INTERMEDIATE Intermediat ACCOUNTING Intermediat e e Accounting Accounting F I F T E E N T H 20-1 E D I T I O N Prepared by Coby Harmon Prepared by Prepared by University of California, Barbara CobySanta Harmon Harmon Westmont College SantaCoby University of California, Barbara University of California, Santa Barbara Westmont College kieso weygandt warfield team for success PREVIEW OF CHAPTER 20 Intermediate Accounting 15th Edition Kieso Weygandt Warfield 20-2 20 Accounting for Pensions and Postretirement Benefits LEARNING OBJECTIVES After studying this chapter, you should be able to: 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 20-3 Describe the amortization of prior service costs Explain the accounting for unexpected gains and losses Explain the corridor approach to amortizing gains and losses Describe the requirements for reporting pension plans in financial statements Nature of Pension Plans An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years Pension PensionPlan Plan Administrator Administrator Employer Employer Retired Employees 20-4 Contributions Benefit Payments Assets & Liabilities LO Nature of Pension Plans Pension plans can be:  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 20-5 LO Nature of Pension Plans Illustration 20-2 Pension Funds and Pension Expense The two most common types of pension plans are defined contribution plans and defined benefit plans 20-6 LO 20 Accounting for Pensions and Postretirement Benefits LEARNING OBJECTIVES After studying this chapter, you should be able to: 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 20-7 Describe the amortization of prior service costs Explain the accounting for unexpected gains and losses Explain the corridor approach to amortizing gains and losses Describe the requirements for reporting pension plans in financial statements Nature of Pension 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 make predictions (called actuarial assumptions) of mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and any other factors necessary to operate a pension plan 20-8 LO 20 Accounting for Pensions and Postretirement Benefits LEARNING OBJECTIVES After studying this chapter, you should be able to: 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 20-9 Describe the amortization of prior service costs Explain the accounting for unexpected gains and losses Explain the corridor approach to amortizing gains and losses Describe the requirements for reporting pension plans in financial statements Accounting for 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? 20-10 LO APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Postretirement Benefits Accounting Provisions Postretirement Expense Service Cost Interest Cost Actual Return on Plan Assets Amortization of Prior Service Costs Gains and Losses 20-64 LO 10 APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Illustrative Accounting Entries 2014 Entries and Worksheet Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2014, Quest Company adopts a healthcare benefit plan The following facts apply to the postretirement benefits plan for the year 2014 20-65 ► Plan assets at fair value on January 1, 2014, are zero ► Actual and expected returns on plan assets are zero ► Accumulated postretirement benefit obligation (APBO), January 1, 2014, 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 APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Illustrative Accounting Entries Illustration 20A-4 Journal Entry 20-66 2014 Entries and Worksheet APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS 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 20-67  The Corridor Approach  Amortization Methods LO 11 APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Illustrative Accounting Entries 2015 Entries and Worksheet Illustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2015 20-68 ► 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 APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Illustrative Accounting Entries 2015 Entries and Worksheet Illustration 20A-6 Journal Entry 20-69 LO 11 APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS Illustrative Accounting Entries Amortization of Gains and Losses in 2016 Illustration 20A-8 2016 CORRIDOR TEST 2016 20-70 LO 11 RELEVANT FACTS - Similarities 20-71  IFRS and GAAP separate pension plans into defined contribution plans and defined benefit plans The accounting for defined contribution plans is similar  IFRS and GAAP recognize a pension asset or liability as the funded status of the plan (i.e., defined benefit obligation minus the fair value of plan assets) (Note that defined benefit obligation is referred to as the projected benefit obligation in GAAP.)  IFRS and GAAP compute unrecognized past service cost (PSC) (referred to as prior service cost in GAAP) in the same manner However, IFRS recognizes past service cost as a component of pension expense in income immediately GAAP amortizes PSC over the remaining service lives of employees LO 12 Compare the accounting for pensions under GAAP and IFRS RELEVANT FACTS - Differences 20-72  IFRS and GAAP include interest expense on the liability in pension expense Regarding asset returns, IFRS reduces pension expense by the amount of interest revenue (based on the discount rate times the beginning value of pension assets) GAAP includes an asset return component based on the expected return on plan assets  Under IFRS, companies recognize both liability and asset gains and losses (referred to as remeasurements) in other comprehensive income These gains and losses are not “recycled” into income in subsequent periods GAAP recognizes liability and asset gains and losses in “Accumulated other comprehensive income” and amortizes these amounts to income over remaining service lives, using the “corridor approach.” LO 12 RELEVANT FACTS - Differences  20-73 The accounting for pensions and other postretirement benefit plans is the same under IFRS GAAP has separate standards for these types of benefits, and significant differences exist in the accounting LO 12 ON THE HORIZON The IASB and the FASB have been working collaboratively on a postretirement benefit project The recent amendments issued by the IASB moves IFRS closer to GAAP with respect to recognition of the funded status on the statement of financial position However, as illustrated in the About the Numbers section above, significant differences remain in the components of pension expense The FASB is expected to begin work on a project that will reexamine expense measurement of postretirement benefit plans The FASB likely will consider the recent IASB amendments in this area, which could lead to a converged standard 20-74 LO 12 IFRS SELF-TEST QUESTION At the end of the current period, Oxford Ltd has a defined benefit obligation of $195,000 and pension plan assets with a fair value of $110,000 The amount of the vested benefits for the plan is $105,000 What amount related to its pension plan will be reported on the company’s statement of financial position? a $5,000 b $90,000 c $85,000 d $20,000 20-75 LO 12 IFRS SELF-TEST QUESTION At the end of the current year, Kennedy Co has a defined benefit obligation of $335,000 and pension plan assets with a fair value of $245,000 The amount of the vested benefits for the plan is $225,000 Kennedy has unrecognized past service costs of $24,000 and an unrecognized actuarial gain of $8,300 What account and amount(s) related to its pension plan will be reported on the company’s statement of financial position? 20-76 a Pension Liability and $74,300 b Pension Liability and $90,000 c Pension Asset and $233,300 d Pension Asset and $110,000 LO 12 IFRS SELF-TEST QUESTION At January 1, 2014, Wembley Company had plan assets of $250,000 and a defined benefit obligation of the same amount During 2014, service cost was $27,500, the discount rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500 Based on this information, what would be the defined benefit obligation for Wembley Company at December 31, 2014? 20-77 a $277,500 c $27,500 b $285,000 d $302,500 LO 12 Copyright Copyright © 2013 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 20-78 ...PREVIEW OF CHAPTER 20 Intermediate Accounting 15th Edition Kieso Weygandt Warfield 20- 2 20 Accounting for Pensions and Postretirement Benefits LEARNING OBJECTIVES After studying this chapter, you... worksheet for 201 4 20- 22 LO Using a Pension Work Sheet Prepare a pension worksheet for 201 4 Illustration 20- 8 ($100,000 x 10%) ($1,000) net liability 20- 23 LO Pension Journal Entry Illustration 20- 8 Pension... operate a pension plan 20- 8 LO 20 Accounting for Pensions and Postretirement Benefits LEARNING OBJECTIVES After studying this chapter, you should be able to: Distinguish between accounting for the