Concept Review Solutions

CHAPTER 18: PENSIONS AND OTHER POST-RETIREMENT BENEFITS

PAGE 1043

1. Examples of postretirement benefits other than pensions include extended health care and life insurance.

2. A defined contribution pension plan isone in which the employer (often the employee as well) makes agreed-upon cash contributions. The pension the employee actually receives is a function of the investment success of the pension fund. A defined benefit pension plan isone in which the benefits received by the employee are stated in the pension plan (therefore, not contingent on the investment success of the pension fund). In a defined benefit plan the contributions are variable while the benefits are fixed. In a defined contribution plan the contributions are fixed while the benefits are variable.

3. A trusteeship is critical for accounting because it means the assets are beyond the control of the company and therefore neither the plan assets nor liabilities are reported on the company’s SFP.

4. If an employee’s pension rights are not vested, should the employment be terminated he/she has no rights to receive a pension.

5. If a plan is non-contributory only the employer makes contributions to the plan.

Page 1050

1. The three basic actuarial cost methods are the accumulated benefit method, the projected unit credit (projected benefit) method, and the level contribution method. All of these methods require projections for life expectancy and expected return on the investment of the pension assets. Under the projected unit credit method, a projection of the employee’s salary at the retirement date is required. Under the level contribution method, projections are required for both the final salary and the total years of service.

2. The actuarial method required for accounting measurements for a defined benefit plan is the projected unit credit (projected benefit) method.

3. The accrued pension liability represents the difference between the accounting expense and the amount of cash contributed to the pension plan (funding). While these accounts may create the perception of underfunding or overfunding of the pension plan, the nature of these accounts is that they are purely the result of using different measurements for different purposes (i.e., accounting vs. funding).

Page 1057

1. The five components that are typically part of pension expense are the current service cost, interest on the defined benefit obligation, expected earnings on pension assets, past service cost from plan initiation or amendment, and the actuarial losses and gains.

2. Past service costs arise as the result of granting pension entitlements to employees for employment services rendered prior to the initiation of the plan or as a result of a pension plan amendment.

3. Actuarial gains and losses may be recognized using one of the following alternative methods:

Amortization through pension expense using the 10% corridor approach
Amortization through pension expense using any systematic method that is faster than the corridor approach
Immediate recognition through pension expense; or
Immediate recognition through reserves, with the annual change reported in comprehensive income.

4. The period of amortization of actuarial gains/losses exceeding the “10% corridor” is the average remaining service period (ARSP) of employee participants.

5. The accrued pension asset or liability is the sum of: the defined benefit obligation of the pension plan, less pension plan assets, less any unrecognized past service costs, less any unrecognized actuarial gains or losses.

Page 1065

1. Expected return on pension assets reduces pension expense.

2. The 10% corridor is calculated as the greater of: (1) the defined benefit obligation at the beginning of the year, or (2) the fair value of plan assets at the beginning of the year. If the cumulative gains or losses are greater than the corridor, only the excess is amortized.

3. Benefit payments to employees reduce both the value of plan assets and the accrued pension obligation.

4. Newly arising actuarial losses increase both the unamortized actuarial loss and the accrued pension obligation.

Page 1066

1. Losses or gains from plan settlements and curtailments and termination benefits not reported as part of the pension expense on the income statement may appear instead as part of the charge for discontinued operations (shown on the income statement as a separate line item below operating earnings) or an unusual item if part of a restructuring plan.

2. A company will use a valuation allowance on potentially over-valued assets in order to limit the carrying value of any accrued pension asset to the amount of the expected future benefit.

PAGE 1073

1. Arguments in favour of recording the net status of a pension plan, without netting unrecognized amounts, include:

1. The net position of the plan appears to meet the definition of a liability, since it is based on a past transaction, and it represents a probable sacrifice of future benefits.

2. Pension amounts are subject to certain estimates, but these estimates can be made in reliable enough form that recognition is appropriate.

3. Analysts and others may react differently to the underfunded status of a plan if it were recorded in the SFP, compared with being disclosed in the notes. In such a case, disclosure is not a good substitute for recognition.

2. The five continuing components of the expense for a post-retirement benefit are:

current service cost

plus interest on the OPEB obligation

minus expected earnings on segregated fund assets, if any

plus recognition of past service costs

plus or minus recognition of actuarial gains or losses

3. In connection with pensions, the financial statements include only the amount of expense on the income statement and the net accrued pension asset or liability on the SFP. These amounts provide little information about the nature of the pensions and the manner in which they are being recognized. Accordingly, increased disclosure is essential.

Concept Review Solutions Intermediate Accounting, 5e, Volume 2