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Intermediate accounting 17e by kieso ch20

Intermediate Accounting
Seventeenth Edition

Kieso ● Weygandt ● Warfield

Chapter 20

Accounting For Pensions and Postretirement Benefits
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Learning Objectives
After studying this chapter, you should be able to:

1.

Discuss the fundamentals of pension plan accounting.

2.

Use a worksheet for employer’s pension plan entries.


3.

Describe the accounting and amortization of prior service costs.

4.

Explain the accounting and amortization for unexpected gains and losses.

5.

Describe the requirements for reporting pension plans in financial statements.

Copyright ©2019 John Wiley & Sons, Inc.

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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 ©2019 John Wiley & Sons, Inc.

3


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.

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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.

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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.

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Learning Objective 1
Discuss the Fundamentals of Pension Plan Accounting

LO 1

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Pension Plan Accounting
An arrangement whereby an employer provides benefits (payments) to retired employees for
services they provided in their working years.

LO 1

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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 1

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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 1

Copyright ©2019 John Wiley & Sons, Inc.

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Pension Plan Accounting
Contribution versus Benefit Plans
Defined-Contribution Plan

Defined-Benefit Plan



Employer contribution determined by plan



Benefit determined by plan

(fixed)



Employer contribution varies (determined by



Risk borne by employees



Benefits based on plan value

LO 1

Actuaries)



Risk borne by employer

Copyright ©2019 John Wiley & Sons, Inc.

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The Role of Actuaries in Pension Accounting

Actuaries make predictions (called actuarial assumptions) of mortality rates, employee turnover,
interest and earnings rates, early retirement frequency, future salaries, and any other factors
necessary to operate a pension plan.

LO 1

Copyright ©2019 John Wiley & Sons, Inc.

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Measures of the Liability
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?

LO 1

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Measures of the Liability
Different Measures of the Pension Obligation

LO 1

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Measures of the Liability
Recognition of the Net Funded Status of the Pension Plan



Companies must recognize on their balance sheet the full overfunded or underfunded status of
their defined benefit 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.

LO 1

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Components of Pension Expense

LO 1

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Components of Pension Expense
Service Costs
Effect on
Expense
1

Service Costs

+

Actuarial present value of benefits attributed by the pension benefit formula to employee service
during the period

LO 1

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Components of Pension Expense
Interest on the Liability
Effect on
Expense
2

Interest on the Liability

+

Interest for the period on the projected benefit obligation outstanding during the period
The interest rate use is referred to as the settlement rate.

LO 1

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Components of Pension Expense
Actual Return on Plan Assets
Effect on
Expense
3

Actual Return on Plan Assets

+−

Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair value of the plan
assets.

LO 1

Copyright ©2019 John Wiley & Sons, Inc.

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Components of Pension Expense
Amortization of Prior Service Costs
Effect on
Expense
4

Amortization of Prior Service Costs

+

Plan amendments often include provisions to increase benefits for employee 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.

LO 1

Copyright ©2019 John Wiley & Sons, Inc.

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Components of Pension Expense
Gain or Loss
Effect on
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.

LO 1

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Learning Objective 2
Use a Worksheet for Employer’s Pension Plan Entries

LO 2

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Using a Pension Worksheet

LO 2

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Using a Pension Worksheet
Illustration
On January 1, 2020, Zarle Company provides the following information related to its pension plan for the year 2020.
Plan assets, January 1, 2020, are $100,000.
Projected benefit obligation, January 1, 2020, is $100,000.
Annual service cost is $9,000.
Settlement rate is 10 percent.
Actual return on plan assets is $10,000.
Funding contributions are $8,000.
Benefits paid to retirees during the year are $7,000.

LO 2

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Using a Pension Worksheet
Prepare a pension worksheet for 2020

LO 2

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