University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
Views:

386

Pages:

21
Author:

Deckungsqzu

Pensions and Other Postretirement Benefits Part 2 Chapter 17 17-23 Pension Plan Assets The pension plan assets are not reported separately in the balance sheet but are netted together with the PBO to report either a net pension asset (debit balance) or a net pension liability (credit balance). The higher the expected return on plan assets, the less the employer must actually contribute. On the other hand, a relatively low expected return means the difference must be made up by higher contributions. 17-24 Pension Plan Assets Global Communications funds its defined benefit pension plan by contributing the year’s service cost plus a portion of the prior service cost each year. Cash of $48 million was contributed to the pension fund in 2013. Plan assets at the beginning of 2013 were valued at $300 million. The expected rate of return on the investment of those assets was 9%, but the actual return in 2011 was 10%. Retirement benefits of $38 million were paid at the end of 2013 to retired employees. The plan assets at the end of 2013 will be: 17-25 Funded Status of the Pension Plan OVERFUNDED Market value of plan assets exceeds the actuarial present value of all benefits earned by participants. UNDERFUNDED Market value of plan assets is below the actuarial present value of all benefits earned by participants. Reporting the Funded Status of Pension Plan Projected Benefit Obligation (PBO) - Plan Assets at Fair Value Underfunded / Overfunded Status This amount is reported in the balance sheet as a Pension Liability or Pension Asset. 17-26 The Relationship Between Pension Expense and Changes in the PBO and Plan Assets 17-27 17-28 Service Cost Actuaries have determined that Global Communications has service cost of $41 million in 2013. Global's 2013 Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 17-29 Interest Cost Interest cost is calculated as: PBOBeg × Discount rate Global had PBO of $400 million on 1/1/13. The actuary uses a discount rate of 6%. Global's 2013 Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 24 2013 Interest Cost PBO 1/1/13 $400,000,000 × 6% = $24,000,000 17-30 Return on Plan Assets The plan trustee reports that plan assets were $300 million on 1/1/13. The trustee uses an expected return of 9% and the actual return is 10%. Global's 2013 Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 24 (27) 17-31 Amortization of Prior Service Cost In 2012, Global Communications amended the pension plan, increasing the PBO at that time. For all plan participants, the prior service cost was $60 million at 1/1/12. The average remaining service life of the active employee group is 15 years. $60 million PSC ÷ 15 = $4 million per year Global's 2013 Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 24 (27) 4 17-32 Gains and Losses Projected Benefits Return on Plan Obligation Assets Higher than Expected Low er than Expected Loss Gain Gain Loss Only if a net gain or net loss exceeds the “corridor” is a charge to pension expense allowed. 17-33 Corridor Amount The corridor amount is 10% of the greater of PBO at the beginning of the period. Or Fair value of plan assets at the beginning of the period. 17-34 Gains and Losses If the beginning net unrecognized gain or loss exceeds the corridor amount, amortization is recognized using the following formula . . . Net unrecognized gain or loss Corridor ‫־‬ at beginning of year amount Average remaining service period of active employees expected to receive benefits under the plan 17-35 Gains and Losses Net loss Corridor amount ($400 x 10%) Excess at the beginning of the year $ $ $15 million ÷ 15 years = $1 million 55 40 15 17-36 Determining Pension Expense Global's 2013 Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 24 (27) 4 1 $ 43 17-37 Recording Gains and Losses For 2013, the actual return on plan assets exceeded the expected return by $3 million. In addition, there was a $23 million loss from changes made by the actuary when it revised its estimate of future salary levels causing its PBO estimate to increase. Global would make the following journal entry to record the gain and loss: Loss—OCI PBO Plan assets Gain—OCI ($ in millions) 23 23 3 OCI = Other comprehensive income 3 17-38 Record Pension Expense ($ in millions) Pension expense (calculated below) Plan assets ($27 expected return on assets) PBO ($41 service cost + $24 interest cost) Prior service cost–AOCI Net loss–AOCI 43 27 OCI = Other comprehensive income 65 4 1  Service cost and interest cost add to Global’s PBO.   The return on plan assets adds to the plan assets. Amortization of prior service and net loss reduce each account. Global's Pension Expense Service cost Interest cost Expected return on the plan assets Amortization of prior service cost Amortization of net loss Pension expense ($ in millions) $ 41 24 (27) 4 1 $ 43 17-39 Recording the Funding of Plan Assets When Global adds its annual cash investment of $48 million to its plan assets, the value of those plan assets increases by $48 million. ($ in millions) Plan assets 48 48 Cash (contribution to plan assets) It’s not unusual for the cash contribution to differ from that year’s pension expense. After all, determining the periodic pension expense and the funding of the pension plan are two separate processes. 17-40 Recording the Funding of Plan Assets Global pays $38 million in retirement pension benefits. ($ in millions) PBO 38 38 Plan assets (payments to retired employees) 17-41 U. S. GAAP vs. IFRS Important differences in accounting for actuarial gains and losses using U.S. GAAP and IFRS.  Gains and losses are the difference between the actual and expected returns, where the expected return is different from company to company and usually different from the interest rate used to determine the interest cost.  Requires that we use the same rate (the rate for “high -grade corporate bonds”) for both the interest cost on the defined benefit obligation (called projected benefit obligation or PBO under GAAP) and the interest revenue on the plan assets. 17-42 U. S. GAAP vs. IFRS Important differences in accounting for actuarial gains and losses using U.S. GAAP and IFRS.  Requires that gains and losses are to be (a) included among OCI items in the statement of comprehensive income when they first arise and then (b) gradually amortized or recycled out of OCI and into expense (when the accumulated net gain or net loss exceeds the 10% threshold).  Gains and losses are included in OCI when they first arise, but unlike U.S. GAAP those amounts are not subsequently amortized out of OCI and into expense. Instead, under IFRS those amounts remain in the balance sheet as accumulated other comprehensive income.