Opening balance
Contributions ($75,000 + $12,000)
Expected return
Asset gain (loss) (Actual return – expected
return)
Benefits paid
Ending balance
Opening balance
Past service cost, 1/1/13
Service cost
Interest cost
Benefits paid
Ending balance
2013
12,000
6,000
(6,000)
18,750
30,750
2014
13,000
7,440
(7,480)
18,750
31,710
2015
12,500
8,755
(9,160)
18,750
30,845
0
87,000
6,000
500
93,500
15,000
7,480
2,520
114,500
12,000
9,160
(1,160)
0
93,500
(4,000)
114,500
(5,000)
129,500
Accrued Benefit Obligation
0
75,000
12,000
6,000
0
93,000
Funded Status
Accrued benefit obligation
93,000CR
Plan Assets
93,500 DR
Funded status (net asset)
500 DR
Unrecognized amounts:
Past Service Costs
56,250 DR
Net actuarial gains
500 CR
Net defined benefit asset on statement
56,250 DR
of financial position
93,000
109,440
13,000
7,440
(4,000)
109,440
12,500
8,755
(5,000)
125,695
109,440 CR
114,500 DR
5,060 DR
125,695 CR
129,500 DR
3,805 DR
37,500 DR
3,020 CR
39,540 DR
18,750 DR
1,860 CR
20,695 DR
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PROBLEM 19-5 (Continued)
(c) Conclusions:
The pension expense is higher in the first year using the
immediate recognition approach because the full amount of the
past service costs must be recognized in this year. Using the
deferral and amortization approach, a portion of the past service
costs are recognized in 2013, but $56,250 (or $75,000 - $18,750)
is deferred to the period from 2014-2016. As a result, pension
expense is higher under the deferral and amortization approach
for 2014 and 2015.
There is no difference in the plan asset balances under the two
methods.
The amount reported on the statement of financial position is
significantly different between the two methods, because the
past service costs have not been fully recognized in expense
and in the statement of financial position account under the
defer and amortize approach, nor have the net actuarial gains
yet been recognized.
Under the immediate recognition
approach, net actuarial gains are recognized immediately in OCI,
and past service costs are expensed immediately, and both
affect the statement of financial position account.
Recommended approach: In order to be ready for the
implementation of IFRS when the company goes public, it would
be best to implement the “immediate recognition” approach
under ASPE. The difference between it and the IFRS version of
the same method is that under the ASPE version, net actuarial
gains or losses are recognized immediately in net income
(instead of in OCI, as under the IFRS version). In addition, the
ASPE immediate recognition approach currently calls for the
funding basis ABO to be used rather than the accounting
measure of the DBO.
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-6
(a) Pension expense for 2013 comprises the following:
Current service cost
Interest on accrued benefit obligation
(10% X $1,430,000)
Expected return on plan assets*(10% X $1,040,000)
Amortization of unrecognized gain or loss in 2013
Amortization of unrecognized past service cost
Pension expense
$213,200
143,000
(104,000)
0
45,882*
$298,082
*Amortization: $390,000 ÷ 8.5 years = $45,882
(b) 2013 Increase/Decrease in Unrecognized Actuarial
Gains/Losses
(1) 12/31/13 actuarially calculated ABO
$1,825,200
Less: Accrued benefit obligation
per memo record:
1/1/13 ABO
$1,430,000
Add interest (10% X $1,430,000) 143,000
Add service cost (given)
213,200
Less benefit payments
0 1,786,200
Liability loss
$39,000
(2) Expected return on plan assets at 1/1/13
(10% X $1,040,000)
Less: Actual return on plan assets
Asset loss
Net loss at 12/31/13
Plan Assets – 2013:
1/1/13 Plan Assets
Add actual return
Add funding
($213,200 + $106,600)
Less benefit payments
Plan assets, Dec. 31/13
$104,000
80,600
23,400
$62,400
$1,040,000
80,600
319,800
0
1,440,400
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-6 (Continued)
No amortization occurs in 2013 because no balance existed in
the Unrecognized Net Gain or Loss account at the beginning of
2013.
The $62,400 net loss in the Unrecognized Net Gain or Loss
account becomes the beginning balance in 2014. The corridor at
1/1/14 is 10% of the greater of $1,825,200 (ABO) or $1,440,400
(market-related asset value). Since the amount of loss of $62,400
is less than the corridor amount of $182,520, there does not
have to be any amortization in 2014.
(c)
Journal Entries—2013
Pension Expense ............................................ 298,082
Net Defined Benefit Liability/Asset ........
298,082
Net Defined Benefit Liability/Asset ................ 319,800
Cash .........................................................
319,800
(d) Reconciliation of Pension-Related Amounts
Accrued benefit obligation
Fair value of plan assets
Accrued benefit obligation in excess of plan
assets (funded status)
Unrecognized net (gain) or loss
Unrecognized past service cost
($390,000 – $45,882)
Net defined benefit (liability)/asset
Dr (Cr)
$(1,825,200)
1,440,400
(384,800)
( 62,400
344,118
$
21,718
Proof: Opening balance of statement of financial position
account of $0 + expense amount credited to account of $298,082
– contributions charged to the account of $319,800 = ending
balance of $21,718 debit.
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PROBLEM 19-6 (Continued)
(e) The liability loss that relates to the disposal of the business
segment would be shown in the Discontinued Operations
section of the income statement on a net of tax basis. The
loss would not be amortized using the corridor approach.
The credit side of the entry would increase the net defined
benefit liability/(asset).
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PROBLEM 19-7
(a) Calculation of pension expense:
Current service cost
Interest cost
($600,000 X .09) and ($700,000 X .09)
Expected return on plan assets
Amortization of unrecognized
past service cost
Pension expense
2013
($ 60,000)
(
54,000)
(24,000)
(
10,000)
($100,000
)
2014
($ 90,000)
(
63,000)
( (30,000)
(
12,000)
($135,000
)
Note: there is no amortization of the unrecognized net actuarial
loss at January 1, 2013 because the $50,000 loss is within the
10% corridor of 10% of $600,000 (ABO) (see part (d)); nor of the
January 1, 2014 amount of $50,000 because it is within the 10%
corridor of 10% of $700,000 (see part (d)).
(b)
Journal Entries—2013
Pension Expense ............................................. 100,000
Net Defined Benefit Liability/Asset ........
100,000
Net Defined Benefit Liability/Asset ................ 110,000
Cash .........................................................
110,000
Journal Entries—2014
Pension Expense ............................................ 135,000
Net Defined Benefit Liability/Asset ........
135,000
Net Defined Benefit Liability/Asset ................ 120,000
Cash .........................................................
120,000
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-7 (Continued)
(c) Note X: The company sponsors a defined benefit pension
plan covering the following group of employees and
providing the following benefits.
For the year ended December 31, 2014, the net expense for
the company’s pension plan is $135,000. The present value
of the accrued benefit obligation at December 31, 2014, is
$788,000 (1) and the market related value of the fund assets
is $465,000 (1) based on the fair market value of the assets on
that date. This results in an underfunded obligation of
$323,000. The company has unrecognized past service
costs of $228,000 and an unrecognized net actuarial loss of
$50,000. Employer contributions during 2014 amounted to
$120,000 and benefits of $65,000 (1) were paid out. At
December 31, 2014, the net defined benefit liability is
$45,000 (1).
Reconciliation of Pension-Related Amounts
Accrued benefit obligation
Fair value of plan assets
Accrued benefit obligation in excess of plan
assets (funded status)
Unrecognized net (gain) or loss
Unrecognized past service cost
Net defined benefit (liability)/asset
$(788,000)
465,000
(323,000)
( 50,000
228,000
($ 45,000)
Other information to be disclosed:
assumptions that
underlie the plan such as the discount rate, the rate of
increase in compensation levels, and the expected longterm rate of return on plan assets, as well as significant
accounting policies governing the pension plan.
(1)
Calculations are shown on the following page using a
pension worksheet. It is assumed that there were no
actuarial gains and losses on the accrued benefit obligation
in 2014. There would be no experience gain or loss on plan
assets since expected return is equal to actual return.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-7 (Continued)
(d)
Items
Balance, Jan. 1, 2013
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Amortization of PSC
(e) Funding
(f) Benefits
Expense entry, 12/31/13
Contribution, 2013
Balance, Dec. 31, 2013
(g) Service cost
(h) Interest cost
(i) Expected return
(j) Amortization of PSC
(k) Funding
(l) Benefits
Expense entry, 12/31/14
Contribution, 2014
Balance, Dec. 31, 2015
Manon Corporation
Pension Work Sheet—2013 and 2014
General Journal Entries
Memo Record
UnrecoUnrecoAnnual
Net. Def.
Accrued
gnized
gnized
Past Service Net Gain
Pension
Benefit
Benefit
Plan
Expense
Cash
Liab/Asset
Obligation
Assets
Cost
or Loss 2
40,000 Cr.
600,000 Cr.
260,000 Dr. 1 250,000 Dr. 50,000 Dr.
60,000 Dr.
60,000 Cr.
54,000 Dr.
54,000 Cr.
24,000 Cr.
24,000 Dr.
10,000 Dr.
10,000 Cr.
110,000 Cr.
110,000 Dr.
000,000 Dr. 000,000 Dr.
14,000 Dr.
14,000 Cr.
100,000 Dr.
100,000 Cr. 0,000,000 Cr. 0,000,000 Cr. 0,00,000
0,00,000
110,000 Cr. 110,000 Dr.
30,000 Cr.
700,000 Cr.
380,000 Dr. 240,000 Dr. 50,000 Dr.
90,000 Dr.
63,000 Dr.
30,000 Cr.
12,000 Dr.
120,000 Cr.
000,000 Dr. 000,000 Dr.
135,000 Dr.
135,000 Cr.
120,000 Cr. 120,000 Dr.
45,000 Cr.
90,000 Cr.
63,000 Cr.
30,000 Dr.
12,000 Cr.
65,000 Dr.
0,000,000 Cr.
788,000 Cr.
120,000 Dr.
65,000 Cr.
0,0
00,000 Cr.
465,000 Dr.
00
000,000 Dr. 0,000
228,000 Dr. 50,000 Dr.
1
Beginning balance of plan assets calculated from ending balance provided and transactions during the year.
The unrecognized loss
does not need to be amortized over 2014 and 2015 since it does not exceed the greater of 10% of the beginning
balances of ABO and plan assets.
(f) $14,000 calculated by using beginning and ending balances of ABO as provided
(l) $65,000 calculated by using beginning and ending balances of Plan Assets as provided.
2
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Chapter 19
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-8
(a) Pension expense under the immediate recognition approach
under ASPE:
Current service cost
$ 107,500
Interest on benefit obligation ($750,000 x 6%)
45,000
Actuarial loss related to benefit obligation
15,500
Actual loss on plan assets
9,500
Past service cost expense
240,000
$417,500
Pension expense under the defer and amortize approach under
ASPE:
Current service cost
$ 107,500
Interest on benefit obligation ($750,000 x 6%)
45,000
Expected return on plan assets ($320,000 x 7%)
(22,400) *
Amortization of Past service cost ($240,000 / 21)
11,429
$ 141,529
*Actual return of ($9,500) – expected return of $22,400 = actuarial
loss on assets in 2013 of $31,900.
(b) Reconciliation of Pension Expense
Immediate Recognition Approach expense:
$417,500
Difference in past service cost
Less: Past service cost:
($240,000)
Add: Amortization of past service cost:
11,429 (228,571)
Difference in return on plan assets
Less: Actual loss on plan assets:
Less: Expected return on plan assets:
(9,500)
(22,400)
(31,900)
Difference in actuarial loss related to benefit obligation
Less: Actuarial loss on accrued obligation:
(15,500)
Deferral and Amortization Approach Expense:
$141,529
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-8 (Continued)
Note for Instructors: In reality, there will be other differences
usually because the ABO for funding purposes is usually lower
than the ABO for accounting purposes and this will affect the
interest cost.
(c) Continuity Schedule of Accrued Benefit Obligation under the
immediate recognition approach:
Accrued benefit obligation, 1/1/13
Recognition of Past service costs
Interest cost ($510,000 + $240,000) x 6%
Current service cost
Benefits paid out
Actuarial loss related to benefit obligation
ABO, 12/31/13
$510,000
$240,000
45,000
107,500
(48,000)
15,500
$870,000
Plan assets, 1/1/13
Actual return on plan assets
Contributions ($107,500 + $240,000)
Benefits paid out
Plan assets, 12/31/13
$320,000
(9,500)
347,500
(48,000)
$610,000
Amount reported on the statement of financial position:
Accrued benefit obligation
Plan assets at fair value
ABO in excess of plan assets
Net defined benefit (liability)/asset
$(870,000)
610,000
(260,000)
($260,000)
An easier method is as follows: Jan. 1/13 balance of statement
of financial position account =
$190,000 cr.
From expense entry
= 417,500 cr.
From contributions entry
=
Balance, Dec. 31/13
= $260,000 cr.
347,500 dr.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-8 (Continued)
(c) Continuity Schedule of Accrued Benefit Obligation under the
deferral and amortization approach:
Accrued benefit obligation, 1/1/13
$510,000
Recognition of past service costs
$240,000
Interest cost ($510,000 + $240,000) x 6%
45,000
Current service cost
107,500
Benefits paid out
(48,000)
Actuarial loss related to benefit obligation
15,500
ABO, 12/31/13
$870,000
Plan assets, 1/1/13
Actual return on plan assets
Contributions ($107,500 + $11,429)
Benefits paid out
Plan assets, 12/31/13
$320,000
(9,500)
118,929
(48,000)
$381,429
Amount reported on the statement of financial position:
Accrued benefit obligation
$(870,000)
Plan assets at fair value
381,429
ABO in excess of plan assets
(488,571)
Unrecognized past service costs (240,000 – 11,429) 228,571
Unrecognized actuarial loss (15,500 + 31,900)
47,400
Net defined benefit (liability)/asset
($212,600)
An easier method is as follows: Jan. 1/13 balance of statement
of financial position account =
$190,000 cr.
From expense entry
= 141,529 cr.
From contributions entry
=
Balance, Dec. 31/13
= $212,600 cr.
118,929 dr.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-8 (Continued)
(d) The immediate recognition approach results in a cash
outflow of $347,500 as both the current year’s service cost
($107,500) and the entire past service cost ($240,000) are
funded in the current year. The entire $240,000 of past
service cost is funded in the current year because it was
expensed in the current year in accordance with the advice
from the actuary.
The deferral and amortization approach results in a cash
outflow of $118,929 from the current year service cost
($107,500) and the amortization of the past service cost
($11,429).
Note to Instructors/Students: In reality, the funding would
not likely vary depending on the accounting policy chosen.
Often, pension funding is determined by minimum funding
requirements set out in legislation, although the advice of
the actuary and the cash position of the company can be
important variables in the decision.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-9
(a) Continuity Schedule of Accrued Benefit Obligation:
2013
Accrued benefit obligation at
beginning of year
Current service cost
Interest cost
Benefits paid out
Net actuarial loss (gain)
Accrued benefit obligation at
end of year
a
b
c
$0
55,000
0
8,900)
$63,900
2014
a
2015
$ 63,900 $ 101,429
85,000
119,000
b
7,029
8,114 c
(30,000)
(35,000)
(24,500 ))
84,500)
$101,429
$278,043
No interest is calculated since there was no obligation at the
beginning of the year.
$7,029 = $63,900 X 11%
$8,114 = $101,429 X 8%
(b) Continuity Schedule of Plan Assets:
2013
Plan assets at beginning of
year
Expected return on assets
Net actuarial gain (loss)
Benefits paid out
Contributions
Plan assets at end of year
a
b
c
d
2014
2015
$ 0 $ 50,000
$ 85,000
a
b
0
4,000
6,800 d
0
1,000 c
18,200
0
(30,000)
(35,000)
50,000)
60,000
95,000)
$50,000
$85,000 $170,000
No interest is calculated since there were no plan assets
during the year.
$4,000 = $50,000 X 8%
$1,000 = $85,000 – $50,000 – $4,000 – $60,000 + $30,000
$6,800 = $85,000 X 8%
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-9 (Continued)
(c) Pension expense for 2013 consisted only of the current
service cost component amounting to $55,000. There were
no past service costs, net gains or losses, pension assets,
or accrued benefit obligation as of January 1, 2013.
Pension expense for 2014 comprised the following:
Current service cost
Interest on accrued benefit obligation
Expected return on plan assets
Amortization of unrecognized net gain or loss*
Amortization of unrecognized past service cost
Pension expense
$85,000
7,029
(4,000)
251
0
$88,280
Pension expense for 2015 comprised the following:
Current service cost
Interest on accrued benefit obligation
Expected return on plan assets
Amortization of unrecognized net gain or loss
Amortization of unrecognized past service cost
Pension expense
$119,000
8,114
(6,800)
(671)
0
$119,643
Amortization of net actuarial gain/loss:
Year
2013
2014
2015
Accrued
Cumulative
Minimum
Benefit
Plan
Unrecognized Amortization
Obligation (a) Assets (a) Corridor (b) (Gain) Loss (a) of (Gain) Loss
$
0
$
0
$
0
$(
0)
$( 0) ( )
63,900
50,000
6,390
( 8,900)
( 251) (c)( )
101,429
85,000
10,143
(16,851) (d)
(671) (e)
(a) As of the beginning of the year.
(b) The corridor is 10 percent of the greater of accrued benefit obligation
or plan assets.
(c) $8,900 – $6,390 = $2,510; $2,510/10 = $251
(d) $8,900 – $251 – $25,500 = ($16,851)
(e) $16,851 – $10,143 = $6,708; $6,708/10 = $671
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-9 (Continued)
(d)
Items
Balance, Jan. 1, 2013
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Funding
(e) Benefits
(f) Actuarial loss
Journal entries, 12/31/13
Balance, Dec. 31, 2013
Dubel Toothpaste Corporation
Pension Work Sheet—2013, 2014 and 2015
General Journal Entries
Memo Record
Annual
Pension
Expense
Cash
55,000 Dr.
Net Defined
Benefit
Liab/Asset
0 Cr.
Accrued
Benefit
Obligation
(g) Service cost
(h) Interest cost
(i) Expected return
(j) Amortization of loss
(k) Funding
(l) Benefits
(m) Actuarial gain
Journal entries, 12/31/14
Balance, Dec. 31, 2014
85,000 Dr.
7,029 Dr.
4,000 Cr.
251 Dr.
(n) Service cost
(o) Interest cost
(p) Expected return
(q) Amortization of gain
(r) Funding
(s) Benefits
(t) Actuarial loss/gain
Journal entries, 12/31/15
Balance, Dec. 31, 2015
119,000 Dr.
8,114 Dr.
6,800 Cr.
671 Cr.
Plan
Assets
55,000 Cr.
50,000 Cr.
00,000 Dr. 000000 Dr.
55,000 Dr. 50,000 Cr.
Unrecognized
Net Gain
or Loss
50,000 Dr.
5,000 Cr.
5,000 Cr.
8,900 Cr.
0,00,000 Cr.
63,900 Cr.
0,00,000 Cr.
50,000 Dr.
8,900 Dr.
0,00000 C
8,900 Dr.
85,000 Cr.
7,029 Cr.
4,000 Dr.
251 Cr.
60,000 Cr.
000,00 Dr. 000,00 Dr.
88,280 Dr. 60,000 Cr.
28,280 Cr.
33,280 Cr.
30,000 Dr.
24,500 Dr.
0,00,00 Cr.
101,429 Cr.
60,000 Dr.
30,000 Cr.
1,000 Dr.
0,0000 Cr.
85,000 Dr.
25,500 Cr.
000,00 Dr.
16,851 Cr.
119,000 Cr.
8,114 Cr.
6,800 Dr.
671 Dr.
95,000 Cr.
000,000 Dr. 000,000 Dr.
119,643 Dr. 95,000 Cr. 24,643 Cr.
57,923 Cr.
35,000 Dr.
84,500 Cr.
0,000,0 Cr.
278,043 Cr.
95,000 Dr.
35,000 Cr.
18,200 Dr.
0,0,000 Cr.
170,000 Dr.
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66,300 Dr.
00,000 Dr.
50,120 Dr.
Chapter 19
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-9 (Continued)
(e)
Pension Reconciliation Schedule—2015
Accrued benefit obligation
Plan assets at fair value
Accrued benefit obligation in excess of plan
assets (funded status)
Unrecognized net (gain) or loss
Net defined benefit (liability)/asset
$(278,043)
170,000
(108,043)
50,120
$ (57,923)
The pension is underfunded by $108,043 at December 31,
2015. The amount shown as a net defined benefit liability on
Dubel’s statement of financial position at December 31, 2015
is $57,923. The difference is due to the unamortized portion
of the unrecognized loss of $50,120 which will be amortized
over the average remaining service life of the employees.
(f) The Company can elect to recognize 100% of the actuarial
gains and losses as they are incurred or use any other
systematic method of amortization as long as the amount
amortized exceeds the minimum amount established by the
corridor method. If this alternative is selected, amounts
within the corridor can be recognized as expense in the
year.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-10
(a)Past service cost was incurred on December 30, 2012,
affecting the DBO at December 31, 2012. Pension expense
for 2012 is affected only under the immediate recognition
approach, and this would be for the full $500,000.
Past Service Cost under the immediate recognition approach
under ASPE
2013
2014
2015
$0
0
0
Recognized in full in 2012
Past Service Cost under the deferral and amortization approach
under ASPE
2013
2014
2015
$38,462
38,462
38,462
($500,000 ÷ 13 years)
($500,000 ÷ 13 years)
($500,000 ÷ 13 years)
Past Service Cost under the immediate recognition approach
under IFRS
2013
2014
2015
$0
0
0
Recognized in full in 2012
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-10 (Continued)
(b) 12/31/13 Fair value of plan assets
Less: Expected fair value of assets
1/1/13 fair value
$750,000
Add expected return
(8% X $750,000)
60,000
Add contributions
143,750
Less benefits
0
Asset gain
12/31/13 New actuarially
calculated ABO
Less: 1/1/13 ABO
Add interest
(10% X $1,250,000)
Add current service cost
Less benefits
Liability gain
$975,000
953,750
(21,250)
1,187,500
$1,250,000
125,000
50,000
0
1,425,000
(237,500)
Unrecognized net actuarial gain 12/31/13
$ (258,750)
Amortization in 2013: None because there was no
beginning balance.
Amortization in 2014 (corridor approach): $8,750
Year
Accrued
Benefit
Obligation
MV of
Plan
Assets
Corridor
2013
2014
$1,250,000
1,187,500
$750,000
975,000
$125,000
118,750
Unrecognized
Net (Gain)
$
0)
(258,750)
Amortization
$
0*
*8,750*
*$258,750 – $118,750 = $140,000; $140,000 ÷ 16 = $8,750
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-10 (Continued)
(c) Pension expense for 2013 under the immediate recognition
approach under ASPE is comprised of the following:
Current service cost
Interest on accrued benefit obligation*
Expected return on plan assets**
Actuarial gain on ABO
Actuarial gain on plan assets
Pension expense
$50,000
125,000
(60,000)
(237,500)
(21,250)
$(143,750)
***($1,250,000 X 10% = $125,000)
Pension expense for 2013 under the deferral and amortization
approach under ASPE is comprised of the following:
Current service cost
Interest on accrued benefit obligation*
Expected return on plan assets**
Amortization of unrecognized past service cost
Pension expense
$50,000
125,000
(60,000)
38,462
$153,462
***($1,250,000 X 10% = $125,000)
***$750,000 X 8% = $60,000
Pension expense for 2013 under the immediate recognition
approach under IFRS is comprised of the following:
Current service cost
$ 50,000
Interest on defined benefit obligation*
125,000
Expected return on plan assets, using discount rate (75,000)
Pension expense
$100,000
***$1,250,000 X 10% = $125,000
***$750,000 X 10% = $75,000
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-10 (Continued)
(d) Reconciliation Schedule 2013 for ASPE (defer and amortize
approach)
Accrued benefit obligation
Fair value of plan assets
ABO in excess of plan assets (funded status)
Unrecognized past service cost
($500,000 – $38,462)
Unrecognized net (gain) or loss
Net defined benefit (liability)/asset*
$(1,187,500)
975,000
(212,500)
(461,538
(258,750)
$
(9,712)
*Proof: January 1, 2013 balance of the Net Defined Benefit
Liability/Asset account was equal to the funded status of
$500,000 ($1,250,000 - $750,000) – the unrecognized past service
cost of $500,000 = $0.
During 2013, the Net Defined Benefit Liability/Asset:
Opening balance
$0
Credit when expense recognized
$153,462 cr
Debit when contributions made
143,750 dr
Balance, December 31, 2013
$ 9,712 cr
(e) If Ekedahl’s plan was contributory, the employees would
bear part of the cost to fund the pension plan, reducing the
net pension expense by the amount of the employee
contribution. In a non-contributory plan, the employer
bears the entire cost of the pension plan. The plan status
as contributory versus non-contributory would not change
any portion of parts (a) to (d) of the previous answers; the
reduction of pension expense from employee contributions
would be recorded separately; the financial statements
would show the net pension expense. The funding journal
entry would still show a credit to cash. In a contributory
plan, the cash would be provided from the employer’s own
account and a portion would come from amounts withheld
from employee pay. The statement of cash flows would
show a smaller net cash outflow for a contributory plan
since the employees would be providing a portion of the
cash funding to the plan.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-11
(a) The pension work sheet for Beaton and Gunter Inc. for the
year ended December 31, 2014 is presented on the following
page. It is assumed that the company is following IFRS
because it is a subsidiary of a multinational company that is
likely a public company.
(b) The journal entries required to reflect the accounting for
Beaton and Gunter Inc.’s pension plan for the year ended
December 31, 2014, are as follows:
Pension Expense ............................................. 540,625
Remeasurement Gain (OCI) .....................
40,625
Net Defined Benefit Liability/Asset .........
500,000
Net Defined Benefit Liability/Asset ................. 575,000
Cash ..........................................................
575,000
Cash* ...............................................................
Pension Expense .....................................
81,250
81,250
* In effect, when the payroll transaction took place, the
employees contributed $81,250 as their share of the pension
cost.
(c)
Pension Reconciliation Schedule—2014
Defined benefit obligation
Plan assets at fair value
Defined benefit obligation in excess of plan
assets (funded status), and Net defined
Benefit (liability)/asset
$(12,243,750)
10,006,250
$(2,237,500)
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-11 (Continued)
(d) If interest rates in the economy are falling this will translate
to a lower discount rate being used to calculate the DBO.
This will increase the DBO and therefore also increase the
amount by which the pension fund is underfunded.
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-11 (Continued)
Beaton and Gunter Inc.
Pension Work Sheet—2014
General Journal Entries
Items
Remeasurement (Gain)
Loss - OCI
Balance, Jan. 1, 2014
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Funding
(e) Employee contr.
(f) Benefits paid
(g) Act. gain on assets
(h) Liability loss
Expense entry, 12/31/14
Funding entry
Balance, Dec. 31, 2014
Annual
Pension
Expense
Cash
Net Def. Ben.
Liability/
Asset
2,312,500 Cr.
425,000 Dr.
568,750 Dr.
453,125 Cr.
81,250 Cr.
671,875 Cr.
631,250 Dr.
40,625 Cr.
Memo Record
Defined
Benefit
Obligation
11,375,000 Cr.
425,000 Cr.
568,750 Cr.
Plan
Assets
A
9,062,500 Dr.
453,125 Dr.
575,000 Dr.
575,000 Cr.
81,250 Dr.
756,250 Dr.
00,000 Dr.
459,375 Dr.
493,750 Cr.
418,750 Cr.
493,750 Dr.
2,237,500 Cr.
756,250 Cr.
671,875 Dr.
631,250 Cr.
0 Cr.
12,243,750 Cr.
10,006,250 Dr.
(c) $9,062,500 X 5% = $453,125
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Chapter 19
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-12
(a) The pension work sheet for Glomski Corporation for the
year ended May 31, 2013 is presented on the following page.
(b) The journal entries required to reflect the accounting for
Glomski Corporation’s pension plan for the year ended May
31, 2013, are as follows:
Pension Expense ................................................. 2,960
Net Defined Benefit Liability/Asset .............
2,960
Net Defined Benefit Liability/Asset .....................
Cash ..............................................................
425
425
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-12 (Continued)
(a)
Glomski Corporation
Pension Work Sheet—For the Year Ended May 31, 2013
General Journal Entries
Items
June 1, 2013
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Contributions
(e) Benefits paid
(f) Amortization of past
service cost
Expense entry
Contribution entry
Balance, May 31, 2013
(a)
(b)
(c)
(f)
Annual
Pension
Expense
Cash
Memo Record
Net Def.
Ben. Liab
/Asset
Accrued
Benefit
Obligation
400 Cr.
24,100 Cr.
3,000 Cr.
1,446 Cr.
3,000 Dr.
1,446 Dr.
1,736 Cr.
425 Cr.
500 Dr.
250 Dr.
2,960 Dr.
Plan
Assets
Unrecognized
Past
Service Cost
21,700 Dr.
2,000 Dr.
1,736 Dr.
425 Dr.
500 Cr.
000 Cr.
425 Cr.
2,960 Cr.
425 Dr.
2,935 Cr.
00,000 Cr.
28,046 Cr.
00,00
0 Cr.
23,361 Dr.
250 Cr.
0
,000 Dr.
1,750 Dr.
Per actuary’s report.
$24,100 X .06.
$21,700 X .08.
Amortization of unrecognized past service cost from plan amendment over 8-year average period to full eligibility.
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Chapter 19
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-13
(a) Post-retirement benefit expense – 2014
Current service cost
Interest on Post-retirement benefit obligation
($3,439,800 X 9%)
Return on assets, using discount rate
($2,780,000 X 9%)
$ 273,000
309,582
(250,200)
$332,382
(b) Continuity of Post-Retirement Benefit Obligation – 2014
Defined post-retirement benefit obligation, 1/1/14 $3,439,800
Current service cost
273,000
Interest cost ($3,429,800 x 9%)
309,582
Benefits paid out
(171,600)
Defined post-retirement benefit obligation, 12/31/14$3,850,782
Continuity of Fund Assets – 2014
Plan assets, 1/1/14
Actual return on plan assets 1/1/14
Contributions
Benefits paid out
Plan assets, 12/31/14
$2,780,000
58,500
234,000
(171,600)
$2,900,900
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Chapter 19
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Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-13 (Continued)
(c)
Reconciliation Schedule 2014
Post-retirement benefit obligation (credit)
$(3,850,782)
Fair value of plan assets (debit)
2,900,900
Post-retirement benefit obligation in excess of
plan assets (funded status) (credit) / Net Defined
Post-retirement (Liability)/Asset (credit)*
(949,882)
*Proof:
Net Defined Post-retirement Liability, Jan.1
Expense recognized
Remeasurement (gain) loss – OCI
Contribution by company
Account balance December 31, 2014
$659,800cr
332,382cr
191,700cr
234,000dr
$949,882cr
(d) The basic concepts and measurement methodology for
post-retirement benefits that accumulate are the same as for
pension benefits. The recognition and measurement criteria
for the obligation and plan assets are the same, as is the
actuarial valuation method, the attribution period, and the
calculation of the current cost of benefits.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
PROBLEM 19-13 (Continued)
The following worksheet is not required but is provided to illustrate the similarities with
accounting for pension benefits.
General Journal Entries
Items
Balance, Jan. 1, 2014
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Actuarial loss
(e) Contributions
(f) Benefits paid
Expense entry, 12/31
Contribution
Balance, Dec. 31/14
Remeasurement (gain)
loss - OCI
Net Periodic
Postretirement
Expense
Cash
Net Defined
Post-retirement Liab.
659,800 Cr.
** 273,000 Dr.**
** 309,582 Dr.**
** 250,200 Cr.***
191,700 Dr.**
**
Defined
Post-retirement Benefit
Obligation
3,439,800 Cr.
273,000 Cr.
309,582 Cr.
234,000 Cr.
191,700 Dr.
**332,382 Dr.**
234,000 Cr.
524,082 Cr.
234,000 Dr.
949,882 Cr.
171,600 Dr.
000
,000 Dr.
3,850,782 Cr.
Plan
Assets
2,780,000 Dr.
250,200 Dr.
191,700 Cr.
234,000 Dr.
171,600 Cr.
00
0,000 Dr.
2,900,900 Dr.
***$3,439,800 X .09 = $309,582
$2,780,000 X .09 = $250,200
***$58,500 – $250,200 = $191,700
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Chapter 19
Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14
(a)
Amounts
using
original
assumptions
Pension benefits earned to
December 31, 2015
PV of annuity at Dec. 31, 2047
DBO at Dec. 31, 2015
1
2
3
4
5
6
Amounts
using
revised
assumptions
$9,000 1
75,455 3
11,692 5
$8,700 2
69,101 4
7,929 6
2% X $150,000 X 3 years = $9,000
2% X $145,000 X 3 years = $8,700
$9,000 X PV factor (6%, 12 years) = $9,000 X 8.38384
(Table A-4) = $75,455
$8,700 X PV factor (7%, 12 years) = $69,101
Since the tables do not include 7%, the calculation was
done using a financial calculator:
PV
$ ?
Yields $69,101
I
7%
N
12
PMT
$ (8,700)
FV
$ 0
Type
0
$75,454 X PV factor (6%, 32 years) = $75,454 X 0.15496
(Table A-2) = $11,692
$69,101 X PV factor (7%, 32 years) = $7,929
PV
I
N
PMT
FV
Type
$ ?
7%
32
$0
$ (69,101)
0
Yields $7,929
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14 (Continued)
The calculations could also be done using Excel:
Excel formula: =PV(rate,nper,pmt,fv,type)
The DBO at December 31, 2015, using the revised assumptions
would be $7,929. This represents an actuarial gain of $3,763
($11,692 – $7,929) since the revised DBO is lower than the DBO
calculated under the original assumptions.
(b)
6% discount
rate
8% discount
rate
Pension benefits earned to
December 31, 2015
PV of annuity at Dec. 31, 2047
$8,700
72,939 1
$8,700
65,564 2
DBO at Dec. 31, 2015
DBO at Dec. 31, 2015 using 7%
11,303 3
(7,929 )
5,586 4
(7,929 )
Change in DBO
$ 3,374
Percentage change
1
2
3
4
43% increase
$(2,343)
30% decrease
$8,700 X PV factor (6%, 12 years) = $8,700 X 8.38384
(Table A-4) = $72,939
$8,700 X PV factor (8%, 12 years) = $8,700 X 7.53608
(Table A-4) = $65,564
$72,939 X PV factor (6%, 32 years) = $72,939 X 0.15496
(Table A-2) = $11,303
$65,564 X PV factor (8%, 32 years) = $65,564 X 0.08520
(Table A-2) = $5,586
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14 (Continued)
(c) Assuming the plan was 100% funded previously (DBO =
Fund assets), the decrease in DBO would make the plan
overfunded by $11,692 - $7,929 = $3,763.
Pension expense for 2015 would not be affected if the ASPE
deferral and amortization approach is used since the
change took place at December 31, 2015. The amortization
of the actuarial gain would be based on beginning-of-year
balances, and since the actuarial gain took place at the end
of the year, there would be no amortization in 2015. In 2016,
the actuarial gain would be amortized based on the excess
of the gain over 10% of the greater of DBO and plan assets
at January 1, 2016 (i.e. the corridor approach). This excess,
if any, would be amortized over the employee’s average
remaining service period of 31 years. Any amortization of
the actuarial gain would be included as a reduction of 2016
pension expense.
If the ASPE immediate recognition approach is used, the
actuarial gain of $3,763 would reduce the 2015 pension
expense and reduce the DBO (and increase funded status)
by $3,763.
If the IFRS immediate recognition approach is used, the
actuarial gain of $3,763 would be recorded as a credit to
remeasurement (gain) loss – OCI and reduce the DBO (and
increase funded status) by $3,763.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14 (Continued)
(d)
Before credit
for prior
service
Pension benefits earned to
December 31, 2016
PV of pension earned at
Dec. 31, 2046
DBO at Dec. 31, 2016
DBO, at Dec. 31/16 after prior
service recognized
DBO, at Dec. 31/13 before
service recognized
Past service cost incurred
After credit
for prior
service
$14,500 1
$31,900 2
115,169 3
15,129 5
253,372 4
33,285 6
$33,285
( 15,129)
$18,156
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14 (Continued)
1
2
3
2% X $145,000 X 5 years = $14,500
2% X $145,000 X 11* years = $31,900
* 11 years = 6 years past service cost before 2012 plus 5
years from 2012 to 2016.
$14,500 X PV factor (7%, 12 years) = $115,169
Since the tables do not include 7%, the calculation was
done using a financial calculator:
PV
I
N
PMT
FV
Type
4
Yields $115,169
$31,900 X PV factor (7%, 12 years) = $253,372
PV
I
N
PMT
FV
Type
5
$ ?
7%
12
$ (14,500)
$ 0
0
$ ?
7%
12
$ (31,900)
$ 0
0
Yields $253,372
$115,169 X PV factor (7%, 30 years) = $15,129
PV
I
N
PMT
FV
Type
$ ?
7%
30
$0
$ (115,169)
0
Yields $15,129
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
*PROBLEM 19-14 (Continued)
6
$253,372 X PV factor (7%, 30 years) = $33,285
PV
I
N
PMT
FV
Type
$ ?
7%
30
$0
$ (253,372)
0
Yields $33,285
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Chapter 19
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
TIME AND PURPOSE OF WRITING ASSIGNMENTS
WA 19-1 (Time 30–40 minutes)
Purpose−to provide the student with an opportunity to determine the appropriate
accounting for a sabbatical benefit under ASPE and IFRS and to list the
information needed to prepare adjusting entries.
WA 19-2 (Time 30–35 minutes)
Purpose—to provide the student with the opportunity to discuss some of the
more traditional issues related to pension reporting. Specifically, the student is
asked to define a contributory versus a non-contributory plan, distinguish
between a funded and unfunded plan, and differentiate between accounting for
the employer and the benefit plan. In all cases, the treatment under IFRS and
ASPE is explored. The student must also discuss the advantages and
disadvantages of immediate recognition versus the defer-and-amortize
approaches.
WA 19-3 (Time 20-30– minutes)
Purpose—to provide the student with the opportunity to compare the immediate
recognition approach and the defer-and-amortize approach.
WA 19-4 (Time 20–30 minutes)
Purpose—to provide students with an opportunity to research actions companies
are taking to reduce post employment costs.
WA 19-5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to understand why the
ceiling test must be made and how it is done.
WA 19-6 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to understand the
differences between ASPE and IFRS and the conceptual reasons for any
differences.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
SOLUTIONS TO WRITING ASSIGNMENTS
WA 19-1
(a)
This benefit relates to a compensated absence. It is a defined benefit plan
which is service related (the benefit is earned by the employee over a fiveyear period and then vests in the employee). Under both ASPE and IFRS,
the company should accrue the cost of the benefit and the related liability
over the five years in which the employee obtains full eligibility for benefits.
Under ASPE, the company can use the immediate recognition method that
measures the accrued benefit obligation using the funding valuation
method. All past service costs and actuarial gains and losses are
immediately recognized, as well as the actual return on any plan assets.
As an alternative, ASPE also currently allows the deferral and amortization
method. Under this approach, the accrued benefit obligation is estimated
using the projected benefits valuation method which is an accounting
specified approach. Under this method, any past service costs that arise
can be deferred and amortized over the remaining period to full eligibility for
the sabbatical or a shorter period. Actuarial gains and losses related to
these plans are also deferred and amortized over some reasonable period
(EARSL or some shorter period).
(b)
The accountant must have the following information or make assumptions
about them:
− employee turnover data: i.e., Probability that some employees will not
satisfy the minimum five year service requirement. This information
would not necessarily be needed by the assistant controller, but would
be needed by the actuary. Projected salary in the sabbatical year. This
information would not necessarily be needed by the assistant controller,
but would be needed by the actuary.
− appropriate discount rate to use in discounting benefits to their present
value (market rates). Under ASPE, this discount rate can either be the
current yield on high quality corporate bonds, or the settlement date rate.
IFRS requires that the current yield on high quality corporate bonds be
used.
− Valuation of the accrued benefit obligation at the report date (or within 3
months under ASPE if applying the defer-and-amortize approach),
expected earnings rates on plan assets, if any, required only for the
defer-and-amortize method under ASPE and the immediate recognition
approach under IFRS.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
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WA 19-1 (Continued)
− Actual return on any plan assets supporting the obligation. Fair value of
the plan assets (or an option under ASPE is the market-related value).
(c)
Yes, the answer to part (a) could change. The accounting method
described in (a) is based on the assumption that the employees are
receiving compensation in the sixth year based on past services and that in
the sixth year they are not providing active service to the company. If the
company dictates their activities during the sabbatical year and the
activities benefit the company, this would be considered active service. The
sabbatical year would then not be a compensated absence, but rather a
salary for active service even if the service is in alternative activities such
as research and promotion. The company would then not need to accrue
the compensated absence in the preceding years, and it would account for
the payments in the sabbatical year in the same way as for regular salary
payments. This treatment is the same under both IFRS and ASPE.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
WA 19-2
(a)
In a contributory pension plan, the employees bear part of the cost of the
stated benefits whereas in a non-contributory plan, the employer bears the
entire cost.
(b)
The employer is the organization sponsoring the pension plan. The
employer incurs the costs and makes contributions to the pension fund. For
the employer the accounting involves (1) allocating the cost of the pension
plan to the proper accounting periods, (2) measuring the amount of pension
obligation resulting from the plan, and (3) disclosing the status and effects
of the plan in the financial statements.
The pension fund or plan is the entity that receives the contributions from
the employer, administers the pension assets, and makes the benefit
payments to the pension recipients. For the plan, the accounting involves
identifying receipts as contributions from the employer sponsor and as
income from fund investments as well as computing the amounts due to
individual pension recipients. (NB: accounting for the benefit costs and
obligations of the employer is the topic of this chapter; accounting for the
fund or plan is not.)
(c)
Relative to the benefit plan, the term “funded” refers to the fact that assets
are accumulated over the period the employee provides service to the
organization so that monies will be available to pay the benefits when they
are due. The relationship between pension fund assets and the present
value of expected future pension benefit payments indicates the funded
status of the plan; thus, the benefit plan may be fully funded, over-funded,
or under-funded. Relative to the employer, the term “funded” has a similar
meaning. Some plans are pay-as-you-go and others (i.e. funded plans)
have assets set aside as the employees provide services.
Relative to the benefit plan, the accrued benefit liability or asset is what is
reported on the balance sheet of the employer. Under the immediate
recognition method, this balance would generally be the same as the
funded status of the plan. Under the defer-and-amortize approach, this
balance is the funded status of the plan adjusted for any past service costs
or actuarial gains and losses not yet amortized.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
WA 19-2 (Continued)
(d)
Terms and their definitions as they apply to accounting for pension plans
follow:
1. Current service cost is the actuarial present value of benefits attributed
by the pension benefit formula to employee service during that period.
Under the defer and amortize approach and the immediate recognition
approach, the current service cost is expensed in the year.
Past-service cost represents the retroactive benefits granted in a plan
amendment (or initiation). Retroactive benefits are benefits granted in a
plan amendment (or initiation) that are attributed by the pension benefit
formula to employee services rendered in periods prior to the
amendment. Under the immediate recognition approach, these are all
immediately expensed. Under the (ASPE) defer-and-amortize approach,
these are deferred and amortized over an appropriate period of time.
More specifically under this approach, these costs are amortized over
the period to full eligibility for the employee or some shorter period.
2. Remeasurement gain/loss refers to the difference between the actual
return on plan assets and the expected return. The expected return is
used as part of the pension expense calculation under IFRS (and under
ASPE defer and amortize) in order to smooth out wide swings that may
occur in the actual return. Actuarial experience gain/loss refers to
changes in actuarial assumptions (for example, changes in mortality
rate, turnover rate, disability rate, and salary amounts) that cause a
change in the defined benefit obligation. This would also involve a
change in assumptions used by the actuary in calculating the DBO (for
example, a change in the interest rate used to discount the pension cash
flows). IFRS recognizes actuarial gains and losses, and remeasurement
gains and losses, immediately into OCI. Under ASPE immediate
recognition, such gains or losses would be recognized immediately in
net income.
Under the (ASPE) defer-and–amortize approach, either the corridor
approach or some shorter period can be used to recognize these gains
and losses. The corridor approach requires the excess of the experience
gain or loss over the corridor amount (10% of the greater of ABO and
pension assets at the beginning of the year) be amortized over the
remaining service period of the employee group.
(e) The basic concepts and measurement methodology for post-retirement
benefits that accumulate are the same as for pension benefits. The
recognition and measurement criteria for the obligation and plan assets are
the same, as is the actuarial valuation method, the attribution period, and the
calculation of the current cost of benefits. However, under IFRS, a distinction
is made between plans that are more uncertain and require
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
WA 19-2 (CONTINUED)
more complex assumptions such as post-employment pension plans and
health-care benefit plans, and other plans. These other plans would
include paid leave, sabbaticals, long term disability which increases with
length of service, deferred compensation and profit sharing and bonus
plans. For these types of plans, any past service costs or actuarial gains
and losses must be recognised immediately into income (not OCI).
Solutions Manual
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Intermediate Accounting, Tenth Canadian Edition
WA 19-3
The immediate recognition approach recognizes all changes to the funded
status of the plan immediately into income, and the funded status is reported
on the statement of financial position. The accrued benefit obligation is
determined using the funded valuation approach prepared by the actuary.
Accordingly, there are no unamortized amounts with respect to past service
costs or actuarial gains and losses that will be recognized in future periods.
The advantages are that the accounting is simplified, since unamortized
balances do not need to be tracked and estimates of deferral periods need not
be determined. Finally, the net liability (or asset) reported reflects the actual
funded status of the plan in most cases. (Where the plan is in a surplus
position, the amount of the asset reported will be limited to the amount of
expected future funding benefit the company will receive.) The disadvantage
of this method is that the pension expense will be more variable year over year
due to expensing past services costs and actuarial gains and losses when
they arise (immediately). Over time, actuarial gains and losses would likely
reverse and have an overall immaterial impact. In addition, these actuarial
gains and losses are out of management control, and therefore might give a
false impression of the management’s ability to manage the firm’s results and
risk.
The defer-and-amortize approach calculates the accrued benefit obligation
using the projected benefit approach which is strictly a method developed for
accounting purposes. The defer-and-amortize approach allows for past service
costs and actuarial gains and losses to be deferred and amortized over some
reasonable length of time (as defined within the accounting standards) which
results in delaying their recognition. The rationale for delaying the recognition
is that management expects future benefits to arise from the provision of these
past service adjustments to the plans. Consequently, these past service costs
should be recognized over the future periods in which the benefits are
expected to be realized. Actuarial gains and losses arise due to unexpected
changes in the market value of plan assets and changes in actuarial
assumptions impacting the amount of the benefit obligation. Both of these
changes are beyond the control of management and are likely to reverse over
time. By deferring the recognition of past service costs and actuarial gains
and losses over defined periods (or in some cases, not recognizing at all), net
earnings is less volatile with respect to these changes. This is seen as an
advantage by some preparers of financial statements.
The disadvantage of the defer-and-amortize approach is that the amount
reported on the statement of financial position for the accrued benefit liability
or asset, is not equal to the funded status of the plan. In some cases, this
account may even be reported as an asset, when in reality the plan is actually
in a deficit and is under-funded. To compensate for this, the notes must
describe and reconcile the funded status to the reported amount and indicate
balances of unamortized amounts for past service costs and actuarial gains
and losses.
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WA 19-4
The following is a summary of what Canadian companies have been doing in
recent years in response to rising post-employment health-care costs and the
risks that are associated with defined benefit pension plans.
(a) Elimination of retiree benefits:
•
The most drastic response.
•
Significant employee discontent is likely.
•
Unilaterally reducing or eliminating post-retirement benefits may
prompt retirees and/or active employees to bring a legal action
against the employer.
•
Reserving the right to amend or terminate post-retirement benefits
is expressly needed.
•
An employer may consider providing employees with a lump-sum
payment in exchange for the elimination or reduction of postretirement benefits.
(b) Stricter eligibility requirements:
•
Imposing more stringent eligibility requirements with respect to new
hires will have little impact on an employer’s present bottom line since
new hires generally do not reach retirement age for quite some time.
(c) Capping of benefits.
(d) Switching to defined contribution:
•
Employees would be taking on more risk but continue to be
protected against catastrophic expenses.
•
Employees could manage their share of the risk by adjusting future
contribution and coverage levels to match their personal situation.
•
Some companies implement defined contribution plans for new
employees, while retaining a defined benefit plan for existing
employees.
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WA 19-5
IFRIC 14 outlines the calculation for the asset ceiling test and its rationale. Since
the surplus in the plan assets arguably belongs to the employees and not the
company, limitations must be put on the amount of asset that a company can
report when the funded status is a surplus. Under IFRIC 14, a company is
allowed to show as an asset (related to the surplus of the pension plan)
economic benefits available to the entity in the form of refunds or reductions in
the future contributions that would be made to the plan. But only under the
condition that the entity has an unconditional right to realize these benefits at
some point, either during the life of the plan or when the plan is settled.
The ceiling or maximum amount is determined by calculating the present value of
the future cost savings over the shorter period of the expected life of the plan and
the expected life of the entity. And this calculation is based on the conditions
prevailing at the report date.
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Intermediate Accounting, Tenth Canadian Edition
WA 19-6
There are many differences between IFRS and ASPE with respect to
measurement and reporting for pension and other employee future benefits.
Primarily, ASPE has been written to keep recognition and measurement issues
simple and therefore requiring less cost and time to calculate and report. ASPE
has also been designed with the creditor in mind as the primary user, rather than
outside shareholders and creditors. Given that creditors generally have access
to management; the disclosure has also been simplified.
Other differences are highlighted below:
a) ASPE has more choices available on reporting pensions and other future
benefits. An enterprise may choose to follow the immediate recognition
approach which results in the accrued benefit liability or asset being equal
to the actual funded status of the plan in most cases (unless the plan is in
a surplus position and then only the amount of future benefits accruing to
the enterprise would be reported as an asset, which might be lower than
the actual surplus). This is similar to the approach used under IFRS.
However, under ASPE the accrued benefit obligation is determined using
the funding valuation basis and all past services and actuarial gains and
losses are immediately recognized into income. This method is simpler
and less costly to implement and maintain.
b) ASPE also allows the defer-and-amortize (D&A) approach to be followed.
For past service costs, ASPE D&A requires amortization over the time to
full eligibility or any shorter period. For actuarial gains and losses, ASPE
D&A allows the corridor approach to be used, with amortization over
EARSL or some shorter period.
c) For immediate recognition under IFRS, remeasurement gains and losses
(actuarial gains and losses) are recognized directly into OCI and do not
impact current earnings. As ASPE does not have OCI, this is not an
option.
d) There are differences in the discount rates that can be used for the
determination of the obligation. ASPE allows a choice of either the current
yield rate on high quality corporate bonds (as does IFRS) or the current
settlement rate (which is not allowed under IFRS). These options again
make it easier to determine the information for the private enterprise.
e) For the value of the plan assets at the report date, IFRS requires that the
fair value be used. Under ASPE, there is a choice to use either the fair
value of the plan assets or a market-related value which is a calculated
amount that recognizes changes in the value of the assets over no more
than a five year period.
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WA 19-6 (CONTINUED)
f)
For other types of employee future benefits which are not complex, ASPE
would allow treatment similar to that of the pension plans. For IFRS, the
only difference is that past service contributions and actuarial gains and
losses would be immediately recognized (not included in OCI).
g) The disclosure under ASPE is greatly reduced in comparison with IFRS,
keeping in mind that the primary users of ASPE statements are creditors
that would likely have access to information from management. This is
not the case for IFRS prepared statements, where all types of investors
and creditors could be users, so there is a significant amount of disclosure
required.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
Intermediate Accounting, Tenth Canadian Edition
CASES
Note: See the Case Primer on the Student website, as well as
the Summary of the Case Primer in the front of the text. Note
that the first few chapters in volume 1 lay the foundation for
financial reporting decision making.
CA 19-1
Overview:
•Delmar Manufacturing Inc. (DM) is operating in a stable
environment but current income has been impacted by the cost
of expansion and construction of a manufacturing facility in
another province.
•Users – The Management and Pension Committee of DM will be
reviewing the impact on the financial statements that the
pension accounting entries and presentation will have. There
may be a greater preference for DM to adopt the accounting
policy choice that allows for less volatility in net income.
•Role – as a consultant an objective and transparent financial
reporting objective is adopted. Consideration of future
accounting changes and the impact to DM is specifically
requested.
•GAAP – DM is private and has the option to follow ASPE.
Differences between IFRS and ASPE are specifically requested
for this case. The company follows the immediate recognition
approach and does not plan to change the accounting policy for
pensions.
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CA 19-1 (Continued)
Issue: Treatment of the specific pension components
DM’s Net Benefit Obligation for 2012 presented on the financial
statements is net of Fund Assets of $980,000. Therefore, the
pension obligation must be $3,145,000*.
*(Benefit Obligation $3,145,000 less Fund Assets $980,000 yields the
Net Benefit Obligation of $2,165,000 on DM’s financial statements)
IFRS – immediate recognition
(DBO) – Defined Benefit
Obligation
Current service cost of
$236,000 is recorded in net
income as pension expense.
Past service costs: DM must
recognize the entire $96,000
in the 2013 fiscal year within
net income.
ASPE –immediate recognition
(ABO) -- Accrued Benefit
Obligation
Current year expense of
$236,000 is recorded in
net income as pension
expense.
Past service costs – the full
amount must be
recognized in the 2013
fiscal year.
Continued
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CA 19-1 (Continued)
IFRS – immediate recognition
(DBO) – Defined Benefit
Obligation
Interest expense: the
discount rate used to
compute interest accrued on
the defined benefit obligation
(DBO) for 2013 must be
equivalent to the yield on a
high-quality debt instrument
– in DM’s case the 9%
current yield on high-quality
corporate bonds.
Interest expense for 2013 is
calculated as:
[DBO on Jan 1 $3,145,000 +
the immediate recognition of
past service cost $96,000
reduced by the average of
retirement payments of
$34,000 (or 34,000/2) paid
throughout the year] x 9% =
290,160. This amount must
be recorded within net
income for 2013 as net
interest.
The same 9% rate must be
applied to the expected
return on plan assets.
ASPE –immediate recognition
(ABO) -- Accrued Benefit
Obligation
Interest expense: the
discount rate used to
compute the interest
accrued on the accrued
benefit obligation (ABO)
for 2013 has a similar
requirement as IFRS –
current market rate on a
high-quality debt
instrument.
DM can use the 8%
settlement rate to
calculate interest on the
ABO if it plans to purchase
an insurance contract to
settle its liability. As DM
has specifically eliminated
this option the 9% better
reflects the expected
settlement cost of the
liability.
The interest expense is
calculated in the same
manner as under IFRS.
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Intermediate Accounting, Tenth Canadian Edition
CA 19-1 (Continued)
IFRS – immediate recognition
ASPE –immediate recognition
(DBO) – Defined Benefit
(ABO) -- Accrued Benefit
Obligation
Obligation
The expected return on plan
The actual return on fund
assets under IFRS must be
assets of $16,500 is
calculated using the current
included in pension
yield on high-quality bonds
expense and therefore in
(9%). This is applied to the
net income (as are all
weighted average fund asset
changes in the
balance of $1,007,000
surplus/deficit of the plan).
[($980,000+$1,034,000)/2 =
$1,007,000]
 Total expected return on plan
assets is $90,630.
 A combined net interest of
$199,530 will be reflected in
the expense and in net
income.
The total difference of
$74,130 ($90,630 - $16,500)
is treated as a remeasurement loss and is
recorded in OCI.
The actuarial loss must be
reflected immediately – the
$55,000 resulting from the
change in assumptions and
the $19,000 resulting from
the change in expected and
actual actuary costs is
accounted for in
comprehensive income –
through the OCI. A total of
$74,000 in OCI for fiscal
2013.
Under ASPE – the actuarial
loss is immediately
recorded in net income.
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Intermediate Accounting, Tenth Canadian Edition
CA 19-1 (Continued)
Conclusion: The case illustrates the treatment options under the
IFRS and ASPE – immediate recognition.
Issue: Presentation of the final obligation on the financial
statements
IFRS
ASPE
The DBO calculated by
The ABO calculated by
management represents the
management may
benefit obligation used in
represent the benefit
the net benefit calculation.
obligation used in the net
benefit calculation. The
final benefit obligation on
the financial statements
must be updated by the
actuary.
The net obligation owing or
receivable from the plan is
presented on the Balance
Sheet.
The net obligation owing or
receivable from the plan is
presented on the Balance
Sheet.
The overall funded status of
the plan under IFRS is
calculated as follows:
The overall funded status of
the plan under ASPE is
calculated as:
DBO at Dec 31
$3,808,690
DBO at Dec 31
$3,808,690
-FV of PA at Dec 31
$1,050,500
-FV of FA at Dec 31
$1,050,500
Net Defined Benefit Liability is
$2,758,190.
If management’s estimates result
in the same calculation as the
actuary, the Net Defined Benefit
Liability is $2,758,190.
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Kieso, Weygandt, Warfield, Young, Wiecek, McConomy
CA 19-1 (Continued)
IFRS
The DBO at the end of the
period is calculated as:
DBO – Jan 1
$3,145,000
+current service cost
236,000
+past service costs
96,000
Intermediate Accounting, Tenth Canadian Edition
ASPE
The ABO at the end of the
period is calculated in the
same manner as under
IFRS. The difference in
ASPE is the variability in
the pension expense.
Under ASPE the actuarial
loss of $74,000 is reflected
in the pension expense.
- benefits paid
(34,000)
+interest expense
291,690
+actuarial loss
74,000
DBO – Dec 31
$3,808,690
The Plan Assets at the end
of the period is calculated
as:
PA – Jan 1
$980,000
+contributions
88,000
+actual return
16,500
-benefits paid to retirees
(34,000)
PA – Dec 31
$1,050,500
The difference in the
The Fund Assets at the end
of the period is calculated
in the same manner as
under IFRS. The difference
in ASPE is that the actual
return is reflected in the
pension expense.
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expected return and the
actual return is reflected in
the OCI.
Under IFRS, DM can
segregate the benefit costs
(service cost, interest cost
and expected return) on the
income statement or
present as a combined
benefit cost.
Same applies under ASPE.
Recommendation: DM is private and can choose to follow the ‘defer
and amortize’ approach for pension accounting. ASPE guidance is
transitioning towards eliminating this approach for the future. It is
advisable for DM to continue to follow the immediate recognition
approach, which is more transparent.
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IC 19-1
Overview
- Public company since shares trade on national stock exchange
– therefore IFRS constraint
- May be some bias to show company in best light given
significant bank loans – debt to equity ratio is a key ratio as
bank will assess and likely use in setting cost of capital – capital
intensive given large expenditures in exploration and
development (therefore debt likely high)
- Investors will likely want information about potential reserves
and also riskiness of assets
- Environmentalists will use the statements as evidence of
whether the company is being environmentally responsible and
not making excess profits at the expense of the environment
- Since the funding for the new benefit plan is based on net
income, any issue that affects net income will be a significant
one – especially for the employees who are part of the plan.
- As controller – will want to be transparent yet not expose the
company to any additional risks from environmentalists nor
increase the cost of capital
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IC 19-1 (Continued)
Analysis and recommendations
Mine A depreciation
Componentize railway cars/rails
- Should treat cars and
tracks as separate and
amortize over different
period or using different
method since they have
differing lives and usage.
- The mineral property
depreciation should be
based on reserves and
depletion whereas the
railway system on usage.
- The company may be able
to salvage and sell the
railway system at the end –
or reuse.
- Better to separate the
equipment from the
property – more
transparent.
Do not
- Mine will last 10 years and
so just amortize all over 10
years.
- Costs to componentize not
worth it – costs exceed
benefits.
- Will likely abandon mine
after that so likely little
residual value in railway
cars and tracks.
Recommendation: It is more transparent to separate out the
significant components and depreciate separately.
Depletion
Based on high estimate of
Based on low estimate of
reserves (3X higher so significant reserves
difference)
- Lower depletion
- Higher – so more
- Difficult to estimate
conservative
however engineers and
- Significant uncertainty since
geologists have established
engineers and geologists
the higher level – for sure
not able to come up with
more than the low end
concrete number
estimate which is overly
- Will be able to refine as the
conservative
mining progresses
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IC 19-1 (Continued)
Recommendation: It would be prudent to use the lower estimate of
reserves due to the significant uncertainty.
Mine B exploration costs
Capitalize
Expense
- Interest costs must be
- Significant uncertainty as to
capitalized as long as they
whether sufficient gold ore
are directly related to the
actually exists of
producing mine.
commercial grade.
- All other costs related to
- One time fee – like a bribe –
bringing the mine into
should likely expense if
production are capitalized
normal cost of doing
as long as directly related.
business in this type of
- May include senior
environment.
management salaries as
- May need to disclose.
need to spend more time
- Senior management salary
due to political instability in
fixed cost and would spend
country – need to negotiate
this anyway – more like
directly related to getting
overhead – normal ongoing
the mine ready.
cost of doing business.
- The company believes that
the mine will contribute to
future cash flows that they
have access to – otherwise
they would not be spending
the money on developing
the property.
Recommendation: Overall, the company believes that the land is
worth developing and therefore the costs should be capitalized.
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IC 19-1 (Continued)
Mine C ARO
Accrue
Do not
- Must accrue if likely and
- Will likely abandon and
measurable – since they are
therefore expenditure on
in the business of mining –
ARO not probable.
must be able to measure the
- Not yet required by law
estimated cost of cleanup.
therefore no legal
obligation.
- It appears as though it is
measureable since
management knows that it
will be material.
- Environmentalist would find
this useful info and therefore
full recognition would give it
prominence and visibility.
- Even if abandoned – still
have a responsibility to clean
up.
Recommendation: Probably better to accrue.
Oil rigs
Capitalize maintenance
Expense
- Future benefit – 2 years and
- Cost versus benefits – not
therefore meets the
worth it to capitalize since
definition of an asset.
the benefit is only two
years.
- More like an ongoing cost
of doing business – need to
maintain the equipment to
keep it in good working
order.
Recommendation: It is better to expense as it is normal maintenance.
Gas in caves – expense since will not be able to sell. This is an
ongoing cost of doing business.
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IC 19-1 (Continued)
Treat ore piles as inventory or leave as part of mine – likely the latter
since not yet refined.
Other issue: Details about the new long-term benefit plan for the
employees are needed. There may be recognition and measurement
issues that need to be resolved, depending on the plan specifications.
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RESEARCH AND FINANCIAL ANALYSIS
RA19-1
BCE INC.
All of the answers below are taken from Note 20 of the 2011 financial statements.
(a) The plan asset and accrued benefit obligation balances at the end of years
2011 and 2010 are presented below.
(in $millions )
Accrued benefit
obligation
Plan assets
Funded status–deficit
Dec. 31, 2011
Dec. 31, 2010
17,472
16,298
16,384
14,835
1,088
1,463
The plan deficit is $1,088 million before taking into account the effect of the
asset limit of $169 million (the effect of the asset limit was $192 million in 2010 see Note 20 for details). The under-funded status has improved since the end of
the 2010 mainly because the employer made a large contribution of $1.44 billion
in 2011 compared to $1.27 billion in 2010. At the same time, the actual return on
the plan assets was a gain of $774 million in 2011 compared to a gain of $1,458
million in 2010. While the actuarial losses on the ABO decreased from $1,770
million in 2010 to $647 million in 2011. Plans in a net deficit position total $1,288,
and those in a net surplus position total $31.
(b) The reconciliation of the funded status of these plans at December 31, 2011,
to the amounts reported on the balance sheet is as follows:
(in $millions)
Funded status–deficit
Effect of asset limit
Net accrued benefit liabiility
Reported in non-current assets: Employee benefit asset
Reported in non-current liabilities: Employee benefit
obligation *
Dec. 31,
2011
$ (1,088)
(169)
(1,257)
$
31
$ (1,288)
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RA19-1 (CONTINUED)
The company is showing an employee benefit obligation of $1,288 relating to its
pension benefits, which exceeds its funded status deficit due mainly to the effect
of the asset limit requirements. This is much more realistic than what BCE
reported in 2009 under the defer and amortize approach. (You may wish to refer
to the 2009 BCE annual report for 2009 available on SEDAR for further details).
(c) The company’s results are shown below in the table: (in $millions)
Expected return on plan assets
Actual return on plan assets
1,018
774
(d) The expense reported for the defined benefit pension plans is $89 million.
The main components of the cost of the defined benefit pension plans were as
follows:
Current service cost
Interest cost
Expected return on plan assets
220
887
(1,018)
89
This is substantially lower than the expense under the immediate recognition of
ASPE, mainly because under IFRS actuarial losses reported in OCI totalling
$962 million would have been charged directly to expense.
(e) BCE has other post-employment plans that provide for health and life
insurance coverage, but these plans are being phased out over the 10 years
ending December 31, 2016. The company also provides some workers with
disability plans, workers’ compensation and medical benefits to former
employees until their retirement commences. These plans were a large deficit
position at December 31, 2011 and 2010 of $1,678 million and $1,614 million.
The company has few assets to fund these plans. For 2011 and 2010, the
company reported related ABO’s of $1,895 and $1,823 million respectively.
(f) The total expense for the defined contribution plans were: $61 million and $47
million for 2011 and 2010, respectively.
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RA 19-2 CANADIAN NATIONAL RAILWAY
(a) As indicated from the notes, the pension plans were in a surplus in 2010, but
moved into a deficit position for 2011. At December 31, 2010 and 2011, the
surplus (deficit) amounts were $US 197 million and $US (829) million,
respectively.
(b) The expense is reported as a negative $US 80 million in 2011 and negative
$US 70 million in 2010 (that is, it is in an income position for both years). This is
a relatively small change year over year (relative to the size of the overall
pension plan). The expected return on the plan assets has caused a plan to be
in an income, rather than an expense position for both years. This expected gain
was higher than the current service cost and the interest cost for both years.
This could be because the plan assets were greater than the obligation in 2010
and at the beginning of 2011. This would cause returns on assets to be higher.
However it should be noted that in 2011, the company had an actual return that
was much lower than their expected return ($36 million vs. $1,005 million). If this
does not improve in 2012, it could eventually lead to pension cost to be in an
expense position (in 2012 or 2013).
(c) The amount of cash flow incurred to fund the plan for 2011 was $US 458
million and $US 411 million for 2010. Differences in the year over year amounts
to fund the plan could be based on the number of employees still in the plan or
the amount of surplus being used to fund the plan in 2010. In the case of CN, it
is likely that with the large surplus in 2010, the company was able to make lower
contributions in 2010. In both years, the amount of the expense is lower than the
actual amount required to fund the plan (as indicated by the surplus turning into a
deficit position over the two year period).
(d) This is an interesting question for the company (and other companies that
have moved from “Defer and Amortize” to “Immediate Recognition”). Since they
moved from the defer-and-amortize approach several years ago, the financial
statement presentation is more realistic than it has been. However, under IFRS
the company is able to record remeasurement gains and losses (and actuarial
gains and losses) in OCI. In this respect, the company can still “defer” the impact
of actual losses from the plan on EPS. This reflects the expectation that the
losses may reverse eventually and be replaced with higher than expected gains.
Overall, the increase in accumulated OCI loss related to the pension plan in 2011
was $US 1,560 million (reported separately in CNR’s annual report).
For the knowledgeable user, since all of the information is provided in the notes,
they can easily make any adjustments to the expense that they wish in their
analysis. Given this, we could conclude that the information is faithfully
represented.
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RA19-3 RESEARCH TOPIC
(a)
Relevant rates used to calculate pension information:
Discount rate
Rate of compensation
increase
Expected long-term rate of
return on plan assets
2011
Air Canada
2012
Bank of
Montreal
2011
Rona Inc.
5.2%
5.1%
5.0%
2.50%
3.3%
3.7%
6.9%
5.9%
6.0%
(b) The discount rates are fairly similar for all three companies. The expected
rates of compensation increases though are different. Air Canada’s rate of
2.5% is the lowest, with RONA and Bank of Montreal having similar rates of
3.3% and 3.7%. This difference will have a significant impact on the
projected amount of the accrued benefit obligation. The expected rates of
returns are similar ranging from 5.9% for the Bank of Montreal to Air
Canada of 6.9%.
However, even seemingly small differences in these
percentages can be significant (e.g., the difference of 6.0% vs. 6.9% for
RONA and Air Canada is a 15% difference in discount rates). Differences in
discount rates like these can result in significant differences in the
determination of the underlying amounts such as the DBO or ABO.
(c)
The changes in the assumptions during the period covered in the notes of
the companies’ financial statements are presented below.
Air Canada
Discount rate
Rate of
compensation
increase
Expected longterm rate of
return on plan
assets
Decreased by
0.3% from 5.5%
to 5.2%
No change,
remains at 2.5%
Decreased 0.1%
from 7.0% to
6.9%
Bank of
Montreal
Decreased by
0.1% from 5.2%
to 5.1%
Increased 0.1%
from 3.2% to
3.3%
Decreased 0.4%
from 6.3% to
5.9%
RONA
Decreased by
0.5% from 5.5%
to 5.0%
Increased by
0.1% from 3.6%
to 3.7%
No change,
remains at 6%
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Intermediate Accounting, Tenth Canadian Edition
RA19-3 (Continued)
The most significant change was in the discount rate used. All three
companies decreased their discount rates with the range being 0.1% to
0.5%. This will result in a lower interest cost which will decrease the
pension expense, and increase the accrued benefit obligation.
The small increase in the rate of expected compensation increase for Bank
of Montreal and RONA will increase their pension expense and the
obligation. In addition, an increase in the rate of compensation would also
result in an actuarial loss. Increases in pension expense resulting from
changes in assumptions would have the effect of increasing the accrued
pension liability (or decreasing a prepaid pension cost), all else being equal.
(d) Air Canada: The company provides to its employees defined benefit and
defined contribution retirement benefits and other post-employment benefits
such as health, life and disability. Assumptions stated: Discount rate is 5.2%
and rate increase in health care costs are 7.5%, with cost trend rates
declining to 5.0% by 2015.
Bank of Montreal: The company provides defined benefit and defined
contribution pension plans for its employees, in addition to health and dental
and life insurance benefits for retirees and current employees.
Assumptions stated: Discount rate is 5.1%, Rate of compensation increase
is 3.3%, and ultimate health care cost trend rate is 5.4%.
RONA Inc.: RONA provides defined benefit and defined contribution
pension plans for its employees. It does not provide any post-employment
medical plans.
The types of assumptions made are standard among companies, depending
on the actual post-employment benefits provided. The rates applied in
quantifying the components of the medical benefits are similar, although
within a broader range of 5.0% to 7.5%. These rates will have a significant
effect on the health-care plans obligation and related expense, but the long
run trends expected are more similar for Air Canada and the Bank of
Montreal.
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Intermediate Accounting, Tenth Canadian Edition
RA19-3 (Continued)
(e)
Below is the information on the defined benefit pension plan and postretirement benefit plans for 2011 fiscal year end (2012 for Bank of
Montreal).
Defined benefit
plans
Funded status
(deficit) surplus
Actual amount
(liabilities)/assets
reported
Difference
Other employee
benefits
Funded status
(deficit) surplus
Actual amount
(liabilities)/assets
reported
Difference
Air Canada
$millions
Bank of
Montreal
$millions
RONA
$thousands
(4,519)
(210)
(4,610)
(4,519)
465
(6,192)
0
(675)
1,582
(1,116)
(1,068)
N/A
(1,044)
(989)
N/A
(72)
(79)
N/A
There were some significant differences in the values recognized in the
financial statements for the defined benefit liabilities or assets and the actual
funded status of the plans. For example, the difference of $1,582 for RONA
relates to the fact that RONA does not have an unconditional right to any
surpluses in individual plans, so the liability reported is greater than the
funded status deficit at the financial reporting date. The $675 difference for
the Bank of Montreal relates to use of the deferral and amortization method
by the bank for 2012. The difference relates mainly to a loss on the benefit
liability not yet recorded relating to changes in assumptions. The new
standard requiring use of immediate recognition must be adopted by the
bank for its fiscal year starting November 1, 2013, so by the end of fiscal
2013-2014 the difference is likely to be eliminated.
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RA19-4
Intermediate Accounting, Tenth Canadian Edition
RESEARCH TOPIC
The AcSB has proposed replacing existing CICA Handbook Section 3461
with Section 3462. Currently, under Section 3461 of ASPE, a company can
use either the deferral and amortization approach or the immediate
recognition approach for accounting for their pension benefits. Under the
new proposals, the deferral and amortization approach would be
eliminated.
In addition, new Section 3462 would require that plan obligations and plan
assets be measured at the balance sheet date, rather than having the
option of using a date of up to three months prior to the balance sheet date.
The new section also utilizes similar terminology to that used under IAS 19
(for example, using the term defined benefit obligation, rather than accrued
benefit obligation; and using the term defined benefit liability (asset) on the
balance sheet rather than the term accrued benefit liability (asset)). This
should help to minimize confusion when comparing the financial statements
for companies using IFRS vs. ASPE.
Under the new section, companies would no longer need to refer to the
expected rate of return on plan assets when calculating pension expense
(as was done under the deferral and amortization method). The actual rate
of return is used under the immediate recognition approach of ASPE when
determining pension expense. Since ASPE does not utilize OCI, there is
no need to consider the expected rate of return (it is still referred to under
IFRS for determination of remeasurement gains and losses relating to plan
assets, with such gain and losses flowing through OCI).
Companies would use the same discount rate to determine the limit on the
carrying amount of a defined benefit asset as they use for the DBO. This is
a change, as they used to use the expected rate of return on plan assets
for calculating the limit on the carrying amount of a defined benefit asset.
Companies would also use the same discount rate as used for the DBO in
order to determine remeasurement gains or losses related to plan assets
(similar to IFRS). However, while such remeasurement gains or losses
would be charged to OCI under IFRS, under the new ASPE section the
remeasurement gains or losses would just be required to be disclosed (not
recorded separately).
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