Solution manual intermediate accounting IFRS volume 1 kiesoch20

P20-6 Computation of unrecognized past service cost amortization, pension expense, journal entries, net gain or loss, and reconciliation schedule... The gain or loss on a curtailment or

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Brief Exercises Exercises

Problems

Concepts for Analysis

1 Basic definitions and

concepts related to pension

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

Brief Exercises Exercises Problems

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 1, 2, 4 1, 2, 6, 11, 12,

8 Explain the corridor approach to amortizing

gains and losses

18, 19

3, 4, 5,

6, 7, 8

9 Describe the requirements for reporting

pension plans in financial statements

13, 15, 16, 17

1, 2, 3,

4, 8, 9

10 Explain special issues related to

postretirement benefit plans

10, 11,

12, 13

E20-1 Pension expense, journal entries Simple 5–10

E20-3 Preparation of pension worksheet with reconciliation Moderate 15–25

E20-9 Disclosures: Pension expense and reconciliation schedule Moderate 25–35

E20-11 Pension expense, journal entry, statement presentation Moderate 20–30 E20-12 Pension expense, journal entry, statement presentation Moderate 20–30 E20-13 Computation of actual return, gains and losses, corridor test,

past service cost, pension expense, and reconciliation

E20-18 Amortization of unrecognized net gain or loss (corridor approach),

pension expense computation

E20-19 Amortization of unrecognized net gain or loss (corridor approach) Moderate 30–40

P20-2 Three-year worksheet, journal entries, and reconciliation

schedules

P20-3 Pension expense, journal entry, amortization of unrecognized

loss, reconciliation schedule

P20-5 Computation of pension expense, amortization of unrecognized

net gain or loss (corridor approach), journal entries for three years

P20-6 Computation of unrecognized past service cost amortization,

pension expense, journal entries, net gain or loss,

and reconciliation schedule

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item

Description

Level of Difficulty

Time (minutes)

P20-10 Postretirement benefit worksheet with reconciliation Moderate 30–35

CA20-5 Implications of International Accounting Standard (IAS) 19 Complex 50–60 CA20-6 Unrecognized gains and losses, corridor amortization Moderate 30–40

document or from the company’s practices

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost

**2. A defined contribution plan specifies the employer’s contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employer’s profit, or compensation levels

A defined benefit plan specifies a determinable pension benefit that the employee will receive at

a time in the future The employer must determine the amount that should be contributed now to provide for the future promised benefits

In a defined contribution plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula The benefit of gain or risk of loss from assets con-tributed to the plan is borne by the employee In a defined benefit plan, the employer’s obli-gation is to make sufficient contributions each year to provide for the promised future benefits Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits

**3. The employer is the organization sponsoring the pension plan The employer incurs the costs and makes contributions to the pension fund Accounting for the employer involves: (1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in the financial statements

The pension fund or plan is the entity which receives the contributions from the employer, ters the pension assets, and makes the benefit payments to the pension recipients Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients Accounting for the pension costs and obligations of the employer is the topic of this chapter; accounting for the pension fund is not

adminis-**4. When the term ―fund‖ is used as a noun, it refers to assets accumulated in the hands of a funding agency for the purpose of meeting pension benefits when they become due When the term ―fund‖ is used as a verb, it means to pay over to a funding agency (as to fund future pension benefits or to fund pension cost)

**5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to meet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pen-sion plan that must be reported (costs, liabilities and assets) In order to determine the company’s pension obligation, the actuary must first determine the expected benefits that will be paid in the future To accomplish this requires the actuary to make actuarial assumptions, which are esti-mates of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disablement and retirement, changes in compensation, and changes in discount rates to reflect the time value of money

**6. In measuring the amount of pension benefits under a defined benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates,

Questions Chapter 20 (Continued)

**7. One measure of the pension obligation is the vested benefit obligation. This measure uses only current salary levels and includes only vested benefits; that is, benefits the employee is already entitled to receive even if the employee renders no additional services under the plan

A company’s accumulated benefit obligation is the actuarial present value of benefits attributed

by the pension benefit formula to service before a specified date and is based on employee service and compensation prior to that date The accumulated benefit obligation differs from the projected benefit obligation in that it includes no assumption about future compensation levels The defined benefit obligation is based on vested and nonvested services using future salaries

**8 Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by the employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis

Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees

Not infrequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period Cash-basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year Funding is a matter of financial management, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations

* 9. The five components of pension expense are:

(1) Service cost component—the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period

(2) Interest cost component—the increase in the defined benefit obligation as a result of the passage of time

(3) Actual return on plan assets component—the reduction in pension cost for actual investment income from plan assets and the change in the fair value of plan assets

(4) Amortization of past service cost—the cost of retroactive benefits granted in a plan amendment (including initiation of a plan)

(5) Gains and losses—a change in the value of either the defined benefit obligation or the plan assets resulting from experience different from that assumed or expected or from a change

in an actuarial assumption

Note to instructor: Regarding return on plan assets, the final component is expected rate of return We are assuming above that an adjustment is made to the actual return to determine expected return

*10. The service cost component of pension expense is determined as the actuarial present value

of benefits attributed by the pension benefit formula to employee service during the period The plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period The IASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them

11. The interest component is the interest for the period on the defined benefit obligation outstanding during the period The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates) Other rates of return on high-quality fixed-income investments might also be employed

benefits granted in a plan amendment or initiation of a pension plan The cost of the retroactive benefits is the increase in the defined benefit obligation at the date of the amendment

*13. When a defined benefit plan is either initiated or amended, credit is often given to employees for years of service provided before the date of initiation or amendment The cost of these retroactive benefits are referred to as past service costs. Employers grant retroactive benefits because they expect to receive benefits in the future As a result, past service cost should not be recognized as pension expense entirely in the year of amendment or initiation, but should be recognized during the service periods of those employees who are expected to receive benefits under the plan Consequently, unrecognized past service cost is amortized over the remaining average period to vesting of employees who will receive benefits and is a component of net periodic pension expense each period

*14 Liability gains and losses are unexpected gains or losses from changes in the defined benefit obligation Liability gains (resulting from unexpected decreases) and liability losses (resulting from unexpected increases) are deferred and combined in the Unrecognized Net Gain or Loss account They are accumulated from year to year in a memo record account

*15. If pension expense recognized in a period exceeds the current amount funded, a liability account referred to as Pension Liability arises; the account would be reported either as a current or non-current liability, depending on the ultimate date of payment

If the current amount funded exceeds the amount recognized as pension expense, an asset account referred to as Pension Asset arises; the account would be reported as a current asset if

it is current in nature; if non-current, it would be reported in the other assets section Often, one general account is used referred to as Pension Asset/Liability If it has a credit balance, it is identified as a liability; if a debit balance, it is an asset

*16. Computation of actual return on plan assets

Deduct: Contributions to plan during the period $1,000,000

*17. An asset gain occurs when the actual return on the plan assets is greater than the expected return on plan assets while an asset loss occurs when the actual return is less than the expected return on the plan assets A liability gain results from unexpected decreases in the pension obligation and a liability loss results from unexpected increases in the pension obligation

*18 Corridor amortization occurs when the accumulated unrecognized net gain or loss balance gets too large The gain or loss is too large when it exceeds the arbitrarily selected IASB criterion of 10% of the larger of the beginning balances of the defined benefit obligation or the fair value of the plan assets The excess unrecognized gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits

Questions Chapter 20 (Continued)

**19. The IASB allows companies to immediately recognize actuarial gains and losses If a company

chooses immediate recognition, the actuarial gain or loss can either adjust net income or other comprehensive income

*20. No, Bill is not correct Companies may use the corridor approach or the immediate recognition approach to recognize actuarial gains and losses The amount of actuarial gains (losses) recognized under the two approaches will differ

*21. Jacob Inc would report a pension liability of €27,000 (€125,000 – €98,000)

*22. Joshua Co would report a pension liability of £74,300 (£335,000 – £245,000 – £24,000 + £8,300)

*23. (a) A contributory plan is a pension plan under which employees contribute part of the cost

In some contributory plans, employees wishing to be covered must contribute; in other contributory plans, employee contributions result in increased benefits

(b) Vested benefits are benefits for which the employee’s right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer

(c) Retroactive benefits are benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment

*24. Compromises by the IASB to full capitalization or recognition in the financial statements of relevant pension data resulted in nonrecognition of the defined benefit obligation, plan assets, past service cost, and gains and losses These unrecognized items are disclosed in a separate schedule in such a way that the total obligation and funded status (either over- or underfunded)

of the pension plan are reconciled to the pension asset/liability reported in the statement of financial position by acknowledging the unrecognized pension elements (plan assets, past service cost, and deferred gains and losses)

25 Postretirement benefits other than pensions include healthcare and other welfare benefits provided to retirees, their spouses, dependents, and beneficiaries The other welfare benefits include life insurance offered outside a pension plan, dental care as well as medical care, eye care, legal and tax services, tuition assistance, day care, and housing activities

26. The major differences between pension benefits and postretirement benefits are listed below: Differences between Postretirement Healthcare Benefits and Pensions

Benefit Well-defined and level dollar amount Generally uncapped and great

Predictability Variables are reasonably predictable Utilization difficult to predict

Level of cost varies geographically and fluctuates over time

Additionally, although healthcare benefits are generally covered by the fiduciary and reporting standards for employee benefit funds, in many jurisdictions the stringent minimum vesting, participation, and funding standards that apply to pensions do not apply to healthcare benefits

isolated event, such as the closing of a plant, discontinuance of an operation, or termination or suspension of a plan Curtailments are often linked with a restructuring of operations

A settlement occurs when a company enters into a transaction that eliminates all further obligations for part or all of the benefits provided under a defined benefit plan For example, by making a lump-sum cash payment to participants in a defined pension plan in exchange for their rights to receive specified benefits in the future, a settlement has occurred

28. Companies recognize gains or losses on the curtailment or settlement of a defined benefit plan when the curtailment or settlement occurs The gain or loss on a curtailment or settlement is comprised of the following: (1) any resulting change in the present value of the defined benefit obligation, (2) any resulting change in the fair value of the plan assets, and (3) any related actuarial gains and losses and past service cost that had not been previously recognized

Where a curtailment relates to only some of the employees covered by a plan, or where only part

29. The underlying concepts for the accounting for postretirement benefits are similar between U.S GAAP and IFRS—both U.S GAAP and IFRS view pensions and other postretirement benefits as forms of deferred compensation Other similarities include: (1) IFRS and U.S GAAP separate pension plans into defined contribution plans and defined benefit plans The accounting for defined contribution plans is similar (2) Both IFRS and U.S GAAP compute unrecognized past service costs (PSC) in the same manner (3) Both use corridor amortization for recognition on pension gains and losses

Differences include: (1) IFRS recognizes any vested PSC amounts immediately and spreads unvested amounts over the average remaining period to vesting U.S GAAP amortizes PSC over the remaining service lives of employees (2) 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 U.S GAAP does not permit choice—using corridor amortization, actuarial gains and losses are recognized in ―Accumulated other comprehensive income‖ and amortized to income over remaining service lives (3) For defined benefit plans, U.S 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 gain or loss (4) The accounting for pensions and other postretirement benefit plans is the same under IFRS U.S GAAP has separate standards for these types of benefits, and significant differences exist in the accounting

Questions Chapter 20 (Continued)

30. The IASB and the FASB are working collaboratively on a postretirement benefits project The FASB has issued GAAP rules addressing the recognition of the funded status of benefit plans in financial statements The FASB has begun work on the second phase of the project, which will reexamine expense measurement of postretirement benefit plans The IASB also has added a project in this area but on a different schedule The IASB has already issued an exposure draft

on expense measurement in pension plans It is unclear whether the Boards’ differences in schedule will lead to a converged standard

Service cost HK$316,000,000

BRIEF EXERCISE 20-2

Liability

Defined Benefit Obligation

Plan Assets

BRIEF EXERCISE 20-4

Pension Expense 61,000,000

Pension Asset/Liability 9,000,000 Cash 52,000,000

benefit plan 750

BRIEF EXERCISE 20-9

BRIEF EXERCISE 20-12

Unrecognized past service costs (Debit) (€80 X 20) (16)

Pension Asset/Liability 170

Gain on Curtailment 170

*(€180 – €10 – €16)

(a) Computation of pension expense:

(b) Pension Expense 106,000

Cash 95,000 Pension Asset/Liability 11,000

EXERCISE 20-2 (5–10 minutes)

Computation of pension expense:

Annual Pension Expense Cash

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost Balance, January 1, 2010 10,000 Cr 800,000 Cr 640,000 Dr 150,000 Dr

Defined benefit obligation €(930,000 )

Plan assets at fair value 769,000

Unrecognized past service cost 140,000

Pension asset/liability € (21,000 )

*Note: We show actual return on the worksheet to ensure that plan assets are properly reported If expected and

actual return differ, then an additional adjustment is made to compute the proper amount of pension expense

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

EXERCISE 20-5 (5–10 minutes)

Plan B PSC amortization €318,000 ÷ 6 = €53,000

Plan A PSC amortization €(160,000) ÷ 5 = (32,000)

Total PSC amortization for 2010 €21,000

Merkel‘s pension expense in 2010 and 2011 would be increased by the

€21,000 PSC amortization

EXERCISE 20-6 (10–15 minutes)

Computation of Actual Return on Plan Assets

Deduct: Contributions to plan during 2010 $250,000

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost

(a) Prior service cost 100,000 Cr _ 100,000 Dr

New balance, January 1, 2010 13,800 Cr 660,000 Cr 546,200 Dr 100,000 Dr

EXERCISE 20-8 (20–25 minutes)

Corridor and Minimum Loss Amortization

Year

Defined Benefit Obligation (a)

Plan Asset Value (a)

10%

Corridor

Cumulative Unrecognized Net Loss (a)

Minimum Amortization

(b) The following schedule reconciles the funded status of the plan with the amount reported in the statement of financial position at December 31, 2010:

(a) Buhl Corp

Pension Worksheet

Items

Annual Pension

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost

Unrecognized Net Gain

(b) Pension Expense 132,000

Pension Asset/Liability 13,000*

Cash 145,000 (To record pension expense and

Amortization of unrecognized net gain or loss 0

Pension Asset/Liability 62,000 (To record pension expense and

Note to instructor: To prove the amounts reported, a worksheet might be prepared as follows:

Annual Pension

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost

Unrecognized Net Gain

*This number is a plug as the problem states there is no unrecognized gain or loss

**Note: We show actual return on the worksheet to ensure that plan assets are properly reported If expected and actual

return differ, then an additional adjustment is made to compute the proper amount of pension expense

December 31, 2010 £2,620 Deduct: Fair value of plan assets,

(b) Computation of pension liability gains and losses and pension asset gains and losses

1 Difference between 12/31/10 actuarially computed DBO and 12/31/11 recorded defined benefit obligation (DBO):

DBO per memo records:

2 Difference between actual fair value of plan assets and

expected fair value:

12/31/10 actual fair value

Expected fair value

1/1/10 fair value of plan assets £1,700

Add expected return

(c) Because no unrecognized net gain or loss existed at the beginning of the period, no amortization occurs Therefore, the corridor calculation is not needed An example of how the corridor would have been computed

is illustrated on the next page, assuming an unrecognized net loss of

EXERCISE 20-13 (Continued)

Beginning-of-the-Year

Plan Assets (FV)

10%

Corridor

Unrecognized Net Loss

Loss Amortization

(d) Past service cost amortization: £1,100 X 1/10 = £110 per year

(e) Pension expense for 2010:

(f) Reconciliation schedule:

Pension Asset/

Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost

Unrecognized Net Gain

EXERCISE 20-17 (20–25 minutes)

(a) Actuarial present value of benefit obligations:

Past service cost not yet recognized

(c) The past service cost not yet recognized in periodic expense should

be deducted from the defined benefit obligation in excess of plan assets (funded status) because, for accounting purposes, it has not been recognized As a result, the liability for accounting purposes is lower, and, therefore, to reconcile to this lower number, the past service cost not yet recognized must be deducted

The unrecognized loss has either increased the defined benefit tion or decreased the fair value of the plan assets, but has not been recognized for accounting purposes As a result, the accounting obliga- tion is lower by this amount In reconciling from the funded status to the accounting liability, this unrecognized loss must be deducted

obliga-remaining service period of employees

Amortization of Unrecognized Net (Gain) or Loss (Gain) or Loss For the Year

Plan Assets (a) Corridor (b)

Cumulative Unrecognized (Gain) Loss (a)

Minimum Amortization

(b) The corridor is 10 percent of the greater of defined benefit obligation or

plan assets

(c) $780,000 – $498,000 = $282,000; $282,000/14 = $20,143

(d) $780,000 – $20,143 – $210,000 = $549,857

(e) $549,857 – $425,000 = $124,857; $124,857/14 = $8,918

(b) Compare to results in (a),

2010 pension expense: No difference compared to (a)

2011 pension expense: No difference compared to (a)

2012 pension expense: $20,143 lower

2013 pension expense: $8,918 lower

EXERCISE 20-19 (30–40 minutes)

(a)

Year

Unrecognized Past Service Cost Amortized

EXERCISE 20-19 (Continued)

(b) The excess of the cumulative unrecognized net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service life per employee The average service period to vesting

10%

Corridor (b)

Cumulative Unrecognized (Gain) Loss (a)

Minimum Amortization of (Gain) Loss

2010 $2,800,000 $1,700,000 $280,000 ( $ 0 $ –0–

2011 3,650,000 2,900,000 365,000 101,000 –0– (c) (a) As of the beginning of the year

(b) The corridor is 10 percent of the greater of the defined benefit obligation or plan assets

(c) $365,000 is greater than $101,000; therefore, no amortization

(c) Pension expense for 2010 composed of the following:

EXERCISE 20-20 (10–12 minutes)

EXERCISE 20-21 (15–20 minutes)

See worksheet on next page

EXERCISE 20-22 (10–15 minutes)

Marvelous Marvin Co

Postretirement Benefits Worksheet—2010

Items

Annual Post- retirement Expense Cash

Postretirement Benefit Liability

Defined Benefit Obligation

Plan Assets

Unrecognized Past Service Cost

Journal entry for 2010 103,900 Dr 16,000 Cr 87,900 Cr

years’ pension transactions accompanied with a reconciliation schedule at the end of the second year Included in the problem are an unexpected loss and past service cost amortization

Problem 20-2 (Time 45–55 minutes)

Purpose—to provide a problem that requires preparation of a pension worksheet for three separate years’ pension transactions, three years of general journal entries for the pension plan, and a reconciliation schedule at the end of each year

Problem 20-3 (Time 40–50 minutes)

Purpose—to provide a problem that requires computation of the annual pension expense, preparation

of the pension journal entry, measurement of unrecognized gains and losses and their amortization, and preparation of a reconciliation schedule

Problem 20-4 (Time 30–40 minutes)

Purpose—to provide a problem that requires computation of pension expense and preparation of the pension journal entry

Problem 20-5 (Time 45–55 minutes)

Purpose—to provide a problem that requires computation of the pension expense for three separate years and the preparation of the pension journal entry for three years

Problem 20-6 (Time 45–60 minutes)

Purpose—to provide a problem that requires computation and amortization of unrecognized past service cost, computation of pension expense, preparation of pension journal entry, and preparation of

a reconciliation schedule

Problem 20-7 (Time 35–45 minutes)

Purpose—to provide a problem that requires the preparation of a worksheet that shows the journal entry for pension expense

Problem 20-8 (Time 45–60 minutes)

Purpose—to provide a problem that requires preparation of a comprehensive worksheet for two years, covering all facets of pension accounting

Problem 20-9 (Time 40–45 minutes)

Purpose—to provide a problem that requires preparation of a worksheet for two years, journal entries, and a schedule reconciling funded status to pension asset/liability

Problem 20-10 (Time 30–35 minutes)

Purpose—to provide a problem that requires preparation of a worksheet and a reconciliation schedule for postretirement benefit expense