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ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 19
Pensions and
Other Employee
Future Benefits
Prepared by:
CHAPTE
19
R
Defined Benefit
Pension Plans
The employers
obligation
Plan assets
Funded status
Defined benefit cost
components and the
immediate recognition
approach
Other defined benefit
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
Benefit Plans
Three examples of benefit plans:
1. Pension and other post-retirement plans (e.g.
health care and life insurance)
2. Post-employment benefit plans (e.g.
severance benefits and long-term disability
benefits)
3. Compensated absences (e.g. parental leaves,
unrestricted sabbatical leaves)
EMPLOYER
$
Fund
Assets
Pension Terminology
Funded
Employer sets aside money for future pension
benefits in a separate legal entity
Contributory
Employee and employer make contributions to the
plan
Non-contributory
Employers bear the full cost of the pension plan
No contributions made by employee
Pension Plans
The two most common types of pension plans
are:
1. Defined contribution (DC) plans
2. Defined benefit (DB) plans
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Defined Benefit
Pension Plans
The employers
obligation
Plan assets
Funded status
Defined benefit cost
components and the
immediate recognition
approach
Other defined benefit
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
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Interest Cost
Interest accrues on the DBO as time passes
Similar to discounted debt
Settlement rate
Implied rate on insurance contract that would
effectively settle pension obligation
Allowed under ASPE
Copyright John Wiley & Sons Canada,
Ltd.
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Plan Assets
Plan assets, fair value at beginning
+ Contributions
+/- Actual return
- Benefits paid to retirees
.
= Plan assets, fair value at end of period
* Actual return = Expected return +
remeasurement gain on assets or
remeasurement actuarial loss on assets
Copyright John Wiley & Sons Canada,
Ltd.
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Contributions
Contributions are made each year by:
The employer
The employees (if applicable)
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Funded Status
Defined Benefit Obligation (DBO)
- Fair Value of plan assets
= Funded status
DBO > Plan assets = underfunded =
funded status liability
DBO < Plan assets = overfunded = funded
status asset
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Immediate Recognition
Approach
Statement of Financial Position Presentation
DBO and fund assets are off-balance
sheet or memo accounts
Under IFRS, the net employee benefit or
liability is reported
Under ASPE, the net employee benefit or
liability is reported based on the funded
status of the plan
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Immediate Recognition
Approach
Income Statement Presentation
Pension expense is made up of:
Current service cost
Interest cost
Actual return on plan assets
Under IFRS, this amount is allocated between net
income (interest amounts) and OCI (remeasurements)
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Immediate Recognition
Approach Example (2013)
General Journal Entries
Items
Annual
Pension
Expense
Cash
Net
Defined
Benefit
Liability/
Asset
0
Memo Record
Defined
Benefit
Obligation
100,000 Cr.
a) Service cost
9,000 Dr.
9,000 Cr.
b) Interest cost
10,000 Dr
10,000 Cr.
c) Actual return
10,000 Cr.
d) Contributions
8,000 Cr.
8,000 Dr.
7,000 Dr.
9,000 Dr.
100,000 Dr.
10,000 Dr.
e) Benefits paid
Expense entry, 2013
Contribution entry,
2013
Plan Assets
7,000 Cr.
9,000 Cr.
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Immediate Recognition
Approach Example (2013)
To record expense:
Pension Expense
9,000
Net Defined Benefit Liability/Asset
9,000
To record contribution:
Net Defined Benefit Liability/Asset 8,000
Cash
8,000
Copyright John Wiley & Sons Canada,
Ltd.
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Immediate Recognition
Approach Example (2014)
General Journal Entries
Items
Annual
Pension
Expense
Cash
Memo Record
112,000 Cr.
80,000 Dr.
80,000 Cr.
g) Service cost
9,500 Dr.
9,500 Cr.
h) Interest cost
19,200 Dr
19,200 Cr.
i) Actual return
11,100 Cr.
j) Contributions
20,000 Cr.
20,000 Dr.
8,000 Dr.
97,600 Dr.
111,000 Dr.
11,100 Dr.
k) Benefits paid
Expense entry, 2014
Plan Assets
8,000 Cr.
97,600 Cr.
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Immediate Recognition
Approach Example (2014)
To record expense:
Pension Expense
97,600
Net Defined Benefit Liability/Asset
97,600
To record contribution:
Net Defined Benefit Liability/Asset 20,000
Cash
20,000
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Immediate Recognition
Approach Example (2015:
ASPE)
General Journal Entries
Items
Annual
Pension
Expense
Cash
Memo Record
78,600 Cr.
212,700 Cr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Actual return
12,000 Cr.
o) Contributions
24,000 Dr.
p) Benefits paid
10,500 Dr.
28,530 Dr.
50,800 Dr.
134,100 Dr.
12,000 Dr.
24,000 Cr.
q) Actuarial loss
Plan Assets
10,500 Cr.
28,530 Cr.
50,800 Cr.
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Immediate Recognition
Approach Example (2015:
ASPE)
To record expense:
Pension Expense
50,800
Net Defined Benefit Liability/Asset
50,800
To record contribution:
Net Defined Benefit Liability/Asset 24,000
Cash
24,000
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Immediate Recognition
Approach Example (2015:
IFRS)
General Journal Entries
Items
Remeasurement (Gain)
Loss OCI
Annual
Pension
Expense
Cash
Memo Record
78,600 Cr.
212,700 Cr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Expected return
14,610 Cr.
o) Remeasurement loss
Plan Assets
134,100 Dr.
14,610 Dr.
2,610 Dr.
2,610 Cr.
p) Contributions
24,000 Cr.
q) Benefits paid
24,000 Dr.
10,500 Dr.
r) Liability loss
28,530 Dr.
Copyright
John
Canada,
31,140 Dr.
19,660
Dr. Wiley & Sons50,800
Cr.
Ltd.
10,500 Cr.
28,530 Cr.
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Immediate Recognition
Approach Example (2015:
IFRS)
To record expense:
Pension Expense
19,660
Remeasurement Loss (OCI) 31,140
Net Defined Benefit Liability/Asset
50,800
To record contribution:
Net Defined Benefit Liability/Asset 24,000
Cash
24,000
Copyright John Wiley & Sons Canada,
Ltd.
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Valuation of Accrued
Benefit Asset
Accrued benefit asset cannot exceed
expected future benefits (valuation
allowance may be necessary to reduce
the value on statement of financial
position)
Referred to as the asset ceiling test
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with
Benefits that Vest or
Accumulate
Accrual accounting is appropriate for post-retirement
benefits, post-employment benefits and long-term
compensated absences
Example: post-retirement health care benefits
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Defined Benefit
Pension Plans
The employers
obligation
Plan assets
Funded status
Defined benefit cost
components and the
immediate recognition
approach
Other defined benefit
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
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Presentation
Defined benefit assets/liabilities
Generally reported separately for each benefit
plan (unless all plans result in asset or
liability)
Generally classified as long-term
Benefit costs
Components of benefit costs may be reported
together or separately on the income
statement
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Disclosure Requirements
Disclosures under ASPE include:
Description of each plan and any major
changes in terms during the year
Information on most recent actuarial valuation
for funding purposes
Funded status at year end (including FV of
plan assets and ABO)
Explanation of differences between funded
status and amounts recorded on balance
sheet
Copyright John Wiley & Sons Canada,
Ltd.
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Disclosure Requirements
Additional disclosure requirements under IFRS
include:
Characteristics of defined benefit plans and related
risks
Amounts included in statements from the plans
How the plans help with cash flow management
Reconciliations of beginning to ending balances of PV
of the net defined benefit liability/asset, plan assets
and DBO
Amounts included in periodic net income and OCI
Underlying assumptions and sensitivity information
Many others such as the estimate of following years
expected funding contributions
Copyright John Wiley & Sons Canada,
Ltd.
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Analysis
Analysis generally focuses on predicting
future cash flow obligations
It is very important to validate the major
assumptions underlying the fund status
and future cash requirements, especially
Discount rate used to measure DBO
Current service cost
Interest cost
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Defined Benefit
Pension Plans
The employers
obligation
Plan assets
Funded status
Defined benefit cost
components and the
immediate recognition
approach
Other defined benefit
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
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Looking Ahead
Recent changes to IFRS has created
additional differences between IFRS and
ASPE
Expected replacement of the ASPE pension
section is expected to take these differences
into account
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COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All
rights reserved. Reproduction or translation of this
work beyond that permitted by Access Copyright (The
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to the Permissions Department, John Wiley & Sons
Canada, Ltd. The purchaser may make back-up copies
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responsibility for errors, omissions, or damages
caused by the use of these programs or from the use
of the information contained herein.
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