Đang tải... (xem toàn văn)
This chapter include objectives: Explain the fundamental differences between a defined contribution pension plan and a defined benefit pension plan; distinguish among the vested benefit obligation, the accumulated benefit obligation, and the projected benefit obligation; describe the five events that might change the balance of the PBO;...
Chapter 17 PENSIONS AND OTHER POSTEMPLOYMENT BENEFIT PLANS © 2013 The McGraw-Hill Companies, Inc Nature of Pension Plans Pension plans provide income to individuals during their retirement years This is accomplished by setting aside funds during an employee’s working years so that at retirement, the accumulated funds plus earnings from investing those funds are available to replace wages 17 - Nature of Pension Plans For a pension plan to qualify for special tax treatment it may need to meet the following requirements: 1.Cover a substantial proportion of employees 2.Cannot discriminate in favor of highly compensated employees 3.Must be funded in advance of retirement through an irrevocable trust fund 4.Benefits must vest after a specified period of service 5.Complies with timing and amount of contributions 17 - Nature of Pension Plans 17 - Defined Contribution Plans Plan Plan Characteristics Characteristics Contributions Contributions are are defined defined by by agreement agreement 17 - Employer Employer deposits deposits an an agreed-upon agreed-upon amount amount into into an an employeeemployeedirected directed investment investment fund fund Employee Employee bears bears all all risk risk of of pension pension fund fund performance performance Defined Contribution Plans Let’s assume that the annual contribution is to be 3% of an employee’s salary If an employee earned $110,000 during the year, the company would make the following entry: Defined benefit expense Cash 3,300 3,300 The employee’s retirement benefits are totally dependent upon how well investments perform 17 - Defined Benefit Plans Plan Plan Characteristics Characteristics Employer Employer is is committed committed to to specified specified retirement retirement benefits benefits 17 - Retirement Retirement benefits benefits are are based based on on aa formula formula that that considers considers years years of of service, service, compensation compensation level, level, and and age age Employer Employer bears bears all all risk risk of of pension pension fund fund performance performance Defined Benefit Plan A pension formula might define annual retirement benefits as: 1/2 % x Years of service x Final year’s salary By this formula, the annual benefits to an employee who retires after 30 years of service, with a final salary of $100,000, would be: 1/2 % x 30 years x $100,000 = $45,000 17 - Defined Benefit Plan An actuary assesses the various uncertainties (employee turnover, salary levels, mortality, etc.) and estimates the company’s obligation to employees in connection with its pension plan The key elements of a defined benefit plan are: 1.The employer’s obligation to pay retirement benefits in the future 2.The plan assets set aside by the employer from which to pay the retirement benefits in the future 3.The periodic expense of having a pension plan 17 - Defined Benefit Cost—An Overview The annual defined benefit cost reflects changes in both the defined benefit obligation and the plan assets Components of Defined Benefit Cost + Service cost ascribed to employee service during the period + Interest accrued on the defined benefit liability Return on the plan assets* Past service cost attributed to employee service before an amendment to the defined benefit plan + or (-) Losses or (gains) from revisions in the defined benefit liability or from investing plan assets = Defined Benefit Cost *The actual return is adjusted for any difference between actual and expected return, resulting in the expected return being reflected in defined benefit expense This loss of gain from investing plan assets is combined with losses and gains from revisions in the defined benefit liability 17 - 10 Recording the Funding of Plan Assets Global pays $38 million in retirement pension benefits PBO 38,000,000 Plan assets 17 - 37 38,000,000 IFRS vs U S GAAP Differences in accounting for actuarial gains and losses using IFRS and U.S GAAP • • 17 - 38 Require that remeasurement gains and losses be included immediately among OCI items in the statement of comprehensive income Amortization is not permitted under IFRS • Requires that gains and losses be included among OCI items in the statement of comprehensive income • Gains and losses are amortized over future periods using the “corridor” approach IFRS vs U S GAAP IFRS and U.S GAAP treat past service cost (PSC) differently • 17 - 39 PSC is expensed immediately to the extent it relates to income • PSC is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period Comprehensive Income Comprehensive income is a more expansive view of income than traditional net income ($ in millions) Net income Other comprehensive income: Unrealized holding gains (losses) on investments Pension plan: Loss-due to revising a DBO estimate Gain-return on plan assets exceed expected Deferred gains (losses) from derivatives Gains (losses) from foreign currency translation Comprehensive income 17 - 40 $xxx $x (23) 12 x x xx $xxx Comprehensive Income 17 - 41 IFRS vs U S GAAP As part of a joint project with the FASB, the IASB issued a revised version of IAS No.1, “Presentation of Financial Statements,” that revised the standard to bring international reporting of comprehensive income largely in line with U.S standards IFRS does not permit reporting other comprehensive income in the statement of shareholders’ equity 17 - 42 PENSION SPREADSHEET Reported Recorded in Accounts ( )s indicate credits; debits otherwise ($ in millions) Balance, Jan. 1, 2011 (41) Interest cost, 6% (24) Expected return on assets 18 Gain on assets 12 Loss on PBO Contributions to fund Retiree benefits paid Balance, Dec. 31, 2011 17 - 43 Plan Assets (400) 300 Service cost Past service cost DBO OCI Only Net Pension Pension (Liability) Expense Cash / Asset (100) 41 (41) 24 (24) (18) 18 12 (12) (4) 4 (4) (23) 23 (23) 48 38 (38) (454) 340 11 51 (48) 48 (114) IFRS vs U S GAAP Under IFRS there is no requirement to present the various components of defined benefit expense as a single net amount U.S GAAP requires employers to present the expense as a net amount and prohibits the reporting of separate components on the income statement 17 - 44 Postemployment Benefits Other Than Pensions Net Cost of Benefits Estimated Estimated medical medical costs costs in in each each year year of of retirement retirement Less: Equals: 17 - 45 Retiree Retiree share share of of cost cost Insurance Insurance payments payments Estimated Estimated net net cost cost of of benefits benefits Many companies also furnish other postemployment benefits to their retired employees Postemployment Benefit Obligation Expected Postemployment Benefit Obligation (EPBO) – The actuary's estimate of the total postemployment benefits (at their discounted present value) expected to be received by plan participants Defined Benefit Obligation (DBO) – The portion of the EPBO attributed to employee service to date 17 - 46 POSTEMPLOYMENT BENEFIT OBLIGATION Assume the actuary estimates the net cost of providing health care benefits to a particular employee during her retirement years to have a present value of $10,842 as of the end of 2009 This is the EPBO If the benefits (and therefore the costs) relate to an estimated 35 years of service and 10 of those years have been completed, the DBO would be: $10,842 2009 EPBO x 2010 1.06 $11,492 EPBO x 10/35 = fraction attributed DBO The obligation increases by the 6% accrued interest x 11/35 = $3,612 fraction attributed DBO She now has worked 11 of her estimated 35 years 17 - 47 $3,098 HOW THE DBO CHANGED DBO at the beginning of the year Interest cost: $3,098 x 6% Service cost: ($11,492 x 1/35) $3,098 186 328 portion of EPBO attributed to the year DBO at the end of the year 17 - 48 $3,612 Attribution The process of assigning the cost of benefits to the years during which those benefits are assumed to be earned by employees 17 - 49 Accounting for Postemployment Benefit Plans Other Than Pensions Attribute a portion of the accumulated postemployment benefit obligation to each year as the service cost for that year Measuring Service Cost Pension benefits Other postemployment benefits 100 % 0% Employees earn benefits gradually 17 - 50 No benefits until full eligibility End of Chapter 17 ... committed committed to to specified specified retirement retirement benefits benefits 17 - Retirement Retirement benefits benefits are are based based on on aa formula formula that that considers... an irrevocable trust fund 4 .Benefits must vest after a specified period of service 5.Complies with timing and amount of contributions 17 - Nature of Pension Plans 17 - Defined Contribution Plans... approach, units of benefits increase with each year of service 17 - 11 The Defined Benefit Obligation 17 - 12 Defined Benefit Obligation The DBO as a measure of projected benefits is a more meaningful