Chapter 20-1 CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 20-2 Learning Learning Objectives Objectives Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Identify types of pension plans and their characteristics Explain alternative measures for valuing the pension obligation List the components of pension expense Use a worksheet for employer’s pension plan entries Describe the amortization of unrecognized prior service costs Explain the accounting procedure for recognizing unexpected gains and losses Explain the corridor approach to amortizing unrecognized gains and losses Describe the requirements for reporting pension plans in financial statements Chapter 20-3 Accounting Accounting for for Pensions Pensions and and Postretirement Postretirement Benefits Benefits Nature of Pension Plans Accounting for Pensions Defined contribution plan Defined-benefit plan Role of actuaries Alternative measures of liability Recognition of net funded status Components of pension expense Using a Pension Worksheet Reporting Pension Plans in Financial Statements 2010 entries and worksheet Amortization of prior service cost 2011 entries and worksheet Gain or loss Within the financial statements 2012 entries and worksheet 2013 entries and worksheet—a comprehensive example Within the notes to the financial statements Pension note disclosure Special issues Chapter 20-4 Nature Nature of of Pension Pension Plans Plans A Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working Pension PensionPlan Plan Administrator Administrator Employer Employer Retired Employees Chapter 20-5 Contributions Benefit Payments Assets & Liabilities LO Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Nature Nature of of Pension Pension Plans Plans Some pension plans are: Contributory: employees voluntarily make payments to increase their benefits Noncontributory: employer bears the entire cost Qualified pension plans: offer tax benefits Pension fund should be a separate legal and accounting entity Chapter 20-6 LO Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Types Types of of Pension Pension Plans Plans Defined-Contribution Plan    Employer contribution determined by plan (fixed) Risk borne by employees Benefits based on plan value Defined-Benefit Plan    Benefit determined by plan Employer contribution varies (determined by Actuaries) Risk borne by employer Actuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc Chapter 20-7 LO Identify types of pension plans and their characteristics Accounting Accounting for for Pensions Pensions Two questions: (1) What is the pension obligation that a company should report in the financial statements? (2) What is the pension expense for the period? Chapter 20-8 LO Explain alternative measures for valuing the pension obligation Accounting Accounting for for Pensions Pensions The employer’s pension obligation is the deferred compensation obligation it has to its employees for their service under the terms of the pension plan Alternative measures of the Liability Illustration 20-3 FASB’s choice Chapter 20-9 LO Explain alternative measures for valuing the pension obligation Accounting Accounting for for Pensions Pensions Recognition of the Net Funded Status Companies must recognize on their balance sheet the full overfunded or underfunded status of their defined-benefit pension plan The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation Chapter 20-10 LO Explain alternative measures for valuing the pension obligation  iGAAP and U.S GAAP separate pension plans into definedcontribution plans and defined-benefit plans The accounting for defined-contribution plans is similar  For defined-benefit plans, both iGAAP and U.S GAAP recognize the net of the pension assets and liabilities on the balance sheet Unlike U.S GAAP, which recognizes prior service cost on the balance sheet (as an element of “Accumulated other comprehensive income”), iGAAP does not recognize prior service costs on the balance sheet Both GAAPs amortize prior service costs into income over the expected service lives of employees Chapter 20-44  Another difference in defined-benefit recognition is that under iGAAP companies have the choice of recognizing actuarial gains and losses in income immediately or amortizing them over the expected remaining working lives of employees U.S GAAP does not permit choice  The IASB has recently issued a discussion paper on pensions proposing: (1) elimination of smoothing via the corridor approach, (2) a different presentation of pension costs in the income statement, and (3) a new category of pensions for accounting purposes—socalled “contribution-based promises.” Chapter 20-45 Accounting Guidance In December 1990, the FASB issued rules on “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” These rules cover for healthcare and other “welfare benefits” provided to retirees, their spouses, dependents, and beneficiaries Other welfare benefits include life insurance offered outside a pension plan; medical, dental, and eye care; legal and tax services; tuition assistance; day care; and housing assistance Chapter 20-46 Differences Between Pension Benefits and Healthcare Benefits Illustration 20A-1 Chapter 20-47 LO 10 Identify the differences between pensions and postretirement healthcare benefits Differences Between Pension Benefits and Healthcare Benefits Measuring the future payments for healthcare benefit plans is so much more difficult than for pension plans Many postretirement plans not set a limit on healthcare benefits The levels of healthcare benefit use and healthcare costs are difficult to predict Increased longevity, unexpected illnesses (e.g., AIDS, SARS, and avian flu), along with new medical technologies and cures, cause changes in healthcare Chapter 20-48 utilization LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions Attribution Period - period of time over which the postretirement benefit cost accrue Illustration 20A-2 Chapter 20-49 LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions Obligations Under Postretirement Benefits Expected postretirement benefit obligation (EPBO) is the actuarial present value as of a particular date of all benefits a company expects to pay after retirement to employees and their dependents Accumulated postretirement benefit obligation (APBO) is the actuarial present value of future benefits attributed to employees’ services rendered to a particular date Chapter 20-50 LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions Postretirement Expense Service Cost Interest Cost Actual Return on Plan Assets Amortization of Prior Service Costs Gains and Losses Chapter 20-51 LO 10 Identify the differences between pensions and postretirement healthcare benefits Illustrative Accounting Entries 2010 Entries and Worksheet Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2010, Quest Company adopts a healthcare benefit plan The following facts apply to the postretirement benefits plan for the year 2010 Chapter 20-52  Plan assets at fair value on January 1, 2010, are zero  Actual and expected returns on plan assets are zero  Accumulated postretirement benefit obligation (APBO), January 1, 2010, is zero  Service cost is $54,000  No prior service cost exists  Interest cost on the APBO is zero  Funding contributions during the year are $38,000  Benefit payments to employees from plan are $28,000 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2010 Entries and Worksheet Illustration 20A-4 Chapter 20-53 Journal Entry Illustrative Accounting Entries Recognition of Gains and Losses Gains and losses represent changes in the APBO or the value of plan assets Gains and losses are recorded in other comprehensive income  The Corridor Approach  Amortization Methods Chapter 20-54 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2011 Entries and Worksheet Illustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2011 Chapter 20-55  Actual return on plan assets is $600  Expected return on plan assets is $800  Discount rate is percent  Increase in APBO due to change in actuarial assumptions is $60,000  Service cost is $26,000  Funding contributions during the year are $18,000  Benefit payments to employees during the year are $5,000  Average remaining service to expected retirement: 25 years LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2011 Entries and Worksheet Illustration 20A-6 Chapter 20-56 Journal Entry Illustrative Accounting Entries Amortization of Gains and Losses in 2012 Illustration 20A-8 Chapter 20-57 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Chapter 20-58 .. .CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 20- 2 Learning Learning Objectives... expense Chapter 20- 23 LO Describe the amortization of prior service costs Using Using aa Pension Pension Work Work Sheet Sheet –– E20-7 E20-7 Chapter 20- 24 Solution on notes page ($135, 720) liability... Pension Pension Work Work Sheet Sheet E20-7: Pension Journal Entry for 201 0 Dec 31 Pension Expense OCI - PSC Chapter 20- 25 83, 920 103,000 Pension Liability 121, 920 Cash 65,000 LO Describe the amortization