Intermediate Accounting: Prepared by University of California, Santa Barbara

Intermediate
Accounting
Prepared by
Coby Harmon
20-1
University of California, Santa Barbara
Accounting for Pensions and
20 Postretirement Benefits
Intermediate Accounting
14th Edition
Kieso, Weygandt, and Warfield

20-2
Learning Objectives
1. Distinguish between accounting for the employer’s 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 employer’s pension plan entries.
6. Describe the amortization of prior service costs.
7. Explain the accounting procedure 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.
20-3
Accounting for Pensions and Postretirement Benefits
Reporting
Nature of Accounting for Using a Pension Pension Plans in
Pension Plans Pensions Worksheet Financial
Statements
Defined Alternative 2012 entries and Within the

contribution plan measures of worksheet financial
Defined-benefit liability Amortization of statements
plan Recognition of prior service cost Within the notes
Role of actuaries net funded status 2013 entries and to the financial
Components of worksheet statements
pension expense Gain or loss Pension note
disclosure
2014 entries and
worksheet 2015 entries and
worksheet—a
comprehensive
example
Special issues
20-4
Nature of Pension Plans
An arrangement whereby an employer provides benefits to employees

after they retire for services they provided while they were working.
Pension Plan
Administrator
Employer Contributions
Retired
Employees Benefit Payments Assets &
Liabilities
20-5
LO 1 Distinguish between accounting for the employer’s
pension plan and accounting for the pension fund.
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.
20-6
LO 1 Distinguish between accounting for the employer’s
pension plan and accounting for the pension fund.
Defined-Contribution Plan Defined-Benefit Plan

 Employer contribution  Benefit determined by plan
determined by plan (fixed)  Employer contribution varies
 Risk borne by employees (determined by Actuaries)
 Benefits based on plan value  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.
20-7 LO 2 Identify types of pension plans and their characteristics.

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?
20-8 LO 3 Explain alternative measures for valuing the pension obligation.

Alternative measures of the Liability
Employer’s pension
obligation is the deferred
compensation obligation it
has to its employees for
their service under the
terms of the pension plan.
FASB’s
choice
Illustration 20-3
20-9 LO 3 Explain alternative measures for valuing the pension obligation.

Illustration 20-4
Components of Annual
Pension Expense
20-10 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

Expense
1. Service Costs +
Actuarial present value of new benefits earned by
employees during the period.


Expense
2. Interest on the Liability +

Interest for the period on the projected benefit obligation
outstanding during the period.
Interest rate (settlement rate) should be those based rates of

return on high-quality fixed-income investments currently
available, whose cash flows match the timing and amount of
the expected benefit payments.


Expense
3. Actual Return on Plan Assets +-

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.
Illustration 20-5


Expense
4. Amortization of Prior Service Costs +

Plan amendments often increase benefits for service provided
in prior years.
Company allocates the cost (prior service cost) of providing

these retroactive benefits to pension expense in the future,
specifically to the remaining service-years of the affected
employees.


Expense
5. Gain or Loss +-
Volatility in pension expense can result from sudden and
large changes in the fair value of plan assets and by changes
in projected benefit obligation.

Using a Pension Work Sheet
Pension Work Sheet
GENERAL JOURNAL ENTRIES MEMO RECORD
Other Comprehensive Income
(OCI)
Prior Pension Projected
Pension Service Asset / Benefit Plan
Items Expense Cash Costs (PSC) Gain/Loss Liability Obligation Assets
The “General Journal Entries” columns The “Memo Record”

determine the journal entries to be columns maintain balances
recorded in the formal general ledger. for the unrecognized
pension items.
20-16 LO 5 Use a worksheet for employer’s pension plan entries.

BE20-3: At January 1, 2012, Beaty Company had plan assets

of $280,000 and a projected benefit obligation of the same
amount. During 2012, service cost was $27,500, the settlement
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 Beaty for 2012.

BE20-3: Prepare a pension worksheet for Beaty for 2012.
OCI
Pension Projected
Pension Asset / Benefit Plan
Items Expense Cash PSC Gain/Loss Liability Obligation Assets
Jan. 1, 2010 0 (280,000) 280,000
Service costs 27,500 (27,500)
Interest costs 28,000 ($280,000 x 10%) (28,000)
Actual return (25,000) 25,000
Contributions (20,000) 20,000
Benefits paid 17,500 (17,500)
Journal entry 30,500 (20,000) (10,500)
Dec. 31, 2010 - - (10,500) (318,000) 307,500
($10,500) net liability

Note the following about the Work Sheet:
 The balance in the Pension Asset / Liability column

should equal the net balance in the memo record – this is
the “net funded position” of the pension plan. If a credit
balance, Pension liability; if a debit balance, Pension
asset.
 For each transaction or event, the debits must equal the
credits.

Prior Service Cost
Amortization of Prior Service Cost

Company should not recognize the retroactive benefits as
pension expense entirely in the year of amendment.
Employer should recognize the pension expense over the

remaining service lives of the employees who are expected to
benefit from the change in the plan.
Amortization Method:
 Board prefers a years-of-service method.
 SFAS No. 158 allows use of the straight-line method.
20-20 LO 6 Describe the amortization of prior service costs.

E20-7: The following defined pension data of Rydell Corp. apply to the
year 2012.
Projected benefit obligation, 1/1/12 (before amendment)
$560,000
Plan assets, 1/1/12
546,200
Pension liability
13,800
On January 1, 2012, Rydell Corp., through plan amendment,
grants prior service benefits having a present value of
120,000For 2012, prepare a pension work sheet for Rydell Corp. that
Instructions:
Settlement
shows rate entry for pension expense.
the journal
20-21 9% LO 6 Describe the amortization of prior service costs.

Using a Pension Work Sheet – E20-7
OCI
Pension Projected
Pension Gain / Asset / Benefit Plan
Items Expense Cash PSC Loss Liability Obligation Assets
Dec. 31, 2010 (13,800) (560,000) 546,200
PSC 120,000 (120,000)
Bal. Jan. 1, 2010 (680,000) 546,200
Interest costs 61,200 (61,200)
Asset Return (52,280) 52,280
Amort. PSC 17,000 (17,000)
Journal entry 83,920 (65,000) 103,000 (121,920)
AOCI -12/31/2011 -
Dec. 31, 2012 103,000 - (135,720) (759,200) 623,480
20-22
($135,720) liability
E20-7: Pension Journal Entry for 2012.
Dec. 31
Pension Expense 83,920

Other Comprehensive Income (PSC) 103,000
Pension Asset/Liability
121,920
Cash
65,000
20-23 LO 6 Describe the amortization of prior service costs.

Gains and Losses
Gain or Loss
Unexpected swings in pension expense can result from:
1. Sudden and large changes in the fair value of plan

assets, and
2. Changes in actuarial assumptions that affect the

amount of the projected benefit obligation.
20-24 LO 7 Explain the accounting for unexpected gains and losses.

Gains and 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 and Losses
Question: What happens to the difference between the

expected return and the actual return?
Answer
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 and Losses
Question: What happens with unexpected gains or

losses from changes in the Projected Benefit Obligation
(PBO)?
Answer
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 and Losses
Corridor Amortization
FASB invented the corridor approach for amortizing the
accumulated net gain or loss balance 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 (which may
equal fair value) of the plan assets.
Any accumulated net gain or loss balance above the 10%

must be amortized.
20-28 LO 8 Explain the corridor approach to amortizing gains and losses.

Gains and Losses
BE20-7: Shin Corporation had a projected benefit obligation

of $3,100,000 and plan assets of $3,300,000 at January 1,
2012. Shin’s also had a net pension actuarial loss of
$465,000 in accumulated OCI at January 1, 2012. The
average remaining service period of Shin’s employees is 7.5
years.
Instructions: Compute Shin’s minimum amortization of the

actuarial loss.

Gains and Losses
BE20-7: Compute Shin’s amortization of the loss.

Amortization
Projected benefit obligation $ (3,100,000)
Plan assets 3,300,000 $ 3,300,000
Corridor percentage 10%
Corridor amount 330,000
Accumulated loss 465,000
Excess loss subject to amortization 135,000
Average remaining service ÷ 7.5
Amortized to pension expense $ 18,000

P20-2: Jackson Company adopts acceptable accounting for its defined
benefit pension plan on January 1, 2011, with the following beginning
balances: plan assets $200,000; projected benefit obligation $250,000.
Other data are as follows.
2011 2012 2013
Annual service cost $ 16,000 $ 19,000 $ 26,000
Settlement rate and expected rate of return 10% 10% 10%
Actual return on plan assets 18,000 22,000 24,000
Annual funding (contributions) 16,000 40,000 48,000
Benefits paid 14,000 16,400 21,000
Prior service cost (plan amended, 1/1/12) 160,000
Amortization of prior service cost 54,400 41,600
Change in actuarial assumptions, Dec. 31 PBO 520,000
Average remaining service life 15 years 15 years 15 years

P20-2: Pension Work Sheet for 2011
OCI
Pension Projected
Bal. Jan. 1, 2011 (50,000) (250,000) 200,000
Interest 25,000 (25,000)
Return on assets (18,000) 18,000
Unexpected loss (2,000) * 2,000
Journal entry 21,000 (16,000) 2,000 (7,000)
AOCI - 12/31/10 -
Dec. 31, 2011 - 2,000 (57,000) (277,000) 220,000
* Expected Return on Plan Assets $200,000 x ($57,000)

10% = $20,000

P20-2 Pension Journal Entry for 2011
Dec. 31 Pension Expense 21,000

OCI – Gain/Loss 2,000
Pension Asset/Liability 7,000
Cash
16,000

OCI Pension Projected
Pension Gain / Asset Benefit Plan
Bal. Jan. 1, 2012 2,000 (57,000) (277,000) 220,000
Prior service costs 160,000 (160,000)
Adj Bal., 1/1/12 (437,000) 220,000
Interest 43,700 (43,700)
Return on assets (22,000) * 22,000
Amort. of PSC 54,400 (54,400)
Journal entry 95,100 (40,000) 105,600 (160,700)
AOCI - 12/31/11 2,000
Dec. 31, 2012 105,600 2,000 (217,700) (483,300) 265,600
* Actual return = Expected Return

($217,700) liability

Dec. 31

Other Comprehensive Income (PSC) 105,600
Pension Asset/Liability
160,700
Cash
40,000

OCI Pension Projected
Bal. Dec. 31, 2012 105,600 2,000 (217,700) (483,300) 265,600
Interest 48,330 (48,330)
Return on assets (24,000) 24,000
Unexpected loss (2,560) 2,560
Amort. of PSC 41,600 (41,600)
Liability gain (16,630) 16,630
*
Journal entry 89,370 (48,000) (41,600) (14,070) 14,300
AOCI - 12/31/12 105,600 2,000
Dec. 31, 2013 64,000 (12,070) (203,400) (520,000) 316,600
* Plug ($203,400) liability

Dec. 31

Pension Asset/Liability 14,300
Other Comprehensive Income (G/L)
14,070
Other Comprehensive Income (PSC)
41,600
Cash
48,000
Reporting Pension Plans in Financial Statements
Within the Financial Statements

 Pension expense
 Pension Asset / Liability
 Components of Accumulated Other Comprehensive
Income
20-38
LO 9 Describe the requirements for reporting
pension plans in financial statements.
Within the Notes to the Financial Statements

1. Major components of pension expense.
2. Reconciliation showing how the projected benefit obligation and

the fair value of the plan assets changed.
3. A disclosure of the rates used in measuring the benefit amounts

(discount rate, expected return on plan assets, rate of
compensation).
20-39

4. A table indicating the allocation of pension plan assets by
category (equity securities, debt securities, real estate, and other
assets), and showing the percentage of the fair value to total plan
assets.
5. The expected benefit payments to be paid to current plan

participants for each of the next five fiscal years and in the
aggregate for the five fiscal years thereafter. Also required is
disclosure of a company’s best estimate of expected contributions
to be paid to the plan during the next year.
20-40

6. The nature and amount of changes in plan assets and benefit
obligations recognized in net income and in other comprehensive
income of each period.
7. The accumulated amount of changes in plan assets and benefit

obligations that have been recognized in other comprehensive
income and that will be recycled into net income in future periods.
8. The amount of estimated net actuarial gains and losses and prior
service costs and credits that will be amortized from accumulated
other comprehensive income into net income over the next fiscal
year. LO 9 Describe the requirements for reporting
20-41
Special Issues
 The Pension Reform Act of 1974
 Pension Terminations
20-42
APPENDIX 20A ACCOUNTING FOR POSTRETIRMENT BENEFITS
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.
20-43
Differences Between Pension Benefits and

Healthcare Benefits
Illustration 20A-1
20-44
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.
1. Many postretirement plans do not set a limit on healthcare

benefits.
2. 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.
20-45
Postretirement Benefits Accounting Provisions

Attribution Period - period of time over which the
postretirement benefit cost accrue.
Illustration 20A-2
20-46

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.
20-47

Postretirement Expense
1. Service Cost
2. Interest Cost
3. Actual Return on Plan Assets
4. Amortization of Prior Service Costs
5. Gains and Losses
20-48
2012 Entries
Illustrative Accounting Entries and Worksheet
Illustration: The use of a worksheet in accounting for a postretirement

benefits plan, assume that on January 1, 2012, Quest Company adopts a
healthcare benefit plan. The following facts apply to the postretirement benefits
plan for the year 2012.
► Plan assets at fair value on January 1, 2012, are zero.
► Actual and expected returns on plan assets are zero.
► Accumulated postretirement benefit obligation (APBO), January 1, 2012, 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

20-49 other postretirement benefits.
2012 Entries
Illustration 20A-4
Journal
Entry
20-50
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
LO 11 Contrast accounting for pensions to accounting for

20-51 other postretirement benefits.
2013 Entries
Illustration: The following facts apply to the postretirement benefits plan for
Quest Company for the year 2013.
► Actual return on plan assets is $600.
► 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

20-52 for other postretirement benefits.
2013 Entries
Illustration 20A-6
Journal
Entry
20-53
Illustrative Accounting Entries

Amortization of Gains and Losses in 2014
Illustration 20A-8
LO 11 Contrast accounting for pensions to accounting

20-54 for other postretirement benefits.
RELEVANT FACTS
 IFRS and GAAP separate pension plans into defined contribution
plans and defined benefit plans. The accounting for defined
contribution plans is similar.
 Both IFRS and GAAP compute unrecognized past service costs
(PSC) (referred to as prior service cost in GAAP) in the same
manner. However, IFRS recognizes any vested amounts
immediately and spreads unvested amounts over the average
remaining period to vesting. GAAP amortizes PSC over the
remaining service lives of employees.
20-55
RELEVANT FACTS
 Under IFRS, companies have the choice of recognizing actuarial
gains and losses in income immediately (either net income or other
comprehensive income) or amortizing them over the expected
remaining working lives of employees. GAAP does not permit
choice; actuarial gains and losses are reported in “Accumulated
other comprehensive income” and amortized to income over
remaining service lives.
 For defined benefit plans, GAAP recognizes a pension asset or
liability as the funded status of the plan (i.e., defined benefit
obligation minus the fair value of plan assets). IFRS recognizes the
funded status, net of unrecognized past service cost and
unrecognized net gain or loss.
20-56
IFRS SELF-TEST QUESTION
At the end of the current period, Oxford Ltd. has a defined benefit
obligation of $195,000 and pension plan assets with a fair value of
$110,000. The amount of the vested benefits for the plan is $105,000.
What amount related to its pension plan will be reported on the
company’s statement of financial position?
a. $5,000.
b. $90,000.
c. $85,000.
d. $20,000.
20-57
At the end of the current year, Kennedy Co. has a defined benefit
obligation of $335,000 and pension plan assets with a fair value of
$245,000. The amount of the vested benefits for the plan is $225,000.
Kennedy has unrecognized past service costs of $24,000 and an
unrecognized actuarial gain of $8,300. What account and amount(s)
related to its pension plan will be reported on the company’s statement of
financial position?
a. Pension Liability and $74,300.
b. Pension Liability and $90,000.
c. Pension Asset and $233,300.
d. Pension Asset and $110,000.
20-58
At January 1, 2012, Wembley Company had plan assets of $250,000
and a defined benefit obligation of the same amount. During 2012,
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. Based on this information,
what would be the defined benefit obligation for Wembley Company at
December 31, 2012?
a. $277,500. c. $27,500.
b. $285,000. d. $302,500.
20-59
Copyright
Copyright © 2012 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright 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
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errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
20-60

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Intermediate

Kieso, Weygandt, and Warfield

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 employer’s pension plan entries.

6. Describe the amortization of prior service costs.

7. Explain the accounting procedure 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

Defined Alternative 2012 entries and Within the

An arrangement whereby an employer provides benefits to employees

Pension plans can be:

Pension fund should be a separate legal and accounting

Defined-Contribution Plan Defined-Benefit Plan

Actuaries estimate the employer contribution by considering mortality

20-7 LO 2 Identify types of pension plans and their characteristics.

(2) What is the pension expense for the period?

20-8 LO 3 Explain alternative measures for valuing the pension obligation.

20-9 LO 3 Explain alternative measures for valuing the pension obligation.

20-10 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

20-11 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

2. Interest on the Liability +

Interest rate (settlement rate) should be those based rates of

20-12 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

3. Actual Return on Plan Assets +-

20-13 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

4. Amortization of Prior Service Costs +

Company allocates the cost (prior service cost) of providing

20-14 LO 4 List the components of pension expense.

Components of Pension Expense Effect on

20-15 LO 4 List the components of pension expense.

The “General Journal Entries” columns The “Memo Record”

20-16 LO 5 Use a worksheet for employer’s pension plan entries.

BE20-3: At January 1, 2012, Beaty Company had plan assets

Instructions: Prepare a pension worksheet for Beaty for 2012.

20-17 LO 5 Use a worksheet for employer’s pension plan entries.

($10,500) net liability

20-18 LO 5 Use a worksheet for employer’s pension plan entries.

Note the following about the Work Sheet:

 The balance in the Pension Asset / Liability column

20-19 LO 5 Use a worksheet for employer’s pension plan entries.

Amortization of Prior Service Cost

Employer should recognize the pension expense over the

20-20 LO 6 Describe the amortization of prior service costs.

20-21 9% LO 6 Describe the amortization of prior service costs.

E20-7: Pension Journal Entry for 2012.

Pension Expense 83,920

20-23 LO 6 Describe the amortization of prior service costs.

1. Sudden and large changes in the fair value of plan

2. Changes in actuarial assumptions that affect the

20-24 LO 7 Explain the accounting for unexpected gains and losses.

Question: What is the potential negative impact on Net

20-25 LO 7 Explain the accounting for unexpected gains and losses.

Question: What happens to the difference between the

20-26 LO 7 Explain the accounting for unexpected gains and losses.

Question: What happens with unexpected gains or

20-27 LO 7 Explain the accounting for unexpected gains and losses.

10% of the larger of the beginning balances of the projected