1、,Accounting for Pensions and Other Postretirement Benefits,Chapter 20,Intermediate Accounting12th EditionKieso, Weygandt, and Warfield,Prepared by Coby Harmon, University of California, Santa Barbara,Accounting for Pensions and Postretirement Benefits,Alternative measures of liabilityCapitalization
2、versus non-capitalizationComponents of pension expense,Nature of Pension Plans,Accounting for Pensions,Using a Pension Worksheet,Minimum Liability,Reporting Pension Plans in Financial Statements,Defined contribution planDefined-benefit planRole of actuaries,2006 entries and worksheetAmortization of
3、prior service cost2007 entries and worksheetGain or loss2008 entries and worksheet,Minimum liability computationFinancial statement presentationWorksheet example,Within the financial statementsWithin the notes to the financial statements2009 entries and worksheeta comprehensive exampleSpecial issues
4、,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 PlanAdministrator,Contributions,Employer,Retired Employees,Benefit Payments,Assets & Liabilities,LO 1 Distinguish between acco
5、unting for the employers pension plan and accounting for the pension fund.,Nature of Pension Plans,Some pension plans are:,LO 1 Distinguish between accounting for the employers pension plan and accounting for the pension fund.,Contributory: employees voluntarily make payments to increase their benef
6、its.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 Plans,Defined-Contribution Plan,Defined-Benefit Plan,Employer contribution determined by plan (fixed)Risk borne by employe
7、esBenefits based on plan value,Benefit determined by planEmployer 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 salarie
8、s, etc.,Statement of Financial Accounting Standard No. 87, “Employers Accounting for Pension Plans,” 1985,Types of Pension Plans,LO 2 Identify types of pension plans and their characteristics.,Two questions:,What is the pension obligation that a company should report in the financial statements? Wha
9、t is the pension expense for the period?,Accounting for Pensions,LO 3 Explain alternative measures for valuing the pension obligation.,LO 3 Explain alternative measures for valuing the pension obligation.,The employers pension obligation is the deferred compensation obligation it has to its employee
10、s for their service under the terms of the pension plan.,FASBs choice,Alternative measures of the Liability,Accounting for Pensions,Illustration 20-3,Capitalization versus Noncapitalization,FASB Statement No. 87 represents a compromise that combines some of the features of capitalization with some o
11、f the features of noncapitalization.Companies do not capitalize some elements of the pension plan in the accounts and the financial statements.,Accounting for Pensions,LO 3 Explain alternative measures for valuing the pension obligation.,Service Costs,Interest on Liability,Actual Return on Plan Asse
12、ts,Amortization of Unamortized Prior Service Costs,Gain or Loss,+,+,+-,+,+-,Accounting for Pensions,LO 4 List the components of pension expense.,Components of Pension Expense,1.,2.,3.,4.,5.,Effect on Expense,Service Costs,+,Accounting for Pensions,LO 4 List the components of pension expense.,Compone
13、nts of Pension Expense,1.,Effect on Expense,Actuarial present value of benefits attributed by the pension benefit formula to employee service during the period.,Accounting for Pensions,LO 4 List the components of pension expense.,Components of Pension Expense,Effect on Expense,Interest for the perio
14、d 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.,Interest on Liability,+,2.,Accounting for Pensions,LO 4 List the components of pension expense.,Components of Pe
15、nsion 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.,Actual Return on Plan Assets,3.,+-,Accounting for Pensions,LO 4 List the components of pension
16、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.,Amort
17、ization of Unamortized Prior Service Costs,+,4.,Accounting 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 project
18、ed benefit obligation.,Gain or Loss,+-,5.,Companies do not recognize several items in the accounts and in the financial statements:,Using a Pension Work Sheet,LO 5 Use a worksheet for employers pension plan entries.,Projected benefit obligation.Pension plan assets.Unrecognized prior service costs.Un
19、recognized net gain or loss.,A company must disclose in notes to the financial statements, but not in the body of the financials.,Using a Pension Work Sheet,LO 5 Use a worksheet for employers pension plan entries.,The “General Journal Entries” columns determine the journal entries to be recorded in
20、the formal general ledger.,The “Memo Record” columns maintain balances on the unrecognized (noncapitalized) pension items.,BE20-3 At January 1, 2008, Uddin Company had plan assets of $250,000 and a projected benefit obligation of the same amount. During 2008, service cost was $27,500, the settlement
21、 rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500.InstructionsPrepare a pension worksheet for Uddin for 2008.,Using a Pension Work Sheet,LO 5 Use a worksheet for employers pension plan entries.,Using a Pension Work Sheet
22、,BE20-3 Prepare a pension worksheet for Uddin for 2008.,LO 5 Use a worksheet for employers pension plan entries.,($250,000 x 10%),($7,500) net liability,Note the following about the Work Sheet:,Using a Pension Work Sheet,LO 5 Use a worksheet for employers pension plan entries.,The balance in the Pre
23、paid/Accrued Cost column should equal the net balance in the memo record.For each transaction or event, the debits must equal the credits.,Amortization of Unrecognized Prior Service Cost,Company should not recognize the retroactive benefits as pension expense entirely in the year of amendment. Emplo
24、yer 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 unrecognized prior service costs.,Using a Pension Work Sheet,Amortization Method:Board prefers a years-of-service meth
25、od. SFAS No. 87 allows use of the straight-line method.,E20-7 The following defined pension data of Doreen Corp. apply to the year 2008.,Using a Pension Work Sheet,Projected benefit obligation, 1/1/08 (before amendment) $560,000Plan assets, 1/1/08 546,200Prepaid/accrued pension cost (credit) 13,800O
26、n January 1, 2008, Doreen Corp., through plan amendment, grants prior service benefits having a present value of 100,000Settlement rate 9%Service cost 58,000Contributions (funding) 55,000Actual (expected) return on plan assets 52,280Benefits paid to retirees 40,000Average remaining service life for
27、Prior Service Costs 5.8823 years,Instructions: For 2008, prepare a pension work sheet for Doreen Corp. that shows the journal entry for pension expense.,LO 6 Describe the amortization of unrecognized prior service costs.,Using a Pension Work Sheet,E20-7,LO 6 Describe the amortization of unrecognized
28、 prior service costs.,Amortization of Prior Service Costs : Prior Service Costs$100,000 Average remaining service life5.8823 Amortization$ 17,000,Using a Pension Work Sheet,E20-7 Pension Work Sheet for 2008,LO 6 Describe the amortization of unrecognized prior service costs.,($40,920) net liability,U
29、sing a Pension Work Sheet,E20-7 Pension Journal Entry for 2008.,Prepaid/Accrued Costs 27,120,Pension expense 82,120,Dec. 31,Cash 55,000,LO 6 Describe the amortization of unrecognized prior service costs.,Gain or Loss,Unexpected swings in pension expense can result from:Changes in the market value of
30、 plan assets, and Changes in actuarial assumptions that affect the amount of the projected benefit obligation.,LO 7 Explain the accounting procedure for recognizing unexpected gains and losses.,Using a Pension Work Sheet,Question: What is the potential negative impact on Net Income of these unexpect
31、ed swings?,Volatility,The profession decided to reduce the volatility with smoothing techniques.,LO 7 Explain the accounting procedure for recognizing unexpected gains and losses.,Using a Pension Work Sheet,Answer,Recorded in Unrecognized Net Gain or Loss account.Amortize amount in excess of corrido
32、r to pension expense, over the average remaining service period of active employees expected to receive benefits under the plan.,LO 7 Explain the accounting procedure for recognizing unexpected gains and losses.,Using a Pension Work Sheet,Question: What happens to the difference between the expected
33、 return and the actual return?,LO 7 Explain the accounting procedure for recognizing unexpected gains and losses.,Using a Pension Work Sheet,Question: What happens with unexpected gains or losses from changes in the Projected Benefit Obligation (PBO)?,Answer,Recorded in Unrecognized Net Gain or Loss
34、 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.,Corridor Amortization,FASB invented the corridor approach for amortizing the unrecognized net gain or loss accumulated balance
35、 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 of the plan assets. Any unrecognized net gain or loss balance above the 10% must be amortized.,Using a Pension Work Sheet,LO 8 Explain the corr
36、idor approach to amortizing unrecognized gains and losses.,BE20-7 Hunt Corporation had a projected benefit obligation of $3,100,000 and plan assets of $3,300,000 at January 1, 2008. Hunts unrecognized net pension loss was $475,000 at that time. The average remaining service period of Hunts employees
37、 is 7.5 years. InstructionsCompute Hunts amortization of the pension loss.,Using a Pension Work Sheet,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,BE20-7 Compute Hunts amortization of the loss.,Using a Pension Work Sheet,LO 8 Explain the corridor approach to amorti
38、zing unrecognized gains and losses.,Using a Pension Work Sheet,P20-2 Katie Day Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2008, with the following beginning balances: plan assets $200,000; projected benefit obligation $200,000. Other data are as follows.,
39、LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,Using a Pension Work Sheet,P20-2 Pension Work Sheet for 2008,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,($0),* Expected Return on Plan Assets $200,000 x 10% = $20,000,*,Using a Pensio
40、n Work Sheet,P20-2 Pension Journal Entry for 2008,Cash 16,000,Pension expense 16,000,Dec. 31,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,Using a Pension Work Sheet,P20-2 Pension Work Sheet for 2009,LO 8 Explain the corridor approach to amortizing unrecognized gain
41、s and losses.,($49,700) net liability,* Actual return = Expected Return,*,Using a Pension Work Sheet,P20-2 Pension Journal Entry for 2009,Prepaid/Accrued Costs 49,700,Pension expense 89,700,Dec. 31,Cash 40,000,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,Using a Pe
42、nsion Work Sheet,P20-2 Pension Work Sheet for 2010,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,($85,130) net liability,* Plug,*,Using a Pension Work Sheet,P20-2 Pension Journal Entry for 2010,Prepaid/Accrued Costs 35,430,Pension expense 83,430,Dec. 31,Cash 48,000,
43、LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,Using a Pension Work Sheet,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,P20-2 (Variation) Would there be any amortization of the gain/loss for 2011?,The amortization would be reported i
44、n 2011 as follows.,Using a Pension Work Sheet,P20-2 Partial Pension Work Sheet for 2011,LO 8 Explain the corridor approach to amortizing unrecognized gains and losses.,The Board, requires immediate recognition of a liability (minimum liability) when the accumulated benefit obligation exceeds the fai
45、r value of plan assets. If a company has already reported a liability for accrued pension cost, it records only an additional liability to equal the required minimum liability.,Minimum Liability,LO 9 Explain the recognition of a minimum liability.,BE20-8 Judy ONeill Corporation provides the followin
46、g information at December 31, 2007.,Minimum Liability,LO 9 Explain the recognition of a minimum liability.,Accumulated benefit obligation$2,800,000Plan assets at fair value 2,000,000Accrued pension cost 200,000Unrecognized prior service cost 1,100, 000,Compute the additional liability that ONeill mu
47、st record at December 31, 2007.,BE20-8 Compute the additional liability that ONeill must record at December 31, 2007.,Minimum Liability,LO 9 Explain the recognition of a minimum liability.,Accumulated benefit obligation$2,800,000Fair value of plan assets 2,000,000Minimum liability 800,000Accrued pen
48、sion cost 200,000Additional liability$ 600,000,Additional pension liability 600,000,Intangible asset 600,000,Within the Financial Statements,Pension expenseAccrued Pension CostPrepaid Pension CostIntangible AssetDeferred Pension Cost (Minimum Liability test),Reporting Pension Plans in Financial Stat
49、ements,LO 10 Describe the requirements for reporting pension plans in financial statements.,Within the Notes to the Financial Statements,Major components of pension expense.Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed. The funded status of the plan (difference between the projected benefit obligation and fair value of the plan assets).,
