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Chapter 20-1
Chapter 20-2
C H A P T E R C H A P T E R 2020
ACCOUNTING FOR PENSIONS AND ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITSPOSTRETIREMENT BENEFITS
Intermediate Accounting13th Edition
Kieso, Weygandt, and Warfield
Chapter 20-3
1. Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
2. Identify types of pension plans and their characteristics.
3. Explain alternative measures for valuing the pension obligation.
4. List the components of pension expense.
5. Use a worksheet for employer’s pension plan entries.
6. Describe the amortization of unrecognized prior service costs.
7. Explain the accounting procedure for recognizing unexpected gains and losses.
8. Explain the corridor approach to amortizing unrecognized gains and losses.
9. Describe the requirements for reporting pension plans in financial statements.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Chapter 20-4
Alternative Alternative measures of measures of liabilityliability
Recognition of Recognition of net funded statusnet funded status
Components of Components of pension expensepension expense
Nature of Nature of Pension PlansPension Plans
Accounting for Accounting for PensionsPensions
Using a Pension Using a Pension WorksheetWorksheet
Reporting Reporting Pension Plans in Pension Plans in
Financial Financial StatementsStatements
Defined Defined contribution plancontribution plan
Defined-benefit Defined-benefit planplan
Role of actuariesRole of actuaries
2010 entries and 2010 entries and worksheetworksheet
Amortization of Amortization of prior service costprior service cost
2011 entries and 2011 entries and worksheetworksheet
Gain or lossGain or loss
2012 entries and 2012 entries and worksheetworksheet
Within the Within the financial financial statementsstatements
Within the notes to Within the notes to the financial the financial statementsstatements
Pension note Pension note disclosuredisclosure
2013 entries and 2013 entries and worksheet—a worksheet—a comprehensive comprehensive exampleexample
Special issuesSpecial issues
Accounting for Pensions and Postretirement Accounting for Pensions and Postretirement BenefitsBenefits
Accounting for Pensions and Postretirement Accounting for Pensions and Postretirement BenefitsBenefits
Chapter 20-5
A A Pension PlanPension Plan is an arrangement whereby an employer is an arrangement whereby an employer provides benefits (payments) to employees after they provides benefits (payments) to employees after they retire for services they provided while they were working.retire for services they provided while they were working.
Pension PlanAdministrator
Pension PlanAdministrator
ContributionsEmployerEmployer
Retired Employees Benefit Payments Assets &
Liabilities
LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
Nature of Pension PlansNature of Pension PlansNature of Pension PlansNature of Pension Plans
Chapter 20-6
Some pension plans are:
LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.
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.
Nature of Pension PlansNature of Pension PlansNature of Pension PlansNature of Pension Plans
Chapter 20-7
Defined-Contribution PlanDefined-Contribution Plan Defined-Benefit PlanDefined-Benefit Plan Employer contribution Employer contribution
determined by plan (fixed)determined by plan (fixed) Risk borne by employeesRisk borne by employees Benefits based on plan valueBenefits based on plan value
Benefit determined by planBenefit determined by plan Employer contribution varies Employer contribution varies
(determined by Actuaries)(determined by Actuaries) Risk borne by employerRisk borne by employer
Actuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc.
Types of Pension PlansTypes of Pension PlansTypes of Pension PlansTypes of Pension Plans
LO 2 Identify types of pension plans and their characteristics.
Chapter 20-8
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?
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 3 Explain alternative measures for valuing the pension obligation.
Chapter 20-9 LO 3 Explain alternative measures for valuing the pension obligation.
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. FASB’s FASB’s
choicechoice
Alternative measures of the Liability
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
Illustration 20-3
Chapter 20-10
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.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 3 Explain alternative measures for valuing the pension obligation.
Chapter 20-11
Service CostsService Costs
Interest on the LiabilityInterest on the Liability
Actual Return on Plan AssetsActual Return on Plan Assets
Amortization of Prior Service CostsAmortization of Prior Service Costs
Gain or LossGain or Loss
++
++
+-+-
++
+-+-
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense
1.1.
2.2.
3.3.
4.4.
5.5.
Effect on Expense
Chapter 20-12
Service CostsService Costs ++1.1.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense Effect on Expense
Actuarial present value of benefits attributed by the pension benefit formula to employee service during the period.
Chapter 20-13
Interest on the LiabilityInterest on the Liability ++2.2.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense Effect on Expense
Interest for the period on the projected benefit obligation outstanding during the period.
The interest rate (settlement rate) should reflect the rate at which companies can effectively settle pension benefits.
Chapter 20-14
Actual Return on Plan AssetsActual Return on Plan Assets +-+-3.3.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense Effect on Expense
The actual return on plan assets is the increase in pension funds from interest, dividends, and realized and unrealized changes in the fair-market value of the plan assets.
Chapter 20-15
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense Effect on Expense
Plan amendments often increase benefits for service provided in prior years.
The cost (prior service cost) of providing these retroactive benefits is allocated to pension expense over the remaining service-years of the affected employees.
Amortization of Prior Service CostsAmortization of Prior Service Costs ++4.4.
Chapter 20-16
Gain or LossGain or Loss +-+-5.5.
Accounting for PensionsAccounting for PensionsAccounting for PensionsAccounting for Pensions
LO 4 List the components of pension expense.
Components of Pension Expense Effect on Expense
Volatility in pension expense can result from sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation.
Chapter 20-17
Companies do not recognize two main items in the accounts and in the financial statements:
Pension Items Not RecognizedPension Items Not RecognizedPension Items Not RecognizedPension Items Not Recognized
LO 5 Use a worksheet for employer’s pension plan entries.
Some items are recognized in other comprehensive income; changes in these items are amortized into expense through smoothing techniques.
Prior service costs.
Actuarial gains and losses.
A company must disclose in notes to the financial statements, but not in the body of the financials.
Projected benefit obligation.
Pension plan assets.
Chapter 20-18
Pension Work SheetGENERAL JOURNAL ENTRIES MEMO RECORD
Prior Pension ProjectedPension Service Asset / Benefit Plan
Items Expense Cash Costs (PSC) Gain/Loss Liability Obligation Assets
Other Comprehensive Income (OCI)
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
The “General Journal Entries” columns determine the journal entries to be recorded in the formal general
ledger.
The “Memo Record” columns maintain
balances for the unrecognized pension
items.
Chapter 20-19
BE20-3:BE20-3: At January 1, 20100, KRC Company had plan assets of $280,000 and a projected benefit obligation of the same amount. During 2010, service cost was $27,500, the settlement rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500.
Instructions: Instructions: Prepare a pension worksheet for KRC for 2010.
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
Chapter 20-20
Pension Projected Pension Asset / Benefit Plan
I tems Expense Cash PSC Gain/Loss Liability Obligation Assets J an. 1, 2010 0 (280,000) 280,000
Service costs 27,500 (27,500)
I nterest costs 28,000 (28,000)
Actual return (25,000) 25,000
Contributions (20,000) 20,000
Benefits paid 17,500 (17,500)
J ournal entry 30,500 (20,000) (10,500)
Dec. 31, 2010 - - (10,500) (318,000) 307,500
MEMO RECORD GENERAL J OURNAL ENTRI ES
OCI
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
BE20-3: BE20-3: Prepare a pension worksheet for KRC for 2010.
LO 5 Use a worksheet for employer’s pension plan entries.
($280,000 x ($280,000 x 10%)10%)
($10,500) net ($10,500) net liabilityliability
Chapter 20-21
Note the following about the Work Sheet:
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
LO 5 Use a worksheet for employer’s pension plan entries.
The balance in the Pension Asset / Liability
column should equal the net balance in the
memo record – this is the “net funded position”
of the pension plan. If a credit balance,
Pension liability; if a debit balance, Pension
asset.
For each transaction or event, the debits must
equal the credits.
Chapter 20-22
Amortization of Prior Service Cost
Company should not recognize the retroactive benefits as pension expense entirely in the year of amendment.
Employer should recognize the pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan.
LO 6 Describe the amortization of prior service costs.
Prior Service CostPrior Service CostPrior Service CostPrior Service Cost
Amortization Method:
Board prefers a years-of-service method.
SFAS No. 158 allows use of the straight-line method.
Chapter 20-23
E20-7:E20-7: The following defined pension data of Rydell Corp. apply to the year 2010.
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
Projected benefit obligation, 1/1/10 (before amendment)
$560,000Plan assets, 1/1/10
546,200Pension liability
13,800On January 1, 2010, Rydell Corp., through plan amendment, grants prior service benefits having a present value of
120,000Settlement rate
9%Service cost
58,000Contributions (funding)
65,000Actual (expected) return on plan assets
52,280Benefits paid to retirees
40,000Prior service cost amortization for 2010
17,000
Instructions: For 2010, prepare a pension work sheet for Rydell Corp. that shows the journal entry for pension expense.
LO 6 Describe the amortization of prior service costs.
Chapter 20-24
Pension Projected Pension Gain / Asset / Benefit Plan
I tems Expense Cash PSC Loss Liability Obligation Assets Dec. 31, 2009 (13,800) (560,000) 546,200
PSC 120,000 (120,000)
Bal. J an. 1, 2010 (680,000) 546,200
Service costs 58,000 (58,000)
I nterest costs 61,200 (61,200)
Asset Return (52,280) 52,280
Amort. PSC 17,000 (17,000)
Contributions (65,000) 65,000
Benefits paid 40,000 (40,000)
J ournal entry 83,920 (65,000) 103,000 (121,920)
AOCI - 12/31/2009 -
Dec. 31, 2010 103,000 - (135,720) (759,200) 623,480
MEMO RECORD GENERAL J OURNAL ENTRI ES
OCI
Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7Using a Pension Work Sheet – E20-7
($135,720) liability($135,720) liabilitySolution on Solution on notes pagenotes page
Chapter 20-25
Pension Expense 83,920
OCI - PSC 103,000
Pension Liability 121,920
Cash65,000
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
E20-7: E20-7: Pension Journal Entry for 2010.
Dec. 31
LO 6 Describe the amortization of prior service costs.
Chapter 20-26
Gain or Loss
Unexpected swings in pension expense can result from:
1. Changes in the market value of plan assets, and
2. Changes in actuarial assumptions that affect the amount of the projected benefit obligation.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 7 Explain the accounting for unexpected gains and losses.
Chapter 20-27
Question:Question: What is the potential negative impact What is the potential negative impact on Net Income of these unexpected swings?on Net Income of these unexpected swings?
VolatilityVolatility
The profession The profession decided to reduce the decided to reduce the volatility with volatility with smoothing techniquessmoothing techniques..
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 7 Explain the accounting for unexpected gains and losses.
Chapter 20-28
AnswerAnswer
Recorded in Net Gain or Loss account.
Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.
Gains and LossesGains and LossesGains and LossesGains and Losses
Question:Question: What happens to the difference What happens to the difference between the expected return and the actual return?between the expected return and the actual return?
LO 7 Explain the accounting for unexpected gains and losses.
Chapter 20-29 LO 7 Explain the accounting for unexpected gains and
losses.
Gains and LossesGains and LossesGains and LossesGains and Losses
Question:Question: What happens with unexpected What happens with unexpected gains or losses from changes in the Projected gains or losses from changes in the Projected Benefit Obligation (PBO)?Benefit Obligation (PBO)?
AnswerAnswer
Recorded in Net Gain or Loss account.
Amortize amount in excess of corridor to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.
Chapter 20-30
Corridor Amortization
FASB invented the corridor approach for amortizing the accumulated net gain or loss balance when it gets too large. How large is too large?
10% of the larger of the beginning balances of the projected benefit obligation or the market-related value (which may equal fair value) of the plan assets.
Any accumulated net gain or loss balance above the 10% must be amortized.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-31
BE20-7:BE20-7: Shin Corporation had a projected benefit
obligation of $3,100,000 and plan assets of
$3,300,000 at January 1, 2010. Shin’s also had a
net pension actuarial loss of $465,000 in
accumulated OCI at January 1, 2020. The average
remaining service period of Shin’s employees is 7.5
years.
Instructions: Instructions: Compute Shin’s minimum
amortization of the actuarial loss.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-32
BE20-7:BE20-7: Compute Shin’s amortization of the loss.
Gains and LossesGains and LossesGains and LossesGains and Losses
LO 8 Explain the corridor approach to amortizing gains and losses.
Amortization
Projected benefit obligation (3,100,000)$
Plan assets 3,300,000 3,300,000$
Corridor percentage 10%
Corridor amount 330,000
Accumulated loss 465,000
Excess loss subject to amortization 135,000
Average remaining service 7.5
Amortized to pension expense 18,000$ ÷
Chapter 20-33
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2009, with the following beginning balances: plan assets $200,000; projected benefit obligation $250,000. Other data are as follows.
2009 2010 2011
Annual service cost 16,000$ 19,000$ 26,000$
Settlement rate and expected rate of return 10% 10% 10%
Actual return on plan assets 18,000 22,000 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Prior service cost (plan amended, 1/1/10) 160,000
Amortization of prior service cost 54,400 41,600
Change in actuarial assumptions, Dec. 31 PBO 520,000
Average remaining service life 15 years 15 years 15 years
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-34
Pension ProjectedPension Gain / Asset / Benefit Plan
I tems Expense Cash PSC Loss Liability Obligation AssetsBal. J an. 1, 2009 (50,000) (250,000) 200,000
Service costs 16,000 (16,000)
I nterest 25,000 (25,000)
Return on assets (18,000) 18,000
Unexpected loss (2,000) 2,000 Contributions (16,000) 16,000 Benefits paid 14,000 (14,000)
J ournal entry 21,000 (16,000) 2,000 (7,000)
AOCI - 12/31/08 -
Dec. 31, 2009 - 2,000 (57,000) (277,000) 220,000
OCI
GENERAL J OURNAL ENTRI ES MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: P20-2: Pension Work Sheet for 2009
($57,000)($57,000)* * Expected Return on Plan AssetsExpected Return on Plan Assets $200,000 $200,000
x 10% = x 10% = $20,000$20,000
**
Solution on Solution on notes pagenotes page
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-35
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 P20-2 Pension Journal Entry for 2009
Pension Expense 21,000
OCI – Gain/Loss 2,000
Pension Asset/Liability 7,000
Cash 16,000
Dec. 31
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-36
Pension ProjectedPension Gain / Asset Benefit Plan
I tems Expense Cash PSC Loss Liability Obligation AssetsBal. J an. 1, 2010 2,000 (57,000) (277,000) 220,000 Prior service costs 160,000 (160,000)
Adj Bal., 1/1/10 (437,000) 220,000
Service costs 19,000 (19,000)
I nterest 43,700 (43,700)
Return on assets (22,000) 22,000
Amort. of PSC 54,400 (54,400)
Contributions (40,000) 40,000 Benefits paid 16,400 (16,400)
J ournal entry 95,100 (40,000) 105,600 (160,700)
AOCI - 12/31/09 2,000
Dec. 31, 2010 105,600 2,000 (217,700) (483,300) 265,600
GENERAL J OURNAL ENTRI ESOCI
MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: P20-2: Pension Work Sheet for 2010
($217,700) liability($217,700) liability* * Actual return = Expected Actual return = Expected
ReturnReturn
**
LO 8 Explain the corridor approach to amortizing gains and losses.
Solution on Solution on notes pagenotes page
Chapter 20-37
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 P20-2 Pension Journal Entry for 2010
Pension Asset/Liability 160,700
Pension Expense 95,100Dec. 31
Cash
40,000
LO 8 Explain the corridor approach to amortizing gains and losses.
OCI - PSC 105,600
Chapter 20-38
Pension ProjectedPension Gain / Asset / Benefit Plan
I tems Expense Cash PSC Loss Liability Obligation AssetsBal. Dec. 31, 2010 105,600 2,000 (217,700) (483,300) 265,600
Service costs 26,000 (26,000)
I nterest 48,330 (48,330)
Return on assets (24,000) 24,000
Unexpected loss (2,560) 2,560 Amort. of PSC 41,600 (41,600)
Contributions (48,000) 48,000
Benefits paid 21,000 (21,000) Liability gain (16,630) 16,630
J ournal entry 89,370 (48,000) (41,600) (14,070) 14,300
AOCI - 12/31/10 105,600 2,000
Dec. 31, 2011 64,000 (12,070) (203,400) (520,000) 316,600
GENERAL J OURNAL ENTRI ESOCI
MEMO RECORD
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2: P20-2: Pension Work Sheet for 2011
($203,400) liability($203,400) liability* Plug * Plug
**
LO 8 Explain the corridor approach to amortizing gains and losses.
Solution on Solution on notes pagenotes page
Chapter 20-39
Using a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work SheetUsing a Pension Work Sheet
P20-2 P20-2 Pension Journal Entry for 2011
Pension Expense 89,370
Pension Asset/Liability 14,300
OCI - Gain/Loss 14,070
OCI - PSC 41,600
Cash 48,000
Dec. 31
LO 8 Explain the corridor approach to amortizing gains and losses.
Chapter 20-40
Within the Financial Statements
Pension expense
Pension Asset / Liability
Components of Accumulated Other Comprehensive Income
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
LO 9 Describe the requirements for reporting pension plans in financial statements.
Chapter 20-41
Within the Notes to the Financial Statements1. Major components of pension expense.
2. Reconciliation showing how the projected benefit
obligation and the fair value of the plan assets
changed.
3. Amounts recognized in accumulated other
comprehensive income that have not yet been
recognized in pension expense, showing separately
the net gain or loss and prior service costs, and the
amounts to be recognized is pension expense in the
next year.
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
LO 9 Describe the requirements for reporting pension plans in financial statements.
Chapter 20-42
Within the Notes to the Financial Statements4. Disclosure of the rates used in measuring the
benefit amounts (discount rate, expected return on
plan assets, rate of compensation).
5. Table indicating the allocation of pension plan assets
by category (e.g., types of investments).
6. The expected benefit payments to be paid to current
plan participants for each of the next five fiscal
years and in the aggregate for the five fiscal years
thereafter.
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
LO 9 Describe the requirements for reporting pension plans in financial statements.
Chapter 20-43
Special Issues
The Pension Reform Act of 1974
Pension Terminations
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
Reporting Pension Plans in Financial Reporting Pension Plans in Financial StatementsStatements
LO 9 Describe the requirements for reporting pension plans in financial statements.
Chapter 20-44
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. 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 20-45
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—so-called “contribution-based promises.”
Chapter 20-46
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 20-47
Differences Between Pension Benefits and Healthcare Benefits
LO 10 Identify the differences between LO 10 Identify the differences between pensions and postretirement healthcare pensions and postretirement healthcare
benefits.benefits.
Illustration 20A-1
Chapter 20-48
Differences Between Pension Benefits and Healthcare Benefits
LO 10 Identify the differences between LO 10 Identify the differences between pensions and postretirement healthcare pensions and postretirement healthcare
benefits.benefits.
Measuring the future payments for healthcare benefit plans is
so much more difficult than for pension plans.
1. Many postretirement plans do not set a limit on
healthcare benefits.
2. 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 utilization.
Chapter 20-49
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between LO 10 Identify the differences between pensions and postretirement healthcare pensions and postretirement healthcare
benefits.benefits.
Attribution Period - period of time over which the
postretirement benefit cost accrue.Illustration 20A-2
Chapter 20-50
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between LO 10 Identify the differences between pensions and postretirement healthcare pensions and postretirement healthcare
benefits.benefits.
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 20-51
Postretirement Benefits Accounting Provisions
LO 10 Identify the differences between LO 10 Identify the differences between pensions and postretirement healthcare pensions and postretirement healthcare
benefits.benefits.
Postretirement Expense
1. Service Cost
2. Interest Cost
3. Actual Return on Plan Assets
4. Amortization of Prior Service Costs
5. Gains and Losses
Chapter 20-52
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.accounting for other postretirement benefits.
2010 Entries
and
WorksheetIllustration: 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.
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.
Chapter 20-53
Illustrative Accounting Entries 2010 Entries
and
WorksheetIllustration 20A-4
Journal Journal EntryEntry
Chapter 20-54
Recognition of Gains and Losses
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.accounting for other postretirement benefits.
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 20-55
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.accounting for other postretirement benefits.
2011 Entries
and
WorksheetIllustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2011.
Actual return on plan assets is $600. Expected return on plan assets is $800. Discount rate is 8 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.
Chapter 20-56
Illustrative Accounting Entries 2011 Entries
and
WorksheetIllustration 20A-6
Journal Journal EntryEntry
Chapter 20-57
Amortization of Gains and Losses in 2012
Illustrative Accounting Entries
LO 11 Contrast accounting for pensions to LO 11 Contrast accounting for pensions to accounting for other postretirement benefits.accounting for other postretirement benefits.
Illustration 20A-8
Chapter 20-58
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