Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 20 Accounting For Pensions and Postretirement Benefits This slide deck contains animations Please disable animations if they cause issues with your device Learning Objectives After studying this chapter, you should be able to: Discuss the fundamentals of pension plan accounting Use a worksheet for employer’s pension plan entries Describe the accounting and amortization of prior service costs Explain the accounting and amortization for unexpected gains and losses Describe the requirements for reporting pension plans in financial statements Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Fundamentals of Pension Plan Accounting • Defined contribution plan • Defined benefit plan • Role of actuaries • Measures of the liability Components of pension expense Copyright â2019 John Wiley & Sons, Inc Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Using a Pension Worksheet • 2020 entries and worksheet • Funded status Prior Service Cost (P S C) • Amortization • 2021 entries and worksheet Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Gains and Losses • Unexpected gains and losses (assets) • Unexpected gains and losses (liabilities) • Corridor amortization • 2022 entries and worksheet • 2023 entries and worksheet—a comprehensive example Copyright ©2019 John Wiley & Sons, Inc Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Reporting Pension Plans in Financial Statements • Assets and liabilities • Net income • Comprehensive income • Note disclosure • Special issues Copyright ©2019 John Wiley & Sons, Inc Learning Objective Discuss the Fundamentals of Pension Plan Accounting LO Copyright ©2019 John Wiley & Sons, Inc Pension Plan Accounting An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years LO Copyright ©2019 John Wiley & Sons, Inc Pension Plan Accounting Types of 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 LO Copyright ©2019 John Wiley & Sons, Inc Pension Plan Accounting Pension Funds and Pension Expense Company ($ in millions) Pension Expense as % of Pretax Size of Pension Fund 2020 Pension Expense (Income) Income General Motors $74,421 $(1,173) −9.89% Hewlett-Packard 10,176 (132) −4.03 Deere & Company 11,137 106 3.36 Merck 17,560 201 3.08 The Coca-Cola Company 8,371 368 5.46 Molson Coors Brewing 5,946 (68) -4.91 The two most common types of pension plans are defined contribution plans and defined benefit plans LO Copyright ©2019 John Wiley & Sons, Inc 10 Postretirement Benefits Accounting Provisions Attribution Period - period of time over which the postretirement benefit cost accrue LO Copyright ©2019 John Wiley & Sons, Inc 67 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 LO Copyright ©2019 John Wiley & Sons, Inc 68 Accounting for Postretirement Benefits Postretirement Expense Service Cost Interest Cost Actual Return on Plan Assets Amortization of Prior Service Costs Gains and Losses LO Copyright ©2019 John Wiley & Sons, Inc 69 Learning Objective Contrast Accounting for Pensions to Accounting for Other Postretirement Benefits LO Copyright ©2019 John Wiley & Sons, Inc 70 Accounting for Postretirement Benefits Illustrative Accounting Entries 2020 Entries and Worksheet Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2020, Quest Company adopts a healthcare benefit plan The following facts apply to the postretirement benefits plan for the year 2020 • Plan assets at fair value on January 1, 2020, are zero • Actual and expected returns on plan assets are zero • Accumulated postretirement benefit obligation (APBO), January 1, 2020, is zero • Service cost is $54,000 • No prior service cost exists • Interest cost on the A P B O is zero • Funding contributions during the year are $38,000 • Benefit payments to employees from plan are $28,000 LO Copyright ©2019 John Wiley & Sons, Inc 71 Accounting for Postretirement Benefits Postretirement Worksheet—2020 Journal Entry LO Postretirement Expense 54,000 Cash 38,000 Postretirement Asset/Liability 85,000 Copyright ©2019 John Wiley & Sons, Inc 72 Accounting for Postretirement Benefits 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 LO Copyright ©2019 John Wiley & Sons, Inc 73 Accounting for Postretirement Benefits 2021 Entries and Worksheet Illustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2021 • 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 Copyright ©2019 John Wiley & Sons, Inc 74 Accounting for Postretirement Benefits Postretirement Worksheet—2021 Journal Entry LO Postretirement Expense 27,280 Other Comprehensive Income (G/L) 60,200 Cash 18,000 Postretirement Asset/Liability 69,408 Copyright ©2019 John Wiley & Sons, Inc 75 Accounting for Postretirement Benefits Amortization of Net Gain or Loss in 2022 LO Copyright ©2019 John Wiley & Sons, Inc 76 Learning Objective Compare the Accounting for Pensions Under GAAP and IFRS LO Copyright ©2019 John Wiley & Sons, Inc 77 IFRS Insights Relevant Facts - Similarities • 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 G AAP.) • IFRS and GAAP compute unrecognized past service cost (P SC) (referred to as prior service cost in G AAP) in the same manner However, IFRS recognizes past service cost as a component of pension expense in income immediately G AAP amortizes PSC over the remaining service lives of employees LO Copyright ©2019 John Wiley & Sons, Inc 78 IFRS Insights Relevant Facts - Differences • IFRS and GAAP include interest expense on the liability in pension expense Regarding asset returns, I FRS reduces pension expense by the amount of interest revenue (based on the discount rate times the beginning value of pension assets) G AAP 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 G AAP 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.” • The accounting for pensions and other postretirement benefit plans is the same under I FRS GAAP has separate standards for these types of benefits, and significant differences exist in the accounting Copyright ©2019 John Wiley & Sons, Inc 79 IFRS Insights 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 While the FASB may consider the recent IASB amendments, which could lead to a converged standard, the FASB does not have a pension project on its technical agenda LO Copyright ©2019 John Wiley & Sons, Inc 80 Copyright Copyright © 2019 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States 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 Copyright ©2019 John Wiley & Sons, Inc 81 ... (determined by • Risk borne by employees • Benefits based on plan value LO Actuaries) • Risk borne by employer Copyright ©2019 John Wiley & Sons, Inc 11 The Role of Actuaries in Pension Accounting. .. Objective Discuss the Fundamentals of Pension Plan Accounting LO Copyright ©2019 John Wiley & Sons, Inc Pension Plan Accounting An arrangement whereby an employer provides benefits (payments) to... Inc 10 Pension Plan Accounting Contribution versus Benefit Plans Defined-Contribution Plan Defined-Benefit Plan • Employer contribution determined by plan • Benefit determined by plan (fixed) •