FINACC2 Lecture6 Employment Benefits

LIABILITIES
ACCOUNTING FOR
EMPLOYEE BENEFITS
PowerPoint Lecture Presentation

Prof. OSLER T AQUINO
Asia Pacific College
Learning
Learning Objectives
Objectives
1.
Distinguish between accounting for the employers 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 employers pension plan entries.
6.
Describe the amortization of past service costs.
7.
Explain the accounting for unexpected gains and losses.
8.
Explain the corridor approach to amortizing gains and losses.
9.
Describe the requirements for reporting pension plans in financial

statements.
10. Explain special issues related to postretirement benefit plans.

Accounting
Accounting for
for Pensions
Pensions and
and Postretirement
Postretirement Benefits
Benefits
Nature of Pension
Plans
Accounting for
Pensions
Using a Pension
Worksheet
Defined
contribution plan
Defined-benefit
plan
Role of
actuaries
Alternative
measures of
liability
Components of
pension expense
Recognition of
actuarial gains
and losses
Reporting Pension
Plans in Financial
Statements
Within the
financial
statements
Within the notes
to the financial
statements
2013 entries and
worksheeta
comprehensive
example
Special issues

Nature
Nature of
of Pension
Pension Plans
Plans
An arrangement whereby an employer provides benefits to employees
after they retire for services they provided while they were working.
Pension
PensionPlan
Plan
Administrator
Administrator
Employer
Employer
Retired
Employees

Contributions
Benefit Payments
Assets &
Liabilities
Nature
Nature of
of Pension
Pension Plans
Plans
Pension plans can be:
Contributory: employees voluntarily make

payments to increase their benefits.
Noncontributory:
entire cost.
Qualified pension plans: offer tax benefits.
employer
bears
the
Pension fund should be a separate legal and

accounting entity.
Nature
Nature of
of Pension
Pension Plans
Plans
Defined-Contribution Plan
Employers contribution
determined by plan (fixed)
Risk borne by employees
Benefits based on plan value
Defined-Benefit Plan
Benefit determined by plan
Employers contribution varies

(determined by Actuaries)
Risk borne by employer
Actuaries estimate the employers contribution by

considering mortality rates, employee turnover,
interest and earning rates, early retirement
frequency, future salaries, etc.
Accounting
Accounting for
for Pensions
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?

Accounting
Accounting for
for Pensions
Pensions
Employers
pension
obligation is the deferred
compensation obligation it
has to its employees for
their service under the
terms of the pension plan.
Alternative measures of the Liability
IASBs
choice

Accounting
Accounting for
for Pensions
Pensions
Illustration:
Components of Annual
Pension Expense

Accounting
Accounting for
for Pensions
Pensions
Components of Pension Expense
1.
Service Costs
Effect on
Expense
Actuarial present value of benefits attributed by the pension

benefit formula to employee service during the period.

Accounting
Accounting for
for Pensions
Pensions
2.
Interest on the Liability
Effect on
Expense
Interest for the period on the defined benefit obligation

outstanding during the period.
Interest rate (discount rate) should be those based on highquality bonds of currency and term consistent with the
liabilities.

Accounting
Accounting for
for Pensions
Pensions
3.
Actual Return on Plan Assets
Effect on
Expense
+-
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.

Accounting
Accounting for
for Pensions
Pensions
4.
Prior Service Costs
Effect on
Expense
Plan amendments often increase benefits for service provided

in prior years.
The cost (past service cost) of providing these retroactive
benefits is allocated to pension expense depending on
whether the benefits vest immediately or not.

Accounting
Accounting for
for Pensions
Pensions
5.
Gain or Loss
Effect on
Expense
+-
Volatility in pension expense can result from sudden and

large changes in the fair value of plan assets and by changes
in actuarial assumptions that affect the defined benefit
obligation.

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
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.
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
Example: At January 1, 2010, Blue Diamond Company
had plan assets of $250,000 and a defined benefit
obligation of the same amount. During 2010, service cost
was $27,500, the discount rate was 10%, actual and
expected return on plan assets were $25,000, contributions
were $20,000, and benefits paid were $17,500.
Instructions: Prepare a pension worksheet for Blue
Diamond for 2010.

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
BE20-3: Prepare a pension worksheet for Blue Diamond for 2010.
$250,000 x 10%
($7,500) net liability
Prior
Prior Service
Service Cost
Cost
Prior Service Cost
If benefits from the amendment to the plan
Vest immediately
recognize the expense and related liability at the

amendment date.

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
Example: The following defined pension data of Doreen Corp. apply to
the year 2015.
Defined benefit obligation, 1/1/10 (before amendment)
$560,000
Plan assets, 1/1/15
546,200
Pension liability 13,800
On January 1, 2015, Doreen Corp., through plan amendment,
grants prior service benefits having a present value of 100,000
Discount rate
9%
Service cost 58,000
Contributions (funding)
55,000
Actual (expected) return on plan assets 52,280
Benefits paid to retirees
40,000
Past service cost for 2015 17,000
Instructions: For 2015, prepare a pension work sheet for Doreen Corp. that
shows the journal entry for pension expense.
Using
Using aa Pension
Pension Work
Work Sheet
Sheet

($40,920) liability
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
E20-7: Pension Journal Entry for 2010.
Dec. 31
Pension Expense
Pension Liability
Cash

55,000
82,120
27,120
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
Gain or Loss
Unexpected swings in pension expense can result from:
1. Changes in the fair value of plan assets, and
2. Changes in actuarial assumptions that affect the
amount of the defined benefit obligation.

Gains
Gains and
and Losses
Losses
Question: What is the potential negative impact on
Net Income of these unexpected swings?
Volatility
The profession decided to
reduce the volatility with
smoothing techniques.

Gains
Gains and
and Losses
Losses
Question: What happens to the difference between the
expected return and the actual return?
Recorded in
account.
Net Gain or Loss
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
Gains and
and Losses
Losses
Question: What happens with unexpected gains or
losses from changes in the Defined Benefit Obligation?
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
Gains and
and Losses
Losses
Illustration: Wentworth Company has the following components
of pension expense for 2011.
If company decides to report the loss in net income.

Gains
Gains and
and Losses
Losses
Illustration: If Wentworth Company decides to report the loss in
other comprehensive income.
Illustration 20-19
If company decides to report loss in other comprehensive income.

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
P20-2: Katie Day Company adopts IAS 19 in accounting for its defined
benefit pension plan on January 1, 2000, with the following beginning
balances: plan assets $200,000; defined benefit obligation $250,000.
Other data are as follows.

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
P20-2

Using
Using aa Pension
Pension Work
Work Sheet
Sheet
P20-2: Pension Journal Entry for 2010
Dec. 31
Pension Expense
Cash

16,000
16,000
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
P20-2

($49,700) liability
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
Dec. 31
Pension Expense
Pension Liability
Cash
49,700
40,000

89,700
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
P20-2
($85,130) liability
Using
Using aa Pension
Pension Work
Work Sheet
Sheet
Dec. 31
Pension Expense
83,430
Pension Asset/Liability
Cash

48,000
35,430
Reporting
Reporting Pension
Pension Plans
Plans in
in Financial
Financial Statements
Statements
Within the Financial Statements
Pension Expense
Pension Asset / Liability
Components of Accumulated Other Comprehensive

Income

Reporting
Reporting Pension
Pension Plans
Plans in
in Financial
Statements
Within the Notes to the Financial Statements
1. Description of the plan and the accounting policy for
recognizing actuarial gains and losses.
2. Schedule showing all the major components of pension
expense.
3. Reconciliation showing how the defined benefit obligation and
the fair value of the plan assets changed from the beginning
to the end of the period.
4. Funded status of the plan and the amounts recognized and
not recognized in the financial statements.
Reporting
Reporting Pension
Pension Plans
Plans in
in Financial
Statements
Within the Notes to the Financial Statements
5. Disclosure of the rates used in measuring the benefit
amounts (discount rate, expected return on plan assets, rate
of compensation).
6. Companys best estimate of the contributions expected to
be made to the plan in the next year. A table indicating the
allocation of pension plan assets by category and showing
the percentage of or the amount related to the fair value to
total plan assets. In addition, the actual return on the plan is
disclosed, as well as information on how the expected rate
of return is determined.
Reporting
Reporting Pension
Pension Plans
Plans in
in Financial
Statements
Special Issues
Other postretirement benefits
Curtailments and settlements


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LIABILITIES

PowerPoint Lecture Presentation

Distinguish between accounting for the employers pension plan and

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 employers pension plan entries.

Describe the amortization of past service costs.

Explain the accounting for unexpected gains and losses.

Explain the corridor approach to amortizing gains and losses.

Describe the requirements for reporting pension plans in financial

10. Explain special issues related to postretirement benefit plans.

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

Pension plans can be:

Contributory: employees voluntarily make

Qualified pension plans: offer tax benefits.

Pension fund should be a separate legal and

Risk borne by employees

Benefits based on plan value

Benefit determined by plan

Employers contribution varies

Risk borne by employer

Actuaries estimate the employers contribution by

(1)What is the pension obligation that a

PowerPoint Lecture Presentation

Alternative measures of the Liability

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

Actuarial present value of benefits attributed by the pension

PowerPoint Lecture Presentation

Interest on the Liability

Interest for the period on the defined benefit obligation

PowerPoint Lecture Presentation

Actual Return on Plan Assets

Actual return on plan assets is the increase in pension funds

PowerPoint Lecture Presentation

Prior Service Costs

Plan amendments often increase benefits for service provided

PowerPoint Lecture Presentation

Volatility in pension expense can result from sudden and

PowerPoint Lecture Presentation

The General Journal Entries

The Memo Record

PowerPoint Lecture Presentation

($7,500) net liability

recognize the expense and related liability at the

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

PowerPoint Lecture Presentation

Net Gain or Loss

Amortize amount in excess of

If company decides to report the loss in net income.

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If company decides to report loss in other comprehensive income.

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PowerPoint Lecture Presentation

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PowerPoint Lecture Presentation

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