CHAPTER 20Accounting for Pensions and Postretirement Benefits ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)Topics QuestionsBriefExercises Exercises ProblemsConceptsfor Analysis1.Basic definitions andconcepts related topension plans.1, 2, 3, 4,5, 6, 7,8, 9, 12,24, 30161, 2, 3, 4,5, 72.Worksheet preparation.33, 4, 7, 10,14, 15, 181, 2, 4, 7, 8, 9, 10, 11, 123.Income statementrecognition, computationof pension expense.9, 10, 11,13, 16, 171, 2, 41, 2, 3, 6,11, 13, 14,15, 16,17, 181, 2, 3, 4, 5,6, 9, 11, 124, 54.Balance sheet recognition,computation of pensionexpense.15, 19, 20,22, 236, 103, 9, 11, 12,13, 141, 2, 3, 4,5, 6, 7, 8,9, 11, 122, 5, 75.Corridor calculation.1878, 13, 14,16, 17, 182, 3, 5, 6, 7,8, 11, 123, 4, 5, 66.Prior service cost.12, 13, 205, 6, 81, 2, 3, 5,9, 11, 12,13, 141, 2, 3, 4,6, 7, 8, 9,11, 121, 47.Gains and losses.14, 17,21, 227, 98, 9, 13, 14,16, 171, 2, 3, 4, 5, 6,7, 8, 9, 11, 124, 5, 68.Disclosure issues.23109, 11, 1211, 123, 49.Special Issues.25*10.Postretirement benefits.30, 31,32, 3311, 1219, 20, 21,22, 23, 2413, 14*This material is dealt with in an Appendix to the chapter.ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)Learning Objectives BriefExercises Exercises Problems1.Distinguish between accounting for theemployer’s pension plan and accountingfor the pension fund.2.Identify types of pension plans and theircharacteristics.3.Explain alternative measures for valuing thepension obligation.4.List the components of pension expense.1, 2, 41, 2, 6, 11,12, 13, 15e a worksheet for employer’s pension planentries.33, 4, 7, 10,11, 14, 181, 2, 4, 7,8, 9, 10,11, 126.Describe the amortization of prior service costs.51, 2, 5, 7,12, 131, 2, 3, 4, 6, 7, 8, 9, 10, 11, 127.Explain the accounting for unexpected gains andlosses.12, 131, 2, 3, 4,5, 6, 7, 8, 9,10, 11, 128.Explain the corridor approach to amortizing gainsand losses.78, 12, 13,16, 17, 183, 4, 5, 6,8, 11, 129.Describe the requirements for reporting pensionplans in financial statements.6, 8, 9, 109, 11,12, 131, 2, 3, 4,8, 11, 12*10.Identify the differences between pensions and postretirement healthcare benefits.11, 1219, 20, 21,22, 23, 2413, 14*11.Contrast accounting for pensions to accounting for other postretirement benefits.11, 1219, 20, 21,22, 23, 2413, 14ASSIGNMENT CHARACTERISTICS TABLEItem Description Level ofDifficultyTime(minutes)E20-1Pension expense, journal entries.Simple 5–10 E20-2Computation of pension expense.Simple10–15 E20-3Preparation of pension worksheet.Moderate15–25 E20-4Basic pension worksheet.Simple10–15 E20-5Application of years-of-service method.Moderate15–25 E20-6Computation of actual return.Simple10–15 E20-7Basic pension worksheet.Moderate15–25 E20-8Application of the corridor approach.Moderate20–25 E20-9Disclosures: Pension expense and other comprehensive income.Moderate25–35 E20-10Pension worksheet.Moderate20–25 E20-11Pension expense, journal entries, statement presentation.Moderate20–30 E20-12Pension expense, journal entries, statement presentation.Moderate20–30 E20-13Computation of actual return, gains and losses, corridor test, andpension expense.Complex35–45E20-14Worksheet for plex40–50 E20-15Pension expense, journal entries.Moderate15–20 E20-16Amortization of accumulated OCI (G/L), corridor approach,pension expense computation.Moderate25–35 E20-17Amortization of accumulated OCI balances.Moderate30–40 E20-18Pension worksheet—missing amounts.Moderate20–25 *E20-19Postretirement benefit expense computation.Moderate 5–10 *E20-20Postretirement benefit worksheet.Moderate25–30 *E20-21Postretirement benefit expense computation.Simple10–12 *E20-22Postretirement benefit expense computation.Simple10–12 *E20-23Postretirement benefit worksheet.Moderate15–20 *E20-24Postretirement benefit worksheet—missing amounts.Moderate25–30 P20-12-year worksheet.Moderate40–50 P20-23-year worksheet, journal entries, and plex45–55 P20-3Pension expense, journal entries, amortization of plex40–50 P20-4Pension expense, journal entries for 2 years.Moderate30–40 P20-5Computation of pension expense, amortization of net gain orloss-corridor approach, journal entries for 3 years.Complex45–55P20-6Computation of prior service cost amortization, pensionexpense, journal entries, and net gain or loss.Complex45–60 P20-7Pension worksheet.Moderate35–45 P20-8Comprehensive 2-year plex45–60 P20-9Comprehensive 2-year worksheet.Moderate40–45 P20-10Pension worksheet—missing amounts.Moderate25–30 P20-11Pension worksheet.Moderate35–45 P20-12Pension worksheet.Moderate35–45 *P20-13Postretirement benefit worksheet.Moderate30–35 *P20-14Postretirement benefit worksheet—2 years.Moderate40–45ASSIGNMENT CHARACTERISTICS TABLE (Continued)Item Description Level ofDifficultyTime(minutes)CA20-1Pension terminology and theory.Moderate30–35 CA20-2Pension terminology.Moderate25–30 CA20-3Basic terminology.Simple20–25 CA20-4Major pension concepts.Moderate30–35 CA20-5Implications of GAAP rules on plex50–60 CA20-6Gains and losses, corridor amortization.Moderate30–40 CA20-7Nonvested employees—an ethical dilemma.Moderate20–30SOLUTIONS TO CODIFICATION EXERCISESCE20-1Master Glossary(a)The actuarial present value of benefits (whether vested or nonvested) attributed, generally by thepension benefit formula, to employee service rendered before a specified date and based on employee service and compensation (if applicable) before that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels. For plans with flat-benefit or non-pay-related pension benefit formulas, the accumulated benefit obligation and the projected benefit obligation are the same. (b) A plan that defines postretirement benefits in terms of monetary amounts (for example, $100,000of life insurance) or benefit coverage to be provided (for example, up to $200 per day for hospitalization, or 80 percent of the cost of specified surgical procedures). Any postretirement benefit plan that is not a defined contribution postretirement plan is, for purposes of Subtopic 715–60, a defined benefit postretirement plan. (Specified monetary amounts and benefit coverage are collectively referred to as benefits).(c)The value, as of a specified date, of an amount or series of amounts payable or receivablethereafter, with each amount adjusted to reflect the time value of money (through discounts for interest) and the probability of payment (for example, by means of decrements for events such as death, disability, or withdrawal) between the specified date and the expected date of payment. (d)The cost of retroactive benefits granted in a plan amendment. Retroactive benefits are benefitsgranted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods before the amendment.CE20-2According to FASB ASC 715-30-35-43 (Defined-Benefit Plans – Pension – Discount Rates):Assumed discount rates shall reflect the rates at which the pension benefits could be effectively settled. It is appropriate in estimating those rates to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation (including information about available annuity rates published by the Pension Benefit Guaranty Corporation). In making those estimates, employers may also look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of the pension benefits. Assumed discount rates are used in measurements of the projected, accumulated, and vested benefit obligations and the service and interest cost components of net periodic pension cost.CE20-3According to FASB ASC 715-30-35-4 (Defined-Benefit Plans – Pension – Components of Net Periodic Cost):All of the following components shall be included in the net pension cost recognized for a period by an employer sponsoring a defined-benefit pension plan:CE 20-3 (Continued)(a)Service cost(b)Interest cost(c)Actual return on plan assets, if any(d)Amortization of any prior service cost or credit included in accumulated other comprehensiveincome(e)Gain or loss (including the effects of changes in assumptions), which includes, to the extentrecognized (see paragraph 715-30-35-26), amortization of the net gain or loss included in accumulated other comprehensive income(f)Amortization of any net transition asset or obligation existing at the date of initial application ofthis Subtopic and remaining in accumulated other comprehensive income.CE20-4According to FASB ASC 715-20-50-6 (Defined-Benefit Plans – General – Interim Disclosure Requirements for Publicly Traded Entities):A publicly traded entity shall disclose the following information for its interim financial statements that include a statement of income:(a)The amount of net benefit cost recognized, for each period for which a statement of income ispresented, showing separately each of the following:1.The service cost component2.The interest cost component3.The expected return on plan assets for the period4.The gain or loss component5.The prior service cost or credit component6.The transition asset or obligation component7.The gain or loss recognized due to a settlement or curtailment.(b)The total amount of the employer’s contributions paid, and expected to be paid, during the currentfiscal year, if significantly different from amounts previously disclosed pursuant to paragraph 715-20-50-1(g). Estimated contributions may be presented in the aggregate combining all of the following:1.Contributions required by funding regulations or laws2.Discretionary contributions3.Noncash contributions.ANSWERS TO QUESTIONS1. A private pension plan is an arrangement whereby a company undertakes to provide its retiredemployees with benefits that can be determined or estimated in advance from the provisions of a document or from the company’s practices.In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost.2. A defined-contribution plan specifies the employer’s contribution to the plan usually based on aformula, which may consider such factors as age, length of service, employer’s profit, or compen-sation levels.A defined-benefit plan specifies a determinable pension benefit that the employee will receive ata time in the future. The employer must determine the amount that should be contributed now toprovide for the future promised benefits.In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets con-tributed to the plan is borne by the employee. In a defined-benefit plan, the employer’s obligation is to make sufficient contributions each year to provide for the promised future benefits.Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits.3.The employer is the organization sponsoring the pension plan. The employer incurs the costsand makes contributions to the pension fund. Accounting for the employer involves:(1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring theamount 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 which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients.Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients.Accounting for the pension costs and obligations of the employer is the topic of this chapter;accounting for the pension fund is not.4.When the term “fund” is used as a noun, it refers to assets accumulated in the hands of afunding agency for the purpose of meeting pension benefits when they become due. When the term “fund” is used as a verb, it means to pay over to a funding agency (as to fund future pension benefits or to fund pension cost).5.An actuary’s role is to ensure that the company has established an appropriate funding pattern tomeet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets). In order to determine the company’s pension obligation, the actuary must first determine the expected benefits that will be paid in the future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disable-ment and retirement, changes in compensation, and changes in discount rates to reflect the time value of money.6.In measuring the amount of pension benefits under a defined-benefit pension plan, an actuarymust consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries.Questions Chapter 20 (Continued)7.One measure of the pension obligation is the vested benefit obligation. This measure uses onlycurrent salary levels and includes only vested benefits; that is, benefits the employee is already entitled to receive even if the employee renders no additional services under the plan.A company’s accumulated benefit obligation is the actuarial present value of benefits attributedby the pension benefit formula to service before a specified date and is based on employee service and compensation prior to that date. The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels.The projected benefit obligation is based on vested and nonvested services using future salaries.8.Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid bythe employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis.Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees.Frequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period. Cash-basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year. Funding is a matter of financial manage-ment, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations.9.The five components of pension expense are:(1)Service cost component—the actuarial present value of benefits attributed by the pensionbenefit formula to employee service during the period.(2)Interest cost component—the increase in the projected benefit obligation as a result ofthe passage of time.(3)Actual return on plan assets component—the reduction in pension cost for actual invest-ment income from plan assets and the change in the market value of plan assets.(4)Amortization of prior service cost—the cost of retroactive benefits granted in a plan amend-ment (including initiation of a plan).(5)Gains and losses—a change in the value of either the projected benefit obligation or theplan assets resulting from experience different from that assumed or expected or from achange in an actuarial assumption.Note to instructor: Regarding return on plan assets, the final component is expected rate of return. We are assuming above that an adjustment is made to the actual return to determine expected return.10.The service cost component of net periodic pension expense is determined as the actuarialpresent value of benefits attributed by the pension benefit formula to employee service during the period. The plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period. The FASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them.11.The interest component is the interest for the period on the projected benefit obligation outstandingduring the period. The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates). Companies should look to rates of return on high-quality fixed-income investments currently available whose cash flows match the timing and amount of the expected benefit payments.Questions Chapter 20 (Continued)12.Service cost is the actuarial present value of benefits attributed by the pension benefit formula toemployee service during the period. Actuaries compute service cost at the present value of the new benefits earned by employees during the year. Prior service cost is the cost of retroactive benefits granted in a plan amendment or initiation of a pension plan. The cost of the retroactive benefits is the increase in the projected benefit obligation at the date of the amendment.13.When a defined-benefit plan is either initiated or amended, credit is often given to employees foryears of service provided before the date of initiation or amendment. The cost of these retroactive benefits are referred to as prior service costs. Employers grant retroactive benefits because they expect to receive benefits in the future. As a result, prior service cost should not be recognized as pension expense entirely in the year of amendment or initiation. It is recognized as an adjustment to other comprehensive income. It should be recognized during the service periods of those employees who are expected to receive benefits under the plan. Consequently, prior service cost is amortized over the service life of employees who will receive benefits and is a component of net periodic pension expense each period.14.Liability gains and losses are unexpected gains or losses from changes in the projected benefitobligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting from unexpected increases) are recognized in other comprehensive income. The accumulated gains and losses are then amortized, subject to complex amortization guidelines in other comprehensive income.15.If pension expense recognized in a period exceeds the current amount funded, a liability accountreferred to as Pension Asset /Liability arises; the account would be reported either as a current or long-term liability, depending on the ultimate date of payment.If the current amount funded exceeds the amount recognized as pension expense, an asset account referred to as Pension Asset /Liability arises; the account would be reported as a non-current asset. Because these assets are used to fund the pension obligation, noncurrent classification is appropriate.putation of actual return on plan assetsFair value of plan assets at end of period.........................................$10,150,000 Deduct: Fair value of plan assets at beginning of period.............. 9,500,000 Increase in fair value of assets............................................................650,000 Deduct: Contributions to plan during the period..............................$1,000,000Add:Benefits paid during the period........................................... 1,400,000400,000 Actual return on plan assets.................................................................$ 1,050,000 17.An asset gain occurs when the actual return on the plan assets is greater than the expectedreturn on plan assets while an asset loss occurs when the actual return is less than the expected return on the plan assets. A liability gain results from unexpected decreases in the pension obligation and a liability loss results from unexpected increases in the pension obligation.18.Corridor amortization occurs when the accumulated OCI (G/L) balance gets too large. The gainor loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits.Questions Chapter 20 (Continued)19.The amount of the pension asset/liability to be reported on the company’s balance sheet is asfollows:Projected benefit obligation.....................................................................$(400,000) Pension plant assets................................................................................. 350,000 Pension liability..........................................................................................$ (50,000) In the financial statements, the company will report a pension liability of $50,000. This amount is also referred to as the funded status of the plan.20.The prior service cost arising in the year of the amendment (which increases the projectedbenefit obligation) is recognized by an offsetting debit to Other Comprehensive Income (PSC). In subsequent periods, the $9,150,000 will be amortized into periodic pension expense over the remaining service lives of the employees. This approach is consistent with the treatment for actuarial gains and losses.21.Actuarial gains or losses arise from (1) asset gains or losses (when the expected return is differentthan the actual return on plan assets) and (2) a liability gain or loss (when actuarial assumptions do not coincide with actual experiences related to computation of the projected benefit obligation.) In the period that they arise, these gains and losses are not recognized as part of pension expense, but are recognized as increases or decreases in other comprehensive income. In subsequent periods, these amounts are amortized into periodic pension expense over the remaining service lives of the employees, using corridor amortization.22.(a)Other Comprehensive Income for 2011 is as follows:Actuarial liability gain....................................................................................$ 10,000Asset loss........................................................................................................ 14,000Other comprehensive loss...........................................................................($ 4,000)(b)The computation of comprehensive income for 2011 is as follows:Net income......................................................................................................$25,000Other comprehensive loss........................................................................... 4,000Comprehensive income...............................................................................$21,000 23.Multiple plans may be combined and shown as one amount on the balance sheet, only if they arein the same under or overfunded position. For example, if the company has two or more under-funded (overfunded) plans, the underfunded (overfunded) plans are combined and shown as one amount as a liability (asset) on the balance sheet. The FASB rejected the alternative of combining all plans and representing the net amount as a single net asset or net liability. The rationale: A company does not have the ability to offset the excess of one plan against underfunded obligations of another plan. Furthermore, netting all plans is inappropriate because offsetting assets and liabili-ties is not permitted under GAAP unless a right of offset exists.24.(a) A contributory plan is a pension plan under which employees contribute part of the cost.In some contributory plans, employees wishing to be covered must contribute; in othercontributory plans, employee contributions result in increased benefits.(b)Vested benefits are benefits for which the employee’s right to receive a present or futurepension benefit is no longer contingent on remaining in the service of the employer.(c)Retroactive benefits are benefits granted in a plan amendment (or initiation) that areattributed by the pension benefit formula to employee services rendered in periods prior tothe amendment.(d)The years-of-service method is used to allocate prior service cost to the remaining yearsof service of the affected employees. Each year receives a fraction of the original cost withthe fraction depicting the number of service-years received out of the total service-years tobe worked by the affected employees.Questions Chapter 20 (Continued)25.The accounting issue that arises from these terminations is whether a gain should be recognizedby the corporation when these assets revert (often called asset reversion transactions) to the company. The profession requires that these gains or losses be reported immediately in most situations.26.The accounting for various forms of compensation plans under iGAAP is found in IAS 19“Employee Benefits” and IFRS 2 “Share-Based Payment”. IAS 19 addresses the accounting for a wide range of compensation elements—wages, bonuses, postretirement benefits, and compensated absences.27.The primary iGAAP literature has recently been amended, resulting in significant convergencebetween iGAAP and U.S. GAAP in this area. For example, iGAAP and U.S. GAAP separate pension plans into defined contribution 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 and both GAAPs amortize prior service costs into income over the expected service lives of employees.Notable differences are that (1) 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, (2) 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; actuarial gains and losses (and prior service cost) are recognized in Accumulated Other Comprehensive Income and amortized to income over remaining service lives.28.Cadbury Company will record higher income relative to the U.S. company. This is because all ofthe unexpected gain will be reported in income, while the U.S. company will amortize only the amount outside the corridor over the remaining service lives of the employees (10 years). In this case, the U.S. company would recognize just $1,000 ($10,000 ÷ 10). Similar effects would occur for unexpected losses.29.The FASB and the IASB are working collaboratively on a postretirement-benefit project. Asdiscussed in the chapter, the FASB has issued a rule addressing the recognition of benefit plans in financial statements The FASB has begun work on the second phase of the project, which will re-examine expense measurement of postretirement benefit plans. The IASB also has added a project in this area but they are on different schedule. 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—so-called “contribution-based promises”. The IASB is monitoring the FASB’s progress and hopes to issue a converged standard in this area by 2010.*30Postretirement benefits other than pensions include healthcare and other welfare benefits provided to retirees, their spouses, dependents, and beneficiaries. The other welfare benefits include life insurance offered outside a pension plan, dental care as well as medical care, eye care, legal and tax services, tuition assistance, day care, and housing activities.Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)20-11。
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