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After completing this chapter you should be able to: Distinguish between accounting for the employer’s pension plan and accounting for the pension fund, identify types of pension plans and their characteristics, explain alternative measures for valuing the pension obligation, list the components of pension expense... and other contents.
Chapter 20-1 CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 20-2 Learning Objectives Learning Objectives Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Identify types of pension plans and their characteristics Explain alternative measures for valuing the pension obligation List the components of pension expense Use a worksheet for employer’s pension plan entries Describe the amortization of unrecognized prior service costs Explain the accounting procedure for recognizing unexpected gains and losses Explain the corridor approach to amortizing unrecognized gains and losses Describe the requirements for reporting pension plans in financial statements Chapter 20-3 Accounting for Pensions and Postretirement Benefits Accounting for Pensions and Postretirement Benefits Nature of Pension Plans Accounting for Pensions Defined contribution plan Defined-benefit plan Role of actuaries Alternative measures of liability Recognition of net funded status Components of pension expense Using a Pension Worksheet 2010 entries and worksheet Amortization of prior service cost 2011 entries and worksheet Gain or loss 2012 entries and worksheet Chapter 20-4 Reporting Pension Plans in Financial Statements Within the financial statements Within the notes to the financial statements Pension note disclosure 2013 entries and worksheet—a comprehensive example Special issues Nature of Pension Plans Nature of Pension Plans 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 Plan Pension Plan Administrator Administrator Employer Employer Retired Employees Chapter 20-5 Contributions Benefit Payments Assets & Liabilities LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Nature of Pension Plans Nature of Pension Plans Some pension plans are: 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 Chapter 20-6 LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund Types of Pension Plans Types of Pension Plans DefinedContribution Plan DefinedBenefit Plan Employer contribution determined by plan (fixed) Risk borne by employees Benefits based on plan value Benefit determined by plan Employer 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 salaries, etc Chapter 20-7 LO 2 Identify types of pension plans and their characteristics Accounting for Pensions Accounting for Pensions 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? Chapter 20-8 LO 3 Explain alternative measures for valuing the pension obligation Accounting for Pensions Accounting for Pensions The employer’s pension Alternative measures of the Liability obligation is the deferred Illustration 203 compensation obligation it has to its employees for their service under the terms of the pension plan FASB’s choice Chapter 20-9 LO 3 Explain alternative measures for valuing the pension obligation Accounting for Pensions Accounting for Pensions Recognition of the Net Funded Status Companies must recognize on their balance sheet the full overfunded or underfunded status of their definedbenefit 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 Chapter 20-10 LO 3 Explain alternative measures for valuing the pension obligation iGAAP and U.S. GAAP separate pension plans into definedcontribution plans and definedbenefit plans. The accounting for definedcontribution plans is similar For definedbenefit 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 20-44 Another difference in definedbenefit 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—socalled “contributionbased promises.” Chapter 20-45 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 20-46 Differences Between Pension Benefits and Healthcare Benefits Illustration 20A1 Chapter 20-47 LO 10 Identify the differences between pensions and postretirement healthcare benefits Differences Between Pension Benefits and Healthcare Benefits Measuring the future payments for healthcare benefit plans is so much more difficult than for pension plans Many postretirement plans do not set a limit on healthcare benefits. 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 20-48 LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions Attribution Period period of time over which the postretirement benefit cost accrue Illustration 20A2 Chapter 20-49 LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions 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 20-50 LO 10 Identify the differences between pensions and postretirement healthcare benefits Postretirement Benefits Accounting Provisions Postretirement Expense Service Cost Interest Cost Actual Return on Plan Assets Amortization of Prior Service Costs Gains and Losses Chapter 20-51 LO 10 Identify the differences between pensions and postretirement healthcare benefits Illustrative Accounting Entries 2010 Entries and Worksheet Illustration: 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 Chapter 20-52 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 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2010 Entries and Worksheet Illustration 20A4 Chapter 20-53 Journal Entry Illustrative Accounting Entries 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 Chapter 20-54 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2011 Entries and Worksheet Illustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2011 Actual return on plan assets is $600 Chapter 20-55 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 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Illustrative Accounting Entries 2011 Entries and Worksheet Illustration 20A6 Chapter 20-56 Journal Entry Illustrative Accounting Entries Amortization of Gains and Losses in 2012 Illustration 20A8 Chapter 20-57 LO 11 Contrast accounting for pensions to accounting for other postretirement benefits Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc. 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Explain the corridor approach to amortizing unrecognized gains? ?and? ?losses Describe the requirements? ?for? ?reporting pension plans in financial statements Chapter 2 0-3 Accounting? ?for? ?Pensions? ?and? ?Postretirement? ?Benefits Accounting? ?for? ?Pensions? ?and? ?Postretirement? ?Benefits. . .CHAPTER 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS Intermediate? ?Accounting 13th Edition Kieso, Weygandt,? ?and? ?Warfield Chapter 2 0-2 Learning Objectives Learning Objectives... turnover, interest? ?and? ?earning rates, early retirement frequency, future salaries, etc Chapter 2 0-7 LO 2 Identify types of pension plans? ?and? ?their characteristics Accounting? ?for? ?Pensions Accounting? ?for? ?Pensions