Concept Review Solutions
CHAPTER 19: PENSIONS AND OTHER POST-RETIREMENT BENEFITS
PAGE 1134
1. A defined contribution pension plan is one in which the employer (often the employee as well)
makes agreed-upon cash contributions. The pension the employee actually receives is a function of
the investment success of the pension fund. A defined benefit pension plan is one in which the
benefits received by the employee are stated in the pension plan (therefore, not contingent on the
investment success of the pension fund). In a defined benefit plan the contributions are variable while
the benefits are fixed. In a defined contribution plan the contributions are fixed while the benefits are
variable.
2. A trusteeship is critical for accounting because it means the assets are beyond the control of the
company and therefore neither the plan assets nor liabilities are reported on the company’s SFP.
3. If an employee’s pension rights are not vested, should the employment be terminated he/she has
no rights to receive a pension.
4. If a plan is non-contributory only the employer makes contributions to the plan.
5. A pension plan curtailment takes place when there is a significant reduction in the number of
employees covered by a plan, or some significant element of future service that will no longer qualify
for benefits. This may happen when a company closes down a division or otherwise restructures or
downsizes operations. It may also happen when workers agree to a major change in benefits,
perhaps to preserve competitiveness.
PAGE 1140
Concept Review Solutions
© 2014 McGraw-Hill Ryerson, Ltd.
Intermediate Accounting, 6e, Volume 2
1. Fund assets increase when the employer or the employee makes contributions to the fund, and
when the assets generate return. The assets can decline if the plan generates a negative return.
Assets also decline when benefits are paid to pensioners.
2. Demographic assumptions are decisions that relate to the characteristics of the employees eligible
for benefits:
• Employee turnover, disability, and early retirement. Vesting may not occur immediately in defined
benefit plans. Therefore, it is usually necessary to estimate what proportion of employees will stay
long enough for vesting to occur. It is also necessary to establish how many will qualify for disability
benefits prior to retirement, or elect to take a reduced, early retirement.
• Mortality rates. Mortality determines the term of the eventual pension and is an important variable.
Most plans provide minimum guarantees; the pensioner’s estate receives a lump-sum payment if the
pension is not paid for a certain number of years. A pension plan may specify death benefits or
survivor benefits that give lump-sum or continuing benefits to a surviving spouse, partner, and/or
child. The mortality rate and the extent of any trailing entitlements must be estimated. Best estimates
assumptions in this category generally involve adjusting population mortality statistics for the
characteristics of the specific employee group.
3. The three basic actuarial cost methods that can be used for funding can be described briefly as
follows:
1. The accumulated benefit method calculates the contributions that an employer must make
in order to fund the pension to which the employee currently is entitled, based on the actual
years of service to date and on the current salary.
2. The projected unit credit method calculates the required funding based on the actual
years of service to date but on a projected estimate of the employee’s salary at the retirement
date.
3. The level contribution method projects both the final salary and the total years of service,
and then allocates the cost evenly over the years of service.
Concept Review Solutions
© 2014 McGraw-Hill Ryerson, Ltd.
Intermediate Accounting, 6e, Volume 2
4. Accounting standards require the use of the projected unit credit method for pension
measurements. Companies are all required to use the same actuarial cost method to ensure that a
common measurement tool is used, and thus comparability is preserved.
PAGE 1149
1. Accounting for a defined benefit pension plan requires measuring and recording three different
elements, service cost, net interest on the net defined benefit pension liability and re-measurement of
the net defined pension liability.
2. Service cost is the total of current service cost, any past service cost and any gain or loss on plan
settlement. This amount is expensed.
3. Net interest on the net defined benefit pension liability (That is, net interest on the defined benefit
obligation less pension plan assets) is the net defined benefit pension liability multiplied by the
discount rate, and the resulting expense is included in earnings. If the plan is overfunded, the net
status is an asset and this is a revenue item.
4. Re-measurement of the net defined benefit pension liability, whether caused by actuarial gains or
losses, a difference between plan assets’ earnings and the discount rate or other measurement issues
are recorded in other comprehensive income (OCI) and accumulated other comprehensive income
(accumulated OCI).
5. Pension entries are as follows:
Contributions to the plan
Debit net defined benefit pension liability (credit cash)
Service cost
Credit net defined benefit pension liability (debit expense)
Net interest cost
Credit net defined benefit pension liability (debit expense)
(opposite if net position is an asset)
Concept Review Solutions
© 2014 McGraw-Hill Ryerson, Ltd.
Intermediate Accounting, 6e, Volume 2
Actuarial gains and losses
For a loss: Credit net defined benefit pension liability (debit
accumulated OCI)
For a gain: Debit net defined benefit pension liability (credit
accumulated OCI)
When all pension adjustments are recorded, the net defined benefit pension liability on the
SFP will equal the difference between the plan assets and the defined benefit obligation.
PAGE 1155
1. Expected return on pension assets increases the pension plan assets but has no direct effect on
pension expense.
2. Service cost changes the Defined Benefit Obligation and Pension Expense.
3. Benefit payments to employees reduce both the value of plan assets and the defined benefit
obligation.
4. Newly arising actuarial losses change the defined pension obligation or pension plan assets, the
net defined pension liability and accumulated OCI.
PAGE 1160
1. Service costs for both OPEB and pension plans are current service and past service, plus plan
settlements and Curtailments
2. Plans are typically unregistered and likely to be substantially unfunded because contributions to
unregistered plans are not tax deductible for the employer.
Concept Review Solutions
© 2014 McGraw-Hill Ryerson, Ltd.
Intermediate Accounting, 6e, Volume 2
3. Measurement disclosures are extensive, and all calculations and assumptions must be disclosed.
Assumptions may reflect biases, and will affect comparability, and so are especially important
disclosures.
Concept Review Solutions
© 2014 McGraw-Hill Ryerson, Ltd.
Intermediate Accounting, 6e, Volume 2