Chapter 17 Employee Compensation Payroll, … · Chapter 17 Employee Compensation— Payroll, Pensions, ... Social security and income tax legislation impose five taxes ... Accounting

17-1

1. Payroll and payroll taxes

2. Performance bonuses and postemployment

benefits

3. Employer pension plans including the details of

defined benefit plans

4. Compute the periodic expense and the impact on

other comprehensive income

5. Required disclosures and the accounting treatment

for pension settlements and curtailments

6. The differences in accounting for pensions and

postretirement benefits other than pensions

Chapter 17 Employee Compensation—

Payroll, Pensions, and Other

Compensation Issues

17-2 17-2

17-3

Payroll and Payroll Taxes

1. Federal old-age, survivors’, and disability (tax to both the

employee and employer)

2. Federal hospital insurance (tax to both employer and

employee)

3. Federal unemployment insurance (tax to employer only)

4. State unemployment insurance tax (tax to employer

only)

5. Individual income tax (tax to employee only but withheld

and paid by employer)

Social security and income tax legislation impose five taxes

based on payrolls:

1. Account for payroll and payroll taxes, and

understand the criteria for recognizing a liability

associated with compensated absences

17-4

Federal Old-Age, Survivors’, and Disability Tax

• The Federal Insurance Contributions Act (FICA) provides for FICA taxes from both employers and employees to provide funds for federal old-age, survivors’, and disability benefits for certain individuals and members of their families.

• The employer is required to withhold FICA taxes from each employee’s wages.

• In 2013, annual wages up to $113,700 were subject to 6.20% for FICA tax.

17-5

• The Federal Insurance Contribution Act

(FICA) also includes a provision for Medicare

tax.

• This tax differs from the tax previously

discussed in that the tax is applied to all

wages earned; there is no upper limit.

• The tax rate for 2013 was 1.45% for both

employer and employee.

Federal Hospital Insurance

17-6

Federal Unemployment Insurance

• The Federal Social Security Act and the

Federal Unemployment Tax Act (FUTA)

provide for the establishment of

unemployment insurance plans.

• Employers with insured workers employed in

each of 20 weeks during a calendar year or

who pay $1,500 or more in wages during a

calendar quarter are affected.

(continued)

17-7

• Tax rate on the first $7,000 of wages earned has

been 6.2% since 1985.

• Employer can apply for a credit limited to 5.4%

for taxes paid on state unemployment tax,

effectively reducing the federal tax to 0.8%

(6.2% – 5.4%).

• No tax is levied on the employee.

• Payment to the federal government is required

quarterly.

Federal Unemployment Insurance

17-8

State Unemployment Insurance

• State unemployment compensation laws

(SUTA) are not the same in all states. In most

states, laws call for tax only on employers, but

a few states tax both employer and employee.

• Although the normal rate on employers may

be 5.4%, states have merit rating or

experience plans providing for lower rates

based on employer’s individual employment

experiences.

17-9

Income Tax

• Federal income taxes on the wages of individuals are

collected in the period in which the wages are paid.

• The “pay-as-you-go” plan requires employers to

withhold income tax from wages paid to their

employees.

• Most states and many local governments also impose

income taxes on the earnings of employees that the

employer must withhold and remit.

• Withholding is required not only of employers engaged

in a trade or business but also of religious and

charitable organizations, educational institutions, social

organizations, and governments of the United States,

the states, the territories, and their agencies,

instrumentalities, and political subdivisions.

17-10

Salaries Expense 16,000

FICA Taxes Payable 1,224

Employees Income Taxes Payable 1,600

Cash 13,176

To record payment of payroll and

related employee withholdings.

Salaries for the month of January for a retail

store are $16,000. The SUTA tax rate is 5.4%.

Withholdings are $1,600 and FICA tax rate is

7.65%. The employer records the payroll as

follows:

Accounting for Payroll Taxes

(continued)

17-11

Payroll Tax Expense 2,216

FICA Taxes Payable 1,224

State Unemployment Taxes Payable 864

Federal Unemployment Taxes

Payable 128

To record payment of payroll and related

employee withholdings.

The employer’s payroll tax entry is as follows:


(continued)

17-12

Payroll Tax Expense 583

FICA Taxes Payable 459

State Unemployment Taxes Payable 108

FUTA Payable 16

To accrue the payroll tax liability of the

employer.

The salaries and wages accrued at December 31

were $9,500. Of this amount, $2,000 was subject

to unemployment taxes and $6,000 to FICA tax.

The adjusting entry for the employer’s payroll

taxes would be as follows:


17-13

Compensated Absences

Vacations

Holidays

Illnesses

Other personal activities

• Compensated absences include payments

by employers for:

(continued)

• The longer an employee works for a

company, the longer the vacation allowed or

the more liberal the time allowed for

illnesses.

17-14

• At the end of any given period, the firm has a

liability for the earned but unused

compensated absences.

• The estimated amounts earned must be

charged against current revenue and a

liability established for that amount.

• The difficult part comes when estimating how

much should be accrued.

(continued)


17-15

The FASB, in ASC paragraphs 710-10-25-1

through 3, requires a liability to be recognized for

compensated absences that:

1. have been earned through services already

rendered

2. vest or can be carried forward to subsequent

years, and

3. are estimable and probable.


(continued)

17-16

• S&N Corporation has 20 employees who are paid an average of $700 per week. During 2012, all employees earned a total of 40 vacation weeks but took only 30 weeks of vacation that year.

• They took the remaining 10 weeks of vacation in 2013 when the average rate of pay was $800 per week.

(continued)


17-17

Wages Expense 7,000

Vacation Wages Payable 7,000 To record accrued vacation wages

($700 × 10 weeks).

Journal Entry for December 31, 2012 Journal Entry for December 31, 2012

Wages Expense 1,000

Vacation Wages Payable 7,000

Cash 8,000 To record payment at current rates of

previously earned vacation time

($800 × 10 weeks).

Journal Entry for December 31, 2013 Journal Entry for December 31, 2013


17-18

Stock-Based Compensation and Bonuses

• In addition to stock options, employees often earn

bonuses based on a company’s performance over

a given period of time.

• This additional compensation should be

recognized in the period in which it is earned.

2. Compute performance bonuses, and

recognize the issues associated with

postemployment benefits

17-19


• Photo Graphics, Inc. gives its store managers

a 10% bonus based on individual store

earnings.

• The bonus is to be based on income after

deducting the bonus, but before deducting

income taxes. Income for a particular store is

$100,000 before charging any bonus or

income taxes.

(continued)

17-20

B = 0.10($100,000 – B)

B = $10,000 – 0.10B

B + 0.10B = $10,000

1.10B = $10,000

B = $9,091 (rounded)

PROOF: B = 0.10($100,000 – B)

B = 0.10($100,000 – $9,091)

B = 0.10($90,909)

B = $9,090.90 or $9,091

PROOF: B = 0.10($100,000 – B)

B = 0.10($100,000 – $9,091)

B = 0.10($90,909)

B = $9,090.90 or $9,091


17-21

Postemployment Benefits

• Because of downsizing, an employee cannot count on remaining with one employer for his or her entire career.

• Some employees change jobs to facilitate career advancement and to enhance their family’s quality of life.

• It is common for an employee to be terminated.

• Compensation issues following employment but preceding retirement have increased in magnitude.

(continued)

17-22


• Examples of the types of benefits granted to terminated employees include: Supplemental unemployment benefits

Severance benefits

Disability-related benefits

Job training and counseling

• And, continuation of benefits such as:

Health care benefits

Life insurance coverage

17-23 17-23

17-24

Accounting for Pensions

Financing retirement years is accomplished by

establishing some type of pension plan that

sets aside funds during an employee’s working

years so that at retirement the funds and

earnings from investment of the funds may be

returned to the employee in lieu of earned

wages.

3. Understand the nature and characteristics

of employer pension plans, including the

details of defined benefit plans

17-25


In the United States, three major categories of pension plans have emerged:

1. Government plans, primarily Social Security

2. Individual plans, such as individual retirement accounts (IRAs)

3. Employer plans

(continued)

17-26

Postretirement benefits other than pensions

extend benefits beyond the active years of

employment and include such items as:

• Health care

• Life insurance

• Legal services

• Special discounts on items produced or

sold by the employer

• Tuition assistance


17-27

Funding of Employer Pension Plans

• ERISA requires companies to fund their pension

plans in an orderly manner so that the employee is

protected at retirement.

• Noncontributory pension plans are funded

entirely by the employer.

• Plans where the employee also contributes to the

cost of the plan are referred to as contributory

pension plans.

There are two basic classifications of pension

plans:

1) defined contribution plan

2) defined benefit plan

17-28

• Defined contribution pension plans are relatively

simple in their construction and raise very few

accounting issues for employers.

• The employer pays a periodic contribution amount

into a separate trust fund, which is administered by

an independent third-party trustee.

• When an employee retires, the accumulated value

in the fund is used to determine the pension payout

to the employee.

• The employee’s retirement income therefore

depends on how the fund has been managed. In

effect, the investment risk is borne by the employee.

Defined Contribution Pension Plans

17-29

• Defined benefit pension plans are much

more complex than defined contribution plans.

• Under defined benefit plans, the employee is

guaranteed a specified retirement income

often related to his or her number of years of

employment and average salary over a certain

number of years.

• Because the benefits are defined, the funding

must vary as conditions change.

Defined Benefit Pension Plans

(continued)

17-30 17-30

A pension fund may be viewed essentially as funds

set aside to meet the employer’s future pension

obligation just as funds may be set aside for other

purposes.

17-31

Vesting of Pension Benefits

Vesting occurs when an employee has met

certain specified requirements and is eligible to

receive pension benefits at retirement regardless

of whether or not the employee continues

working for the employer.

17-32

Funding of Defined Benefit Plans

• The periodic amounts to be contributed to a

defined benefit plan by the employer are

directly related to the future benefits

expected to be paid to current employees.

• All funding methods are based on present

values. The additional future benefits earned

by employees each year must be discounted

to their present value, referred to as the

actuarial present value, using the assumed

rate of return on pension plan investments.

17-33

Issues in Accounting for Defined Benefit Plans

A list of issues relating to accounting and

reporting by employers follows:

1. The amount of net periodic pension expense

to be recognized on the income statement

2. The amount of pension liability or asset to be

reported on the balance sheet

3. Accounting for pension settlements,

curtailments, and terminations

4. Disclosures needed to supplement the

amounts reported in the financial statements

17-34

Simple Illustration of Pension Accounting

• Lorien Bach is 35 years old.

• She has worked for Thakkar for 10 years.

• Her salary for 2012 was $40,000.

• Pension payments begin after the employee

turns 65; payments made at the end of the

year.

• The annual payment is equal to 2% of the

highest salary times the number of years with

the company.

• Thakkar knows for certain that Bach will live

exactly 75 years. Her benefits are fully vested.

17-35

• In valuing pension fund liabilities, Thakkar uses a

discount rate of 10%.

• As of January 1, 2013, Thakkar had a pension

fund containing $10,000.

• During 2013, Thakkar made additional

contributions of $1,500.

• The fund earned a return of $1,200 during the

year.

• Thakkar expects to earn an average return of 12%

on pension fund assets.

Simple Illustration of Pension Accounting

17-36

Estimate Pension Obligation Estimate Pension Obligation

(2% × 10 years) × $40,000 = $8,000

(continued)

The annual amount that

Bach should receive on

her retirement at age 65.

Estimation of Pension Obligation

17-37

Accumulated Benefit Obligation (ABO) Accumulated Benefit Obligation (ABO)

X X X X X X X X X X

Accumulated benefit

obligation (ABO)

PV of an

annuity of

$8,000 per

year for ten

years deferred

for 30 years is

$2,817

30 years

(continued)


17-38


• The accumulated benefit obligation (ABO)

is the actuarial present value of expected

future pension payments, using the current

salary as the basis for forecasting the amount

of the pension benefit payments.

• The alternative measure of the pension

obligation that does NOT consider the impact

of future salary increases is called the

projected benefit obligation (PBO).

(continued)

17-39

Projected Benefit Obligation (PBO) Projected Benefit Obligation (PBO)

Thakkar Company expects Bach’s 2012 salary

of $40,000 to increase 5% every year until

retirement. Bach’s salary is expected to increase

to $172,877 by the year 2043. The pension

benefit payment based on this salary is as

follows:

(2% × 10 years) × $172,877 = $34,575 (rounded)

PV = $40,000, N = 30, I = 5%

(continued)


17-40


• The PBO at January 1, 2013, is $12,176. This

is the present value of the 10 future annual

payments of $34,575 that Bach is expected to

received.

• Exhibit 17-4 on Slide 17-52 illustrates the

relationship between the future payments and

the PBO.

(continued)

17-41 (continued) 17-41

17-42

Pension-Related Liability Pension-Related Liability

PBO, January 1, 2013 $12,176

Pension fund at fair value, January 1, 2013 (10,000)

Pension-related liability, January 1, 2013 $ 2,176

FASB ASC paragraph 715 stipulates that these two

items be offset against one another and a single

amount be shown.


If the fair value of the pension fund

had exceeded the projected benefit

obligation, the resulting net asset

would have been labeled

Pension-Related Asset.

If the fair value of the pension fund

had exceeded the projected benefit

obligation, the resulting net asset

would have been labeled

Pension-Related Asset.

17-43

PBO,

Beginning of Discount Interest

Period × Rate = Cost

$12,176 × 0.10 = $1,218

Interest Cost Interest Cost

(rounded)

(continued)

Computation of Pension Expense for 2013

obligation discount rate

17-44 (continued)

Bach’s work for Thakkar Company during the

year results in an increase in forecasted annual

pension benefit payments from Thakkar to Bach.

The impact of this extra year of service is to

increase the December 31, 2013, PBO by $1,339

over what it would have been if Bach had just

vacationed for the entire year. Therefore, the

service cost element of pension expense for the

year is $1,339.

Service Cost Service Cost


17-45

Pension expense is reduced by the return on the

pension fund for the year. Because Thakkar

expects a 12% rate of return, the original

$10,000 will have a return of $1,200 in 2013.

Thakkar’s net pension expense is reduce by

$1,200 ($10,000 x 0.12).

(continued)

Return on the Pension Fund Return on the Pension Fund


17-46


In addition to these changes in the PBO and the

pension fund, two additional events are common

when dealing with pension plans:

1. Contributions to the plan

2. Benefits paid from the plan

Projected Benefit Obligation, End of Year Projected Benefit Obligation, End of Year

Service

cost and

interest

cost

PBO,

beginning

of year + –

Retirement

benefits

paid ±

Change in

actuarial

assumptions

17-47


The fair value of the pension fund is based on

its market value at a given measurement date.

Fair Value of Pension Fund, End of Year Fair Value of Pension Fund, End of Year

Employer

contribu-

tions

Fair value

of pension

fund,

beginning

of year

+ –

Retirement

benefits

paid ±

Actual return

on pension

fund

(continued)

17-48

Pension-Related Liability

17-48

Net

Pension

Expense

17-49

Pension-Related Asset/Liability 1,500

Cash 1,500

To record 2013 contribution to pension

plan.

Thakkar would make the following journal

entries for 2013:

Pension Expense 1,357


To record 2013 pension expense.

Service cost ($1,339) + Interest cost

($1,218) – Expected return ($1,200) New contributions to

pension fund

Basic Pension Journal Entries

17-50

Thornton Electronics—2013

Thornton’s pension-related balances as of January 1,

2013, are as follows:

4. Use the components of the pension-related

asset/liability and changes in the components to

compute the periodic expense associated with

pensions and to compute the impact on other

comprehensive income

17-51

17-52

Prior Service Cost

When a pension plan is initially adopted or amended to

provide increased benefits, employees are granted

additional benefits for services performed in years prior

to the plan’s adoption or amendment. The cost of these

additional benefits is called prior service cost.

•The amount of prior service cost is determined by

actuaries and represents the increase in the PBO

arising from the adoption or amendment of the plan.

•The accounting profession has been in general

agreement that prior service cost should not be

recognized as part of expense at the plan’s adoption or

amendment date but should be amortized over future

periods.

17-53

Assume Thornton adopts the plan on December

31, 2012, the journal entry to record the plan

adoption is as follows: Other Comprehensive Income 75,000

Projected Benefit Obligation 75,000

To record January 1, 2012, prior

service cost arising from plan

amendment.


17-54

IAS 19

According to paragraph 96 of IAS 19, past service cost

(equivalent to prior service cost) is recognized as an

expense over the period when the retroactive benefits

vest.

If the retroactive benefits vest immediately, then under

IAS 19 the entire amount of past service cost is expensed

immediately.

17-55

The Basic Spreadsheet

Financial Statement Accounts Detailed Accounts

Cash PBO

Beginning Balances (a) Service Cost

(b) Interest Cost

(c) Actual Return

(d) Benefits Paid

(e) PSC Amortization (g) Deferred Loss

(h) Amort. of Deferred Loss

Summary Journal Entries (1) Accrual Pension

Expense Accrual (2) Annual Pension

Contribution (3) Minimum Liability

Adjustment

Prior

Service

Cost

Pension

Related

Asset/

(Liability)

Net

Pension

Expense

Accumulated

Other

Comprehen.

Income

Fair

Value of

Pension

Fund

Periodic

Pension

Expense

Items

The work sheet is divided into two

sections: the Financial Statement

Accounts section and the Detailed

Accounts section.

17-56

• Service cost $75,000

• Contributions to pension plan $115,000

• Benefits paid to retirees $125,000

• Fair value of pension fund

at December 31, 2013 $1,513,500

• Obligation discount rate 11.0%

• Long-term expected rate of return 10.0%

(continued)

Thornton Electronics 2013

Pension Activity

This information has been entered in the

pension work sheet (Exhibit 17-8) on the

following Slide.

17-57 17-57

(continued)

17-58

Service Cost

• Service cost is the present value of additional

benefits earned by employees during the

period.

• This cost is determined by actuaries based on

the pension plan’s benefit formula.

• Service cost of $75,000 for Thornton is

recorded in the work sheet as an increase in

net periodic pension expense (a debit) and an

increase to the PBO (a credit).

(continued)

17-59 17-59

17-60

Interest Cost

• The interest cost represents the fact that the

present value of Thornton’s pension obligation

is increased by the interest on the beginning

PBO.

• The interest cost for 2013 is $1,500,000 ×

0.11, or $165,000.

• The interest cost is shown as entry (b) in as a

debit to net periodic expense and a credit to

PBO.

17-61 17-61

17-62

Actual Return on the Pension Fund

Fair value of pension fund, 12/31/13 $1,513,500

Fair value of pension fund, 1/1/13 1,385,000

Increase in fair value $ 128,500

Add benefits paid 125,000

Deduct contributions made (115,000)

Actual return on the pension fund $ 138,500

(continued)

The actual return on the pension fund of

$138,500 is computed below and shown as entry

(c).

17-63

(continued)

17-63

17-64

Note that benefits paid from fund assets do not

reduce the account Cash; benefit payments are

shown in entry (d) as a $125,000 decrease in both

the pension fund and the remaining PBO.

Actual Return on the Pension Fund

17-65 17-65

17-66

Amortization of Prior Service Cost

• Prior service cost (PSC) is the cost of

benefits granted to employees for past service

when a pension plan is adopted or amended.

• The FASB states that prior service cost should

be amortized by “assigning an equal amount

to each future period of service of each

employee active at the date of the

amendment who is expected to receive

benefits under the plan.” The future period of

service is referred to as the expected service

period.

17-67

Ten percent (15 employees) of Thornton’s

employees are expected to retire or quit with

vesting privileges in each of the next ten years.

N(N + 1)

2 × D = Total future years of service

10(10 + 1)

2 × 15 = 825 15 employees

for 10 years 150

825 × $75,000

= $13,636 (amortization for 2013)

Amortization of Prior Service Cost

Refer to Slide 17-50

17-68 17-68

17-69

Plan Contributions

• Under the Pension Protection Act of 2006,

companies are required to contribute an

amount equal to their service cost and interest

cost each year plus an additional contribution

designed to eliminate any remaining shortfall

within seven years.

• Thornton made a cash contribution to the

pension fund of $115,000. This is reflected on

the worksheet as item (f).

(continued)

17-70 17-70

17-71

Summary Journal Entries



Accumulated Other Comprehensive

Income 13,636 Summary journal entry to recognize

pension expense for 2013.

17-72



Cash 115,000

Summary journal entry to record

pension fund contribution.

17-73

Financial Statement Reporting

• Net pension expense. The $115,136 expense is

reported as part of compensation expense in

Thornton’s income statement.

• Cash. The $115,000 negative cash amount

associated with Thornton’s defined benefit

pension plan is reported as a cash outflow from

operating activities in the statement of cash flows.

• Pension-related liability. The $101,500 pension-

related liability is reported on the balance sheet.

• Accumulated other comprehensive income.

The $61,364 debit balance in this account is

reported as a subtraction from equity in Thornton’s

balance sheet.

17-74


• Service cost as reported by actuaries $87,000



• Actual return on pension fund $26,350

• Actuarial change increasing PBO $80,000


• Long-term expected rate of return

on pension fund 10.0%

(continued)

17-75 17-75

17-76

Deferral of Gains and Losses

• Because pension costs include many

assumptions and estimates, frequent

adjustments must be made for variations

between the actual results and the estimates

or projections that were used in determining

net periodic pension expense for the previous

period.

• Such differences between expected results

and actual experience give rise to a deferred

pension gain or loss.

17-77

Deferral of Current-Year Difference between

Actual and Expected Return on Pension Fund

• In estimating the return on the pension fund,

the expected long-term rate of return on

assets should be used rather than a more

volatile short-term rate.

• In the short run, the actual return on the

pension fund usually will differ from the

expected return.

17-78

Differences in Actuarial Estimates of PBO

• The actuarial computation of the projected

benefit obligation involves many estimates:

Future interest rates

Life expectancy rates

Future salary rates

• The deferred loss arising from the adjustment

to the PBO becomes part of the deferred net

pension gain or loss for possible future

amortization.

17-79



Cash 115,000


pension fund contribution for 2014.


Other Comprehensive Income 125,000



Income 12,273

Summary journal entry to recognize



Pension-Related Asset/Liability 80,000 To record 2014 impact of a revision

in actuarial estimates associated with

the projected benefit obligation.

17-80

• Service cost as reported by

actuaries $115,000



• Actual return on pension fund $175,500


• Long-term expected rate of return 10.0%

• Accumulated benefit obligation,

December 31, 2015 $1,795,150

(continued)


17-81 17-81

17-82

Amortization of Deferred Net Pension Gain or

Loss from Prior Years

• The deferred pension gain or loss from prior

years is amortized over future years if it

accumulates to more than an amount defined

by the FASB as a corridor amount.

• Amortization is required only on that portion of

the unrecognized net gain or loss that exceeds

10% of the greater of:

PBO or

the market-related value of plan assets at

the beginning of the year.

17-83

The FASB indicated that any systematic method

of amortizing the deferred net gain or loss that

equaled or exceeded the straight –line

amortization over the remaining expected

service years of the employees would be

acceptable as long as the procedure is applied

consistently to both gains and losses.

Amortization of Deferred Net Pension Gain or

Loss from Prior Years

17-84

Summary Journal Entries–2015


Cash 80,000


pension fund contribution for 2015.





Income 15,356

Summary journal entry to recognize


17-85

Revolutionary IASB Exposure Draft

Key elements of the exposure draft are as

follows:

• Balance sheet reporting of the net pension

liability/asset with adjustments.

• Use of actual return on the pension fund rather

than expected return.

• No accumulated other comprehensive income

• Decomposition of the pension expense

components.

17-86

Disclosure of Pension Plans

1. A reconciliation between the beginning and

ending balances for the projected benefit

obligation

2. A reconciliation between the beginning and

ending balances in the fair value of the pension

fund

The major disclosure requirements in FASB ASC

Topic 715 for most publicly traded companies are as

follows:

5. Prepare required disclosures associated with

pensions, and understand the accounting

treatment for pension settlements & curtailments

17-87

3. A disclosure of the accumulated benefit

obligation

4. The funded status of the plans and the amounts

recognized in the balance sheet

5. The components of pension expense for the

period

6. Any effects on the other comprehensive income

for the period and the details of the existing

balances in accumulated other comprehensive

income


17-88

7. The assumptions used relating to (a) discount rate,

(b) rate of compensation increase, and (c) expected

long-term rate of return on the pension fund

8. Disclosure of the percentage of the different types of

investments held in the pension fund along with a

narrative description of the investment strategy

9. For each of the next 5 years, disclose an estimate

of the amount of cash to be paid in benefits and the

amount of cash to be contributed by the company to

the pension fund

10. For postretirement benefits: assumed heath care cost

trend rates and their effect on service and interest costs

and the ABO if the assumed health care cost trend rates

were one percentage point higher


17-89 17-89 (continued)

17-90 17-90

17-91

Pension Settlements and Curtailments

• Settlement of a pension plan occurs when an

employer takes an irrevocable action that

relieves the employer of primary responsibility for

all or part of the obligation.

• A curtailment of a pension plan arises from an

event that significantly reduces the benefits that

will be provided for present employees’ future

services. Curtailments include:

Termination of an employee earlier than expected

Termination or suspension of a pension plan

17-92

FASB ASC paragraph 715-30-35-39 requires

that a settlement be recognized in the current

period if it:

1. was an irrevocable action,

2. relieved the employer of primary

responsibility for the pension benefit

obligation, and

3. eliminated significant risks related to the

obligation and the assets used to effect the

settlement.

Settlements

17-93

Informal Rather than Formal Plans

• Many company postretirement benefit plans are

not written into formal contracts.

• Companies often begin paying for postretirement

health care benefits as a continuation of health

care coverage for active employees.

6. Explain the differences in accounting for

pensions and postretirement benefits other

than pensions

17-94

Pay-as-You-Go Accounting Rather than

Accrual Accounting

• Because postretirement benefit plans are usually

not funded, almost all companies previously

charges these costs against revenue in the

period the benefit costs were incurred rather

than when the employee service was rendered.

• This policy results in uneven charges against

revenue and does not recognize a liability for

unfunded postretirement benefits.

17-95

Nonpay-Related Rather than Pay-

Related Benefits

• The date when employees become eligible for

postretirement benefits is known as the full

eligibility date.

• After that date is reached, the employee is

eligible to receive 100% of the postretirement

benefits regardless of any future service or

pay level reached.

Documents

Chapter 17 Employee Compensation Payroll, … · Chapter 17 Employee Compensation— Payroll, Pensions, ... Social security and income tax legislation impose five taxes ... Accounting