CHAPTER 19 PENSIONS AND OTHER EMPLOYEE ... Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition Items ... (a)

Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition

CHAPTER 19

PENSIONS AND OTHER EMPLOYEE FUTURE

BENEFITS

ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

Exercises

Problems

Writing Assignments

1. Pensions from a

business perspective. 1 1, 2, 3, 4, 5

2. Defined contribution

plans. 2, 3 1, 2

3. Defined benefit plans. 3 1, 2, 3, 6,

10, 13

4. Employer’s benefit

obligation. 4 3, 4, 5 3, 6, 7, 9

5. Transactions and events

that change benefit plan assets.

5, 6 3, 4, 5, 6, 7, 8

6. Funded status. 6, 7, 8 9, 10, 11,

12 4, 5, 9

7. Pension expense and

accounting for a defined benefit pension plan under immediate recognition approach.

2, 9, 10, 11, 12, 13, 14

3, 4, 5, 9, 10, 11, 13, 14, 15, 20, 21

3, 4, 5, 8, 10, 11

8. Defined benefit plans

with benefits that vest or accumulate other than pension plans.

15 14, 17, 18, 19

2, 13

Solutions Manual 19-1 Chapter 19 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.


ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics

Brief Exercises

Exercises

Problems

Writing Assignments

9. Presentation and

disclosure. 3, 7, 8, 12,

20 4, 6, 7

10. Differences between

IFRS and ASPE. 9, 10, 11,

15, 16, 21 5, 8, 10 1, 6

*11. One-person plan. 16 22 14 *12. Deferral and

amortization approach. 7, 8, 11, 13, 14, 16, 17

5, 7, 8, 9, 10, 11, 12, 15, 16, 20, 21, 23

2, 4, 5, 6, 7, 8, 9, 10, 11, 12

3

*This material is dealt with in an Appendix to the chapter.



ASSIGNMENT CHARACTERISTICS TABLE Item

Description

Level of Difficulty

Time (minutes)

E19-1 Defined Contribution Plan. Simple 5-10 E19-2 Defined Contribution Plan. Simple 10-15 E19-3 Calculation of pension expense – IFRS. Moderate 15-20 E19-4 Preparation of work sheet for E19-3. Moderate 15-25 E19-5 Defined benefit plan – Immediate Recognition

versus Deferral and Amortization. Moderate 25-30

E19-6 Calculation of actual return. Simple 10-15 E19-7 Deferral and Amortization. Moderate 35-45 E19-8 Pension work sheet for E19-7. Moderate 30-35 E19-9 Immediate Recognition.. Moderate 30-35 E19-10 Calculation of pension expense. Simple 10-15 E19-11 Calculation of pension expense and journal

entries. Moderate 25-35

E19-12 Calculation of pension expense, journal entries and disclosures.

Moderate 20-25

E19-13 Calculation of pension expense. Simple 5-10 E19-14 Post-retirement benefit expense. Moderate 30-35 E19-15 Calculation of pension expense. Moderate 20-30 E19-16 Actuarial gains and losses.. SImple 15-20 E19-17 Post-retirement benefit expense.. SImple 10-12 E19-18 Post-retirement benefit work sheet. Simple 15-20 E19-19 Post-retirement benefit reconciliation schedule. Simple 10-15 E19-20 Pension calculations and disclosures. Moderate 25-35 E19-21 Accounting for past service costs. Moderate 25-30 *E19-22 Calculation of current service cost and ABO –

one person plan. Moderate 25-30

E19-23 Corridor approach. Moderate 20-25



ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item

Description

Level of Difficulty

Time (minutes)

P19-1 Journal entries for a long-term disability benefit. Moderate 20-25 P19-2 Defined benefit plan for sabbatical leave. Complex 35-45 P19-3 Immediate Recognition Approach under IFRS -

Three-year continuity schedules, journal entries, and statement presentation.

Complex 45-55

P19-4 Comparison of Deferral and Amortization Approach under ASPE vs. Immediate Recognition Approach under IFRS.

Moderate 40-50

P19-5 ASPE versus IFRS – DPB analysis. Complex 40-50 P19-6 DPB – ASPE deferral and amortization approach Complex 45-55 P19-7 Deferral and Amortization Approach - Pension

expense, journal entries, note disclosure and worksheet.

Complex 45-55

P19-8 Calculation of past service cost amortization, journal entries, net gain or loss and amortization, and determination of funded status under Deferral and Amortization versus Immediate Recognition Approach.

Complex 45-60

P19-9 Deferral and Amortization versus Immediate Recognition Approach – options available for actuarial gains/losses.

Moderate 35-45

P19-10 Funded status for DPB under Immediate Recognition (IFRS) versus Deferral and Amortization (ASPE) versus Immediate Recognition Approach (ASPE).

Complex 45-60

P19-11 Comprehensive work sheet and journal entries. Complex 40-45 P19-12 Comprehensive pension work sheet and journal

entries. Moderate 30-35

P19-13 Post-retirement benefit expense, amortization of transitional amount, and continuity of ABO and plan assets.

Moderate 30-35

*P19-14 Calculation of DBO and past service cost – one person plan

Complex 40-45



SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 19-1 (a) With $6 million in total assets less $6.5 million in total

liabilities, the company’s statement of financial position as of December 31, 2014 shows total shareholders’ equity of $(0.5 million). With annual pension expense of $2 million in 2014, it appears that the pension plan caused profit and retained earnings to decrease by $2 million in 2014, and caused retained earnings to decrease to a deficit and shareholders’ equity to become negative. The pension plan is underfunded by $1.5 million ($7.5 million obligation less $6 million fair value of plan assets) as of December 31, 2014, resulting in a net defined benefit liability of $1.5 million. The net defined benefit liability represents 23% of total liabilities, and will affect the company’s solvency ratios such as debt to total assets ratio.

(b) In addition to the cash contributions the company makes

to the plan, the company incurs the cost of administering the plan, the opportunity cost of using the cash for other purposes in the business, and the potentially higher financing costs due to higher solvency risk as a result of the underfunded pension plan.



BRIEF EXERCISE 19-2 (a) IFRS

Past service cost recognized immediately in expense $845,350 Current service cost ($2,732,864 * 3%) 81,986 Pension expense for 2014 $927,336 (b) ASPE

Past service cost amortized over five years ($845,350 / 5 years) $169,070 Current service cost ($2,732,864 * 3%) 81,986 Pension expense for 2014 $251,056



BRIEF EXERCISE 19-3 A Defined Contribution Plan (DC) A defined contribution (DC) plan is a post-employment benefit plan that specifies how the entity’s contributions or payments into the plan are determined, rather than identifying what benefits will be received by the employee or the method of determining those benefits. For a DC pension plan, the amounts that are contributed are usually turned over to an independent third party or trustee who acts on behalf of the beneficiaries (the participating employees). The trustee assumes ownership of the pension assets and is responsible for their investment and distribution. The trust is separate and distinct from the employer. The ultimate risks and rewards of the DC pension plan rests with the employees as the employer’s involvement is essentially limited to making the annual contribution each year. Therefore, the accounting for a DC pension plan is relatively straight-forward. The employer’s obligation is dictated by the amounts to be contributed. Therefore, a liability is reported on the employer’s statement of financial position only if the required contributions have not been made in full, and an asset is reported if more than the required amount has been contributed. The annual benefit cost (i.e., the pension expense) is simply the amount that the company is obligated to contribute to the plan.



BRIEF EXERCISE 19-3 (Continued) A Defined Benefit (DB) Plan A defined benefit (DB) plan is any benefit plan that is not a defined contribution plan. It is a plan that specifies either the benefits to be received by an employee or the method of determining those benefits. Similar to a DC plan, for a DB pension plan, the amounts that are contributed are usually turned over to an independent third party or trustee who acts on behalf of the beneficiaries. The ultimate risks and rewards of the DB pension plan rests with the employer since the employer must guarantee that a set retirement benefit will be paid to the employees. The benefits typically are a function of an employee’s years of service and compensation level in the years approaching retirement. To ensure that appropriate resources are available to pay the benefits at retirement, there is usually a requirement that funds be set aside during the service life of the employees. Therefore, accounting for a DB pension plan is much more complex. The pension cost and defined benefit obligation depends on many factors such as employee turnover, mortality, length of service, and compensation levels, as well as investment returns that are earned on pension assets, inflation, and other economic conditions over long periods of time. Because the cost to the company is affected by a wide range of uncertain future variables, it is not easy to measure the pension cost and liability that have to be recognized each period as employees provide services to earn their pension entitlement. Note: This is not intended to be a comprehensive discussion of all issues associated with the DB pension plan, but rather, to highlight some of the key differences between a DB and DC pension plan.



BRIEF EXERCISE 19-4 Defined benefit obligation, opening balance $92 Interest cost 9 Current service cost 21 Benefits paid to retirees (8) Past service cost 13 Defined benefit obligation, ending balance $127 BRIEF EXERCISE 19-5 Ending plan assets $1,750,000 Beginning plan assets 1,350,000 Increase in plan assets 400,000 Deduct: Contributions $170,000 Less: benefits paid (140,000) (30,000) Actual return on plan assets $ 370,000 BRIEF EXERCISE 19-6 Plan assets, opening balance $100 Actual return on plan assets 11 Contributions from employer 20 Benefits paid to retirees (8) Plan assets, ending balance $123 Defined benefit obligation (BE 19-4) $(127) Plan assets at fair value 123 Plan’s funded status $ (4) Since the defined benefit obligation exceeds the plan assets, the plan is underfunded.



BRIEF EXERCISE 19-7 Accrued benefit obligation $3,400,000 Fair value of plan assets 2,420,000 Funded status – net liability 980,000 Unrecognized past service cost (debit) 990,000 Net defined benefit (liability)/asset $ 10,000 BRIEF EXERCISE 19-8 Current service cost $29,000 Interest on ABO 22,000 Expected return on plan assets (20,000) Amortization of unrecognized prior service cost 15,200 Amortization of unrecognized net actuarial loss 500 Pension expense $46,700 BRIEF EXERCISE 19-9 Past service cost $35 Current service cost 19 Interest cost 11 Expected return on plan assets using discount rate (11) Pension expense $54 Remeasurement gain or loss (OCI): Actuarial loss on fund assets ($11 - $9) $ 2 Actuarial loss on DBO 15 Total remeasurement loss – OCI $17 Under IFRS, the pension plan results in total pension expense and decrease in net income and shareholders’ equity of $54, and total remeasurement loss – OCI and decrease in accumulated other comprehensive income of $17.



BRIEF EXERCISE 19-10 Current service cost $58,000 Interest cost ($210,000 X 10%) 21,000 Expected return on plan assets using discount rate [$200,000 + ($77,000 X 6/12)] X 10% (23,850) Pension expense $55,150 Remeasurement gain or loss (OCI): Actuarial gain on fund assets ($25,000 - $23,850) $(1,150) Actuarial loss on DBO 14,000 Total remeasurement loss – OCI $12,850 Under IFRS, the pension plan results in total pension expense and a related decrease in net income and shareholders’ equity of $55,150, and a total remeasurement loss – OCI and decrease in accumulated other comprehensive income of $12,850.



BRIEF EXERCISE 19-11 (a) IFRS UDDIN CORPORATION General Journal Entries Memo Record

Items

Remeasu- rement (Gain)

Loss- OCI

Annual Pension Expense

Cash

Net Def. Benefit

Liability/ Asset

Defined Benefit

Obligation

Plan Assets

1/1/13 Service cost Interest cost Exp. return Remeasurement gain Past svce cost Contributions Benefits Paid Exp. Entry Contr. entry Bal. 12/31/13

5,000 Cr

5,000 Cr

27,500 Dr 25,000 Dr 25,000 Cr

29,000 Dr.

000 Dr29, 56,500 Dr

20,000 Cr

20,000 Cr

-0-

51,500 Cr 20,000 Dr 31,500 Cr

250,000 Cr 27,500 Cr 25,000 Cr

29,000 Cr

17,500 Dr

314,000 Cr

250,000 Dr

25,000 Dr

5,000 Dr

20,000 Dr 17,500 Cr

282,500 Dr



BRIEF EXERCISE 19-11 (Continued) (b) ASPE UDDIN CORPORATION General Journal Entries Memo Record

Items


Cash

Net Def. Benefit

Liability/ Asset

Accrued Benefit

Obligation

Plan Assets

Unrecog-nized

Past Svce. Cost

Unamor-tized

Actuarial Gain

1/1/13 Service cost Interest cost Exp. return Asset gain Past svce cost Contributions Benefits Paid Exp. Entry Contr. entry Bal. 12/31/13

27,500 Dr 25,000 Dr 25,000 Cr

0

0,0 00 Dr

27,500 Dr

20,000 Cr

00,000 Dr 20,000 Cr

27,500 Cr 20,000 Dr 7,500 Cr

250,000 Cr 27,500 Cr 25,000 Cr

29,000 Cr

17,500 Dr 000

,000 Cr 314,000 Cr

250,000 Dr

25,000 Dr 5,000 Dr

20,000 Dr 17,500 Cr

000, 000 Cr

282,500 Dr

29,000 Dr

29,000 Dr

5,000 Cr

5,000 Cr



BRIEF EXERCISE 19-12 Current service cost $27,500 Interest on ABO 25,000 Actual return on plan assets (30,000) Pension expense $22,500 BRIEF EXERCISE 19-13 (a) Under IFRS, only the immediate recognition approach is permitted and past service costs are recognized immediately in net income. Therefore, the entire $1,125,000 will be included in pension expense for 2013. (b) Under the ASPE deferral and amortization approach, the $1,125,000 of past service costs is amortized to expense over 15 years, which is the expected period of benefit from the time of adoption or amendment until the employees are eligible for the plan’s full benefits. Therefore, the portion of past service costs included in the 2013 pension expense is $75,000 ($1,125,000 / 15).



BRIEF EXERCISE 19-14 Based on the actuarial report, there is a $31,300 actuarial loss. (a) Under IFRS, the entire $31,300 actuarial loss is recognized

immediately in other comprehensive income. (b) Under ASPE, there are two options available to account for

the actuarial loss:

•Deferral and amortization approach: the $31,300 actuarial loss can remain unrecognized until the total unrecognized gain/(loss) exceeds the corridor amount; however, a larger amount can be recognized, even to the extent of immediate recognition.

•Immediate recognition approach: the entire $31,300 actuarial loss is recognized immediately in net income.

BRIEF EXERCISE 19-15 Current service cost $80,000 Interest cost 65,500 Expected return on plan assets (48,000) Post-retirement expense $97,500



BRIEF EXERCISE 19-16 Pension expense for 2013 related to past service costs: Past service costs $775,000 Average years full eligibility of employee group ÷ 17.5 Amortization per year $ 44,286 BRIEF EXERCISE 19-17 Unrecognized net actuarial loss $475,000 Corridor (10% X $3,300,000) 330,000 Excess 145,000 Average remaining service life ÷ 7.5 Minimum amortization $ 19,333



SOLUTIONS TO EXERCISES EXERCISE 19-1 (5-10 minutes) (a) Pension Contributions Payable ...................... 26,300 Cash ......................................................... 26,300 (b) Pension Expense for December 2014: $276,100 x 5% = $13,805 (c) Current liability: Pension Contributions Payable ($13,805 x 2) $ 27,610

This assumes amounts for previous months were remitted as required each month. At December 31, 2014 all that remains payable is the amount withheld from employees in December and the required employer matching amount.

EXERCISE 19-2 (a) Pension Expense ............................................. 135,000

([$2,000 x 40] + [$1,000 x 55]) = $135,000

(b) Pension Expense ............................................. 135,000 Employee Pension Contributions Payable 35,000 Cash ......................................................... 170,000 Employer portion: ([$2,000 x 40] + [$1,000 x 55]) = $135,000 Employee contribution: ([$2,000 x 10] + [$1,000 x 15]) = $35,000 (the $35,000 would have been included as a payable at the time that the related Salaries and Wages Expense was calculated).



EXERCISE 19-3 (15-20 minutes) (a) Defined benefit obligation, 1/1/14 $2,000,000

Interest cost ($2,000,000 x 10%) 200,000 Current service cost 225,000 Past service cost 25,000 Benefits paid out (100,000) DBO, 12/31/14 $2,350,000

(b) Plan assets, 1/1/14 $1,600,000 Actual return on plan assets 160,000 Contributions 262,500 Benefits paid out (100,000)

Plan assets, 12/31/14 $1,922,500 (c) Pension expense 2014:

Current service cost $225,000 Interest cost on DBO ($2,000,000 x 10%) 200,000 Actual return on plan assets (160,000) Past service cost 25,000 Pension expense for 2014 $290,000

(d) Pension Expense ......................................... 290,000

Net Defined Benefit Liability/Asset ...... 290,000 Net Defined Benefit Liability/Asset ............. 262,500

Cash ........................................................ 262,500

(e) Net defined benefit liability/(asset), 1/1/14 $ 400,000 Contributions (262,500) Pension expense 290,000 Net defined benefit liability/(asset), 12/31/14 $ 427,500

Alternatively, the amount could also be reconciled as follows: Defined benefit obligation $(2,350,000) Plan assets at fair value 1,922,500 DBO in excess of plan assets (funded status) or Net defined benefit (liability)/asset $(427,500) Solutions Manual 19-18 Chapter 19 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.




EXERCISE 19-4 (15-25 minutes) (a)

Rebek Corporation Pension Work Sheet—2014

General Journal Entries Memo Record Annual

Pension Expense

Cash

Net Def. Benefit

Liab/Asset

Defined Benefit

Obligation

Plan

Assets

Balance, 01/01/2014 Service cost *Interest cost Actual return Past service cost Contributions Benefits paid Journal entry Balance, 01/31/2014

225,000 Dr. 200,000 Dr. 160,000 Cr. 25,000 Dr.

000,000 Dr. 290,000 Dr.

262,500 Cr. 000,000 Dr. 262,500 Cr.

400,000 Cr.

27,500 Cr. 427,500 Cr.

2,000,000 Cr. 225,000 Cr. 200,000 Cr.

25,000 Cr.

100,000 Dr. 000,000 Dr.

2,350,000 Cr.

1,600,000 Dr.

160,000 Dr.

262,500 Dr. 100,000 Cr. 000,000 Dr.

1,922,500 Dr.

* $200,000 = $2,000,000 X 10%. Calculation of funded status Defined benefit obligation $(2,350,000) Plan assets at fair value 1,922,500 Funded status $(427,500)



EXERCISE 19-4 (Continued) (b) Pension Expense ......................................... 290,000

Net Defined Benefit Liability/Asset ...... 290,000 Net Defined Benefit Liability/Asset ............. 262,500

Cash ........................................................ 262,500



EXERCISE 19-5 (25-30 minutes) (a) Assume that the company uses the immediate recognition approach under IFRS:

Defined

benefit obligation

Pension plan assets

Funded status*

Pension expense

Remeasur-ement Gain (Loss) - OCI

Current service cost I NE D I NE Actual return on plan assets

NE I or D, depending on whether it is positive (I) or negative (D)

I or D, depending on whether it is positive (I) or negative (D)

NE NE

Expected return on plan assets

NE NE NE D NE

Past service costs on date of plan revision (inception)

I NE D I NE

Actuarial gain D NE I NE I Actuarial loss I NE D NE D Employer contributions NE I I NE NE Benefits paid to retirees D D NE NE NE An increase in the average life expectancy of employees.

I NE D NE D as this is an actuarial loss

*Assumes an increase in the DBO decreases the funded status and that an increase in the pension plan assets increases the funded status.



EXERCISE 19-5 (Continued) (b) Assume that the company uses the deferral and amortization approach under ASPE:

Accrued

benefit obligation

Pension plan assets

Funded status*

Pension expense

Current service cost I NE D I Actual return on plan assets NE I or D,

depending on whether it is positive (I) or negative (D)

I or D, depending on whether it is positive (I) or negative (D)

NE

Expected return on plan assets

NE NE NE D

Past service costs on date of plan revision (inception)

I NE D NE

Amortization of past service costs

NE NE NE I

Actuarial gain/loss D/I NE I/D NE Amortization of actuarial gain or loss

NE

NE

NE

D (gain) I (loss)

Employer contributions NE I I NE Benefits paid to retirees D D NE NE An increase in the average life expectancy of employees.

I NE D NE

*Assumes an increase in the ABO decreases the funded status and that an increase in the pension plan assets increases the funded status.



EXERCISE 19-6 (10-15 minutes)

Calculation of Actual Return on Plan Assets Fair value of plan assets at 12/31/14 $1,596,875 Fair value of plan assets at 1/1/14 1,418,750 Increase in fair value of plan assets 178,125 Deduct: Contributions to plan during 2014 $212,500 Less: benefits paid during 2014 218,750 6,250 Actual return on plan assets for 2014 $ 184,375



EXERCISE 19-7 (35-45 minutes) (a) Actual = (Ending – Beginning) – (Contributions – Benefits) Fair value of plan assets, December 31, 2013 $2,096 Deduct: Fair value of plan assets, January 1, 2013 1,360 Increase in fair value of plan assets 736 Deduct: Contributions $640 Less: benefits paid 160 480 Actual return on plan assets in 2013 $ 256 (b) Calculation of pension liability gains and losses and pension

asset gains and losses. 1. Difference between 12/31/13 actuarially calculated ABO and

12/31/13 recorded Accrued benefit obligation (ABO): ABO at end of year $2,916 ABO per memo records: 1/1/13 ABO $2,240 Add interest (10%) 224 Add service cost 320 Less benefit payments (160) 2,624 Liability loss $292 2. Difference between actual fair value of plan assets and expected fair value:

12/31/13 actual fair value of plan assets $2,096 Expected fair value 1/1/13 fair value of plan assets $1,360 Add expected return ($1,360 X 10%) 136 Add contributions 640 Less benefits paid (160) 1,976 Asset gain (120) Unrecognized net actuarial (gain) or loss $ 172



EXERCISE 19-7 (Continued) (c) Because no net actuarial gain or loss existed at the beginning

of the period, no actuarial gain or loss amortization occurs. Therefore, the corridor calculation is not needed.

In 2014, the amortization of the actuarial loss will be as follows: Beginning-of-the-Year

Year

ABO

Plan Assets

(FV)

10%

Corridor

Unreco-gnized

Net Loss

Loss Amorti-zation

2014 $2,916 $2,096 $292 $172 –0– (d) Past service cost amortization: $880 X 1/20 = $44 per year. (e) Pension expense for 2013: Service cost $320 Interest cost ($2,240 X 10%) 224 Expected return on plan assets ($1,360 X 10%) (136) Amortization of past service cost 44 Pension expense for 2013 $452 (f) Reconciliation schedule: Accrued benefit obligation $(2,916) Fair value of plan assets 2,096 Funded status (820) Unrecognized past service cost ($880 – $44) (836 Unrecognized net actuarial (gain) or loss 172 Net defined benefit (liability)/asset $ 188




Berstler Limited Pension Work Sheet—2013

General Journal Entries Memo Record Entries

Items


Cash

Net Def. Benefit

Liability/ Asset

Accrued Benefit

Obligation

Plan

Assets

Unrecognized Past

Service Cost

Unrecognized Net Actuarial

Gain or Loss

Balance, Jan. 1, 2013 (a) Service cost (b) Interest cost (c) Expected return (d) Unexpected gain (e) Amortization of PSC (f) Contributions (g) Benefits paid (h) Liability loss (increase) Expense entry—2013 Contributions Balance, Dec. 31, 2013

320 Dr. 224 Dr. 136 Cr.

44 Dr.

000 Dr. 452 Dr.

640 Cr.

000 Dr.

640 Cr.

452 Cr. 640 Dr. 188 Dr.

2,240 Cr. 320 Cr. 224 Cr.

160 Dr.

292 Cr. 0,000 Cr.

2,916 Cr.

1,360 Dr.

136 Dr. 120 Dr.

640 Dr. 160 Cr.

0,000 Cr.

2,096 Dr.

880 Dr.

44 Cr.

0,000 Cr.

836 Dr.

120 Cr.

292 Dr. 000 Dr.

172 Dr.

(b) $2,240 X 10% (c) $136 = $1,360 X 10% (d) $120 = $2,096 – ($1,360 + $136 + $640 - $160) (e) $880 X 1/20 = $44 (h) $292 = $2,916 – ($2,240 + $320 + $224 – $160)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-8 (Continued) (b) Journal entries 12/31/13 Pension Expense.................................................... 452 Net Defined Benefit Liability/Asset ................ 452 Net Defined Benefit Liability/Asset ....................... 640 Cash ................................................................. 640 (c) Reconciliation schedule: Accrued benefit obligation $(2,916) Fair value of plan assets 2,096 Funded status (820) Unrecognized past service cost ($880 – $44) (836 Unrecognized net actuarial (gain) or loss 172 Net defined benefit (liability)/asset $ 188


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-9 (30-35 minutes) (a) Accrued benefit obligation, 1/1/13 $280,000

Past service cost 50,000 330,000 Interest cost ($330,000 x 9%) 29,700 Current service cost 29,000 Benefits paid out (20,000) ABO, 12/31/13 $368,700

(b) Plan assets, 1/1/13 $273,100 Actual return on plan assets 26,140 Contributions 27,500 Benefits paid out (20,000)

Plan assets, 12/31/13 $306,740 (c) Pension expense 2013:

Current service cost $ 29,000 Interest cost ($330,000 x 9%) 29,700 Actual return on plan assets (26,140) Past service cost 50,000 $ 82,560

Pension Expense ......................................... 82,560 Net Defined Benefit Liability/Asset ....... 82,560

Additionally, though not required, the entry to record the company’s 2013 contribution: Net Defined Benefit Liability/Asset ............. 27,500

Cash........................................................ 27,500 (d) Plan’s Funded Status

ABO, 12/31/13 $368,700 Plan assets, 12/31/13 306,740 Balance of Net Defined Benefit Liability/(Asset)

on the statement of financial position $ 61,960


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-9 (Continued) (e) Pension expense 2013:

Current service cost $29,000 Interest cost ($330,000 x 9%) 29,700 Expected return on plan assets (9% of $273,100) (24,579) Amortization of past service cost ($50,000 / 5) 10,000 $44,121

(f) Deferral and amortization pension expense: $44,121

Deduct: amortization of past service cost (10,000) Add: 100% of past service cost 50,000 Add: Expected return on plan assets 24,579 Deduct: Actual return on plan assets (26,140) $82,560

(g) Under the immediate recognition approach, pension expense increases and net income decreases by $82,560, and net defined benefit liability increases by $55,060 ($82,560 - $27,500). Under the deferral and amortization approach, pension expense increases and net income decreases by $44,121, and net defined benefit liability increases by $16,621 ($44,121 - $27,500). In this case, the immediate recognition approach will result in lower profitability ratios (such as return on assets and return on equity), and weaker solvency ratios (such as debt to total assets and cash debt coverage ratio), compared to the deferral and amortization approach. A creditor should review the notes to the financial statements describing the company’s accounting policies related to its pension plan, and note the effect of the accounting policies on the company’s financial statements and ratios.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-10 (10-15 minutes) (a) Calculation of pension expense under IFRS using the

immediate recognition approach: Service cost $65,000 Interest cost ($500,000 X .10) 50,000 Expected return on plan assets (discount rate) (15,000) Pension expense for 2013 $100,000 Pension Expense ............................................ 100,000 Remeasurement Gain - OCI .................... 2,000* Net Defined Benefit Liability/Asset ........ 98,000 *Actuarial gain on assets = $17,000 - $15,000 Net Defined Benefit Liability/Asset ................ 95,000 Cash ......................................................... 95,000 (b) Calculation of pension expense under ASPE using the

deferral and amortization approach: Service cost $ 65,000 Interest cost ($500,000 X .10) 50,000 Expected return on plan assets (15,000) Pension expense for 2013 $100,000 Pension Expense ............................................ 100,000 Net Defined Benefit Liability/Asset ........ 100,000 Net Defined Benefit Liability/Asset ................ 95,000 Cash ......................................................... 95,000


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-11 (25-35 minutes) (a) Accrued benefit obligation, 1/1/13 $315,000


Plan assets, 1/1/13 $297,000 Actual return on plan assets ($297,000 x 8%) 23,760* Contributions 79,200 Benefits paid out (43,200)

Plan assets, 12/31/13 $356,760 *Note: expected return = 7%X $297,000 = $20,790, therefore there is an actuarial gain on the assets of $23,760 - $20,790 = $2,970.

Amount of Net Defined Benefit Liability/Asset on the balance

sheet: Accrued benefit obligation $(520,740) Plan assets at fair value 356,760 ABO in excess of plan assets (163,980) Unrecognized past service cost $112,320 Unrecognized actuarial gain ( 2,970) 109,350 Net defined benefit (liability)/asset ($54,630) (b) Pension expense 2013:

Current service cost $ 63,000 Interest cost ($455,400 x 10%) 45,540 Expected return on plan assets (7% of $297,000) (20,790) Amortization of past service cost ($140,400 / 5) 28,080 $115,830


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-11 (Continued) (c) Accrued benefit obligation, funding basis, 1/1/13 $255,000


Plan assets, 1/1/13 $297,000 Actual return on plan assets ($297,000 x 8%) 23,760 Contributions 79,200 Benefits paid out (43,200)

Plan assets, 12/31/13 $356,760 Amount Reported on the balance sheet: Accrued benefit obligation $(454,740) Plan assets at fair value 356,760 Funded status and Net defined benefit

(liability)/asset ($97,980) (d) Pension expense 2013:

Current service cost $ 63,000 Interest cost ($395,400 x 10%) 39,540 Actual return on plan assets (23,760) Past service cost 140,400 $219,180


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-12 (20-25 minutes) (a) Pension expense for 2013 comprised the following: Current service cost $ 56,000 Interest on accrued benefit obligation 90,000 (9% X $1,000,000) Expected return on plan assets (54,000) Amortization of past service cost 40,000 Pension expense $132,000 (b) Pension Expense ............................................ 132,000 Net Defined Benefit Liability/Asset ........ 132,000 Net Defined Benefit Liability/Asset ................ 145,000 Cash ......................................................... 145,000 (c) Accrued benefit obligation (credit) (1) $(1,146,000) Plan assets at fair value (debit) (2) 799,000 ABO in excess of plan assets (or funded status) (347,000) Unrecognized past service cost (debit): Beginning balance, 1/1/13 $400,000 Less amortization (40,000) 360,000 Net defined benefit asset $ 13,000

(1) Accrued benefit obligation 31/12/13: $1,000,000 + $56,000 + $90,000 = $1,146,000

(2) Plan assets 31/12/13: $600,000 + $54,000 + $145,000 = $799,000


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-12 (Continued) (d) Income Statement: Pension expense $132,000 Balance Sheet: Assets Net defined benefit asset $13,000

Note X: The company sponsors a defined benefit pension plan covering the following group of employees and providing the following benefits. For the year ending December 31, 2014, the net expense for the company’s pension plan is $132,000. The present value of the accrued benefit obligation at December 31, 2014, is $1,146,000 and the market related value of the fund assets is $799,000 based on the fair market value of the assets on that date. This results in an underfunded obligation of $347,000. Employer and employee contributions during 2014 amounted to $145,000 and no benefits were paid out. At December 31, 2014, the accrued pension cost asset is $13,000.

Other information to be disclosed: assumptions that underlie the plan such as the discount rate, the rate of increase in compensation levels, and the expected long-term rate of return on plan assets, as well as significant accounting policies governing the pension plan.

(e) Accrued benefit obligation 1/1/13 (credit) $(1,000,000) Plan assets at fair value 1/1/13 (debit) 600,000 ABO in excess of plan assets (or funded status) (400,000) Unrecognized past service cost 1/1/13 (debit) 400,000 Net defined benefit liability/asset, 1/1/13 $ 0


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-13 (5-10 minutes) Pension expense 2014 – to net income:

Current service cost $ 13,000 Interest on ABO (10% of $176,000 + $34,000) 21,000 Expected return on plan assets (10% of $155,000) (15,500) Past service cost 34,000 $ 52,500


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-14 (30-35 minutes) (a) Service cost $ 57,000 Interest on defined post-retirement benefit obligation (10% X $110,000) 11,000 Expected return on plan assets – 10% (4,200) Post-retirement benefit expense 2014 $63,800 (b) Actuarial loss on assets (3,000 – 4,200) $1,200 Actuarial loss on obligation 31,000 Post-retirement benefit remeasurement loss – OCI $32,200 (c) Plan assets, 1/1/14 $42,000 Actual return on plan assets 3,000 Contributions 22,000 Benefits paid out (6,000)

Plan assets, 12/31/14 $61,000 Defined post-retirement benefit obligation, 1/1/14 $110,000

Interest cost ($110,000 x 10%) 11,000 Service cost 57,000 Actuarial loss 31,000 Benefits paid out (6,000) Defined post-retirement benefit obligation,12/31/14 $203,000

Defined post-retirement benefit obligation,12/31/14 $(203,000) Plan assets at fair value 61,000 Defined post-retirement benefit obligation in excess of plan assets (funded status) $(142,000) (d) Net post-retirement benefit liability/(asset), 1/1/14 $ 68,000 Post-retirement benefit expense 2014 63,800 Remeasurement loss –OCI 32,200 Contributions (funding) during 2014 (22,000) Net post-retirement benefit liability/(asset),12/31/14 $142,000 (e) There is no need to reconcile – these two now have the same balance. Solutions Manual 19-37 Chapter 19 Copyright © 2013 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is strictly prohibited.





Yorke Inc. Pension Work Sheet—2013

General Journal Entries Memo Record

Items


Cash

Net Def.

Ben. Liab/ Asset

Defined Benefit

Obligation

Plan Assets

Unreco-gnized Gain

(Loss) Balance, January 1, 2013 (a) Service cost (b) Interest cost (c) Expected return (d) Gain on plan assets (e) Contributions (f) Benefits Journal entry, December 31 Balance, Dec. 31, 2013

40,000 Dr. 41,650 Dr. 41,650 Cr.

00,000 Dr. 40,000 Dr.

30,000 Cr. 00,000 Dr. 30,000 Cr.

10,000 Cr. 10,000 Cr.

490,000 Cr. 40,000 Cr. 41,650 Cr.

33,400 Dr. 000,000 Dr. 538,250 Cr.

490,000 Dr.

41,650 Dr. 8,050 Dr. 30,000 Dr. 33,400 Cr. 000,000 Dr. 536,300 Dr.

8,050 Cr.

0,000 8,050 Cr.

(b) $41,650 = $490,000 X .085. (c) $41,650 = $490,000 X .085. (d) $8,050 = $49,700 – $41,650.

Yorke Inc. Pension Work Sheet—2008

General Journal Entries Memo Record

1.1.1.1 Items


Cash

Actuarial Gain in

OCI

Pension Funded Status

Liability

Accrued Benefit

Obligation

Plan Assets


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-15 (Continued) Pension expense 2013: Service cost $ 40,000 Interest on defined benefit obligation (8.5% X $490,000) 41,650 Expected return on plan assets (8.5% X $490,000) (41,650)

$ 40,000 Pension Expense................................................. 40,000 Net Defined Benefit Liability/Asset ............. 40,000 Net Defined Benefit Liability/Asset .................... 30,000 Cash .............................................................. 30,000 These calculations could be completed through a worksheet as shown on the previous page. (b) If the immediate recognition approach was used under IFRS, the following changes to the calculation of pension expense in part (a) would be required:

1. The $8,050 difference between the actual return on plan

assets of $49,700 and the return on the asset portion of the net interest cost of 8.5% X $490,000 or $41,650, would be recorded in the books of the company as a credit to Remeasurement (Gain) Loss – OCI and a debit to Net Defined Benefit Liability/Asset. Therefore, the pension expense included in net income under IFRS is still $40,000, but there is also a $8,050 remeasurement gain recognized in OCI.

2. The Net Defined Benefit Liability/Asset under IFRS is $8,050 less than under ASPE as the $8,050 benefit is “booked.” The balance of the Net Defined Benefit Liability/Asset is therefore $10,000 - $8,050 = $1,950 credit.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-15 (Continued) Note: In addition, under IFRS the discount rate used for the

obligation is also used for the reduction in benefit expense due to the return on plan assets. i.e., it is used to calculate the net interest cost. In this case, co-incidentally, the expected rate of 8.5% is the same as the discount rate, but often would not be.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-16 (15-20 minutes) (a) The excess of cumulative net gain or loss over the corridor amount is amortized by dividing the excess by the average remaining service period of employees.

Amortization of Net (Gain) or Loss

Year

Accrued Benefit

Obligation (a)

Plan Assets (a)

Corridor (b)

Cumulative

Unrecognized (Gain) Loss (a)

Minimum Amortization

of (Gain) Loss

2013 2014 2015 2016

$4,000,000 4,520,000 4,980,000 4,250,000

$2,400,000 2,200,000 2,600,000 3,040,000

$400,000 452,000 498,000 425,000

$ 0 (d) 480,000 (d)

777,667 (d) ( 544,361 (f)

$ 0 (c) 2,333 (c) 23,306 (e) 9,947 (g)

(a) As of the beginning of the year. (b) The corridor is 10% of the greater of accrued benefit obligation or plan

assets. (c) $480,000 – $452,000 = $28,000; $28,000/12 = $2,333 (d) $480,000 + $300,000 – $2,333 = $777,667 (e) $777,667 – $498,000 = $279,667; $279,667/12 = $23,306 (f) $777,667 – $23,306 – $210,000 = $544,361 (g) $544,361 – $425,000 = $119,361; $119,361/12 = $9,947 (b) IFRS requires the immediate recognition approach to

account for actuarial gains or losses. The actuarial gains or losses are recognized in other comprehensive income instead of net income.

(c) The ASPE deferral and amortization approach provides an

option to recognize actuarial gains or losses immediately as well; however, unlike IFRS, the actuarial gains or losses must be recognized in net income as opposed to other comprehensive income. In addition, under ASPE, the approach in part (a) determined the minimum amount to include in expense. The company could have a policy that recognizes more than the minimum, but less than all of the gains or losses.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-17 (10-12 minutes) Current service cost $ 202,500 Interest on defined post-retirement benefit obligation (9% X $1,822,500) 164,025 Expected return on plan assets (9% X $1,597,500) (143,775) Post-retirement benefit expense $222,750 Remeasurement gain or loss – OCI: Actuarial loss on fund assets $143,775 - $141,750 ...................................... $2,025 Post-Retirement Benefit Expense ............... 222,750

Net Retirement Benefit Liability/Asset ................................. 222,750

Remeasurement Loss (OCI) ......................... 2,025 Net Retirement Benefit Liability/Asset ................................ 2,025 Net Retirement Benefit

Liability/Asset ........................................ 47,250 Cash ................................................. 47,250


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-18 (15-20 minutes) (a) See work sheet on next page.

(b) Retirement Benefit Expense ........................ 222,750

Net Retirement Benefit Liability/Asset ................................. 222,750

Remeasurement Loss (OCI) ......................... 2,025 Net Retirement Benefit Liability/Asset ................................ 2,025 Net Retirement Benefit

Liability/Asset ........................................ 47,250 Cash ................................................. 47,250


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-18 (a) (Continued)

(a) Opsco Corp. Post-retirement Benefit Plan Worksheet - 2013

Remeas. (Gain)/Loss

OCI

Benefit Expense

Cash Defined Benefit

Liab/Asset

DBO

Opening balance

225,000 Cr. 1,822,500 Cr. 1

Service cost 202,500 Dr.

202,500 Cr.

Interest cost 164,025 Dr.

164,025 Cr.

Expected return 143,775 Cr.

Remsmt. loss 2,025 Dr. Contributions 47,250

Cr.

Benefits paid 90,000 Dr. Expense entry 2,025 Dr. 222,750

Dr.

224,775 Cr.

Funding entry 47,250 Cr.

47,250 Dr.

Total 402,525 Cr. 2,099,025 Cr. 1


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-19 (10-15 minutes) (a) Accrued post-retirement benefit obligation (Credit) $(190,000) Plan assets at fair value (Debit) 130,000 Funded status (Credit) (60,000) Unrecognized past service cost (Debit) * ( 11,000 Accrued Benefit Liability/Asset (Credit) $ (49,000) * $12,000 – $1,000 (amortization) (b) Defined post-retirement benefit obligation (Credit) $(190,000) Plan assets at fair value (Debit) 130,000 Funded status (Credit) and Net Defined Benefit Liability/Asset (Credit) $ (60,000)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-20 (25-35 minutes) (a) Note A: Significant Accounting Policies Employee Benefit Plans The company accrues its obligations under employee

benefit plans and the related costs, net of plan assets, using the deferral and amortization approach. The company has adopted the following policies: • The cost of pensions earned by employees is actuarially

determined using the accrued benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees.

• For the purpose of calculating the expected return on plan assets, those assets are valued at fair value.

• Past service costs from plan amendments are amortized on a straight-line basis over the average remaining service period of employees active at the date of amendment.

• The excess of the net actuarial gain (loss) over 10% of the greater of the benefit obligation and the fair value of plan assets is amortized over the average remaining service period of active employees. The average remaining service period of the active employees covered by the pension plan is 16 (assumed) years (2012) and 15 (assumed) years (2013).

Note X: The company sponsors a defined benefit pension plan covering the following group of employees and providing the following benefits. As of December 31, 2013, the net expense for the company’s pension plan is $171,320 ($94,000 + $253,000 – $175,680). The present value of the accrued benefit obligation at December 31, 2013, was $2,737,000 and the market related value of the fund assets was $2,278,329 based on the fair market value of the assets on that date. This results in an underfunded obligation of $458,671. Employer contributions during 2013 amounted to $92,329 and benefits paid amounted to $140,000. At December 31, 2013, the accrued pension liability is $(412,991).


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-20 (Continued)

Other information to be disclosed: assumptions that underlie the plan such as the discount rate, the rate of increase in compensation levels, and the expected long-term rate of return on plan assets.

(b)and (c)

Note A: Significant Accounting Policies Employee Benefit Plans The company accrues its obligations under employee defined benefit plans and the related costs, net of plan assets, using the immediate recognition approach.

Note X: The company sponsors a defined benefit pension plan covering the following group of employees and providing the following benefits.

Information about the company’s defined benefit plan is as

follows: Defined benefit obligation: Balance at beginning of year, therefore $2,530,000

Interest cost—given 253,000 Current service cost—given 94,000 Benefits paid—given (140,000) Balance at end of year—given $2,737,000

Plan assets: Fair value at beginning of year, therefore $2,196,000 Actual return on plan assets—given 130,000 Employer contributions—given 92,329 Benefits paid—given (140,000)

Fair value at end of year—given $2,278,329


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-20 (Continued) Net defined benefit (liability)/asset: Defined benefit obligation $(2,737,000) Plan assets at fair value 2,278,329 Funded status and Net defined benefit (liability)/asset $(458,671)

Pension expense: Current service cost—given $ 94,000 Interest cost—given 253,000 Expected return on plan assets—given (175,680) Pension expense $ 171,320 Remeasurement (Gain) Loss - OCI: Actuarial loss on fund assets: $175,680 - $130,000 = $ 45,680 Remeasurement (Gain) Loss - OCI $ 45,680

Other information to be disclosed: assumptions that underlie the plan such as the discount rate, the rate of increase in compensation levels, what type of assets make up the pension fund assets, the dates of the most recent actuarial revaluations, etc.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-20 (Continued) (c) The beginning balances of defined benefit obligation, and pension plan assets are shown in part (b) on the previous page. Net defined benefit liability/(asset): Defined benefit obligation, 1/1/13 $2,530,000 Plan assets at fair value, 1/1/13 2,196,000 Funded status liability/(asset) and

Net defined benefit liability/(asset), 1/1/13 $334,000 Alternatively, Net defined benefit liability/(asset), 12/31/13 $458,671 Pension expense (171,320) Employer contributions 92,329 Remeasurement Gain (Loss) - OCI (45,680) Net defined benefit liability/(asset), 1/1/13 $334,000


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-21 (25-30 minutes) (a) Past service costs under ASPE are amortized on a straight-

line basis over the period the firm expects to realize the economic benefits from the change in the plan.

Calculation of Service-Years Employee

Expected Years of Service

Total

Brandon 3 3 Chiara 5 5 Mikayla 6 6 Angela 5 5 Paolo 4 4 Erminia 7 7 Total 30 Expected average remaining service life = 30 ÷ 6 employees = 5 years Past service cost 2013 through 2017 = $340,000 ÷ 5 = $68,000 Past service cost amortization would be complete at the end of 2017, therefore, there would be no amortization in 2018. (b) Past service costs under IFRS are expensed immediately in

net income. Therefore, the $340,000 of past service costs will be expensed immediately in 2013, resulting in no amortization in 2014 and beyond.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *EXERCISE 19-22 (25-30 minutes) (a) The employee’s expected final salary in 2032 would be

calculated as follows: $40,000 X (1.04)26 = $110,899 (in 27 years there would be 26 raises) (b) Step 1: Calculate annual pension benefit on retirement from

working in 2014: Annual pension benefits on retirement = 2.5% X $110,899 X 1 year = $2,772 per year of retirement Step 2: Discount the present value of the annuity of $2,772

for 21 years at 6% to December 31, 2032. Present value of an annuity of $2,772 discounted at 6% for

21 periods:

($2,772 X 11.76408) = $32,610

Using a financial calculator:

PV $ ?

Yields $32,610 I 6% N 21 PMT $ (2,772) FV $ 0 Type 0

Excel formula: =PV(rate,nper,pmt,fv,type)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *EXERCISE 19-22 (Continued) Step 3: Discount the present value of the annuity in 2032 to

its present value at 2014:

Present value of $32,610 discounted at 6% for 18 years ($32,610 X .35034) = $11,425 (18 years = 2013 to 2032)


PV $ ?

Yields $11,425 I 6% N 18 PMT $ 0 FV $ (32,610) Type 0


The current service cost relative to this plan for 2014 would be $11,425. (c) Pension benefits earned from January 1, 2009 to December 31, 2014 = 2.5% X $110,899 X 6 years = $16,635 per year of retirement. Present value at December 31, 2032 of an annuity of $16,635

discounted at 6% for 21 periods:

($16,633 X 11.76408) = $195,676


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *EXERCISE 19-22 (Continued)


PV $ ?


Excel formula: =PV(rate,nper,pmt,fv,type) The defined benefit obligation represents the present value of

this amount discounted at 6% for 18 years:

Present value of $195,676 discounted at 6% for 18 years ($195,676 X .35034) = $68,558


PV $ ?



The defined benefit obligation at December 31, 2014 would be $68,558.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition EXERCISE 19-23 (20-25 minutes)

Corridor and Minimum Loss Amortization

Year

Accrued Benefit

Obligation (a)

Plan

Asset Value (a)

10% Corridor

Unrecognized Cumulative Net Loss in

(a)

Minimum Amorti-zation

of Loss 2012 2013 2014 2015

$3,500,000 4,200,000 5,075,000 6,300,000

$3,325,000 4,375,000 4,550,000 5,250,000

$350,000 437,500 507,500 630,000

$ 0 ( 490,000 (

642,250 (c) 648,521 (e)

$ 0 ( 5,250 (b) 11,229 (d) 1,543(f)

(a) As of the beginning of the year. (b) ($490,000 – $437,500) ÷ 10 years = $5,250 (c) $490,000 – $5,250 + $157,500 = $642,250 (d) ($642,250 – $507,500) ÷ 12 years = $11,229 (e) $642,250 – $11,229 + $17,500 = $648,521 (f) ($648,521 – $630,000) ÷ 12 years = $1,543


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition TIME AND PURPOSE OF PROBLEMS Problem 19-1 (Time 20-25 minutes) Purpose—to provide the student with an opportunity to determine the appropriate accounting for the costs of a long-term disability benefit and prepare the journal entries. Problem 19-2 (Time 35-45 minutes) Purpose—to provide a problem that requires calculation of the liability for a vested benefit plan for sabbatical leave. This is a challenging problem that requires the student to apply the principles of vested benefit plans to a new situation. Problem 19-3 (Time 45-55 minutes) Purpose—to provide a problem that requires a comparison of the immediate recognition approach under IFRS versus the immediate recognition approach under ASPE, and preparation of continuity schedules for defined benefit obligation, fund assets and pension expense for three years’ pension transactions, three years of general journal entries for the pension plan, and reconciliation schedules at the end of each year. Problem 19-4 (Time 40-50 minutes) Purpose—to provide a problem that requires a detailed analysis of the reporting standards (and differences) for accounting for a defined benefit plan under both the deferral and amortization approach versus the immediate recognition approach. Problem 19-5 (Time 40-50 minutes) Purpose—to provide a problem that requires a detailed analysis of the reporting standards (and differences) for accounting for a defined benefit plan between the immediate recognition approach under IFRS and the deferral and amortization approach under ASPE. Problem 19-6 (Time 40-50 minutes) Purpose—to provide a problem that requires calculation of the annual pension expense, preparation of the pension journal entries, measurement of unrecognized gains and losses and their amortization, and reconciling the funded status to the liability on the statement of financial position.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 19-7 (Time 45-55 minutes) Purpose—to provide a problem that requires calculation of pension expense, preparation of the pension journal entries, and note disclosure. Amounts required in the note disclosure must be calculated using information for two consecutive years. The calculations are complicated by missing information that must be deduced. The pension worksheet must also be prepared. Problem 19-8 (Time 50-60 minutes) Purpose—to provide a problem that requires calculation of the pension expense and continuity of the accrued benefit obligation and plan assets for three separate years. The preparation of the worksheet for the three consecutive years is also required. The application of the corridor approach to the amortization of gains and losses is required. Problem 19-9 (Time 45-60 minutes) Purpose—to provide a problem that requires calculation and amortization of past service cost, calculation of pension expense, calculation and amortization (corridor approach) of actuarial gains or losses, preparation of pension journal entries, and reconciliation of the plan’s funded status to the liability. Problem 19-10 (Time 35-45 minutes) Purpose—to provide a problem that requires preparation of a work sheet. The journal entries for pension-related amounts are also required. Problem 19-11 (Time 40-45 minutes) Purpose—to provide a problem that requires the preparation of a worksheet and journal entries. The problem is complicated by the employee contributions to the pension plan. A challenging problem. Problem 19-12 (Time 30-35 minutes) Purpose—to provide a problem that requires calculation of the amortization of past service cost, preparation of a pension work sheet and preparation of journal entries.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition TIME AND PURPOSE OF PROBLEMS (CONTINUED) Problem 19-13 (Time 30-35 minutes) Purpose—to provide a problem that requires the calculation of post-retirement benefit expense, the preparation of a continuity schedule for accrued obligation and plan assets and a reconciliation schedule for post-retirement benefit expense. In addition, the student is required to discuss differences in accounting for post-retirement benefits and pension benefits. *Problem 19-14 (Time 40-45 minutes) Purpose—to provide a complex problem that requires the calculation of post-retirement benefit obligation by factoring in changes to the discount rate and salary assumptions for a one-person plan. The student must also analyze the change in DBO for a 1% increase and decrease in the discount rate and the past service costs given the revised assumptions.



SOLUTIONS TO PROBLEMS

PROBLEM 19-1 This is partly a defined benefit plan because the plan specifies the benefits to be received by employees – full salary for the first three months. To the extent that the insurance company assumes the risk for the long-term portion of the salary continuation plan for a fixed premium of $18,000, this portion of the benefit plan is a defined contribution plan. 2014: Payment of premium to insurance company: Long-term Disability Benefits Expense ..................... 12,000 Long-term Disability Benefits Payable ...................... 6,000 Cash ...................................................................... 18,000 Late October, 2014: Long-term Disability Benefits Expense ..................... 16,200 Long-term Disability Benefits Payable ($5,400 X 3) 16,200

(based on the “event accrual” approach discussed in Chapter 13)

November 2014: Long-term Disability Benefits Payable ...................... 5,400 Cash ...................................................................... 5,400 December, 2014: Long-term Disability Benefits Payable ...................... 5,400 Cash ...................................................................... 5,400


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-1 (Continued) 2015: January 2015 – payment of third month’s waiting period: Long-term Disability Benefits Payable ...................... 5,400 Cash ...................................................................... 5,400 Payment of premium to insurance company: Long-term Disability Benefits Expense ..................... 12,000 Long-term Disability Benefits Payable ...................... 6,000 Cash ...................................................................... 18,000



PROBLEM 19-2 (a) Because the professors have to do something that benefits

the university while they are on sabbatical, their salary while on sabbatical is simply recognized as expense in the year they take it. No amount needs to be recognized over the 7 year period leading up to it.

(b) The following calculations assume that none of the benefits

vest prior to earning the full sabbatical.

Current salary

Salary when

eligible*

Salary during

sabbatical (80%)

Portion earned

in current

year (1/7)

Present value**

Number of

profess-ors

Amount earned in

current year

$60,000 $67,570 $54,056 $7,722 $5,136 55 $282,480 70,000 78,831 63,065 9,009 5,992 40 239,680

100,000 112,616 90,093 12,870 8,559 5*** 42,795 $564,955

* Salary in 2013 X (1.02)6

* A rate of 6% is assumed. **Using a financial calculator: PV $ ? Yields $5,136 I 6% N 7 PMT $ 0 FV $(7,722) Type 0 Excel formula: =PV(rate,nper,pmt,fv,type) *** Since five of the professors in the $100,000 salary grouping

will retire, they will not have worked the necessary seven years for the benefit to vest.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-2 (Continued) Journal entry required: Compensation Expense .............................................. 564,955 Liability for Compensated Absence ................... 564,955 (c) Liability for Compensated Absence ........................... 367,000 Cash ...................................................................... 367,000 Note: This entry would be made proportionately for each pay period throughout the fiscal year during which the employees are paid while on sabbatical. (d) 1. If the sick leave is allowed to be carried over into the

next fiscal period and employees are eligible to receive a cash payment upon discharge, termination of employment or retirement, (i.e., the benefits are vested) then the amounts related to sick leave represent a liability that should be accrued.

However, if employees are only permitted to take the

paid sick days if they are actually sick, difficulties in measuring the liability combined with the immateriality of the amount may mean that the University recognizes the expense as the sick days are actually taken.

2. If unused sick time is not eligible to be carried over,

there is no future obligation and no entry is required.



PROBLEM 19-3 (a) IFRS Immediate Recognition Approach – 2014

Remeas. Gain/ Loss OCI

Pension Expense

Cash Net Defined Benefit (Liab) Asset

DBO Plan Assets

Opening balance

0 460,000 Cr.

460,000 Dr.

Service cost 36,800 Dr. 36,800 Cr.

Interest cost 46,000 Dr. 46,000 Cr.

Expected return

46,000 Cr. 46,000 Dr.

Remeasure-ment loss

6,900 Dr. 6,900 Cr.

Contributions 36,800 Cr.

36,800 Dr.

Benefits paid 32,200 Dr.

32,200 Cr.

Expense entry

6,900 Dr. 36,800 Dr. 43,700 Cr.

Funding entry 36,800 Cr.

36,800 Dr.

Total 6,900

Cr. 510,600

Cr. 503,700

Dr. (b) Continuity of Defined Benefit Obligation – 2014 Defined benefit obligation, 1/1/14 $460,000

Current service cost 36,800 Interest cost ($460,000 x 10%) 46,000 Benefits paid out (32,200) Defined benefit obligation, 12/31/14 $510,600


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-3 (Continued) Continuity of Defined Benefit Obligation – 2015 Defined benefit obligation, 1/1/15 $510,600

Past service cost, 1/1/15 368,000 878,600 Current service cost 43,700 Interest cost ($878,600 x 10%) 87,860 Benefits paid out (37,720) Defined benefit obligation, 12/31/15 $972,440

Continuity of Defined Benefit Obligation – 2016 Defined benefit obligation, 1/1/16 $972,440 Current service cost 59,800

Interest cost ($972,440 x 10%) 97,244 Benefits paid out (48,300) Actuarial loss 114,816* Defined benefit obligation, 12/31/16 $1,196,000

*$114,816 = $1,196,000 - $972,440 - $59,800 - $97,244 + $48,300


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-3 (Continued) (c) Continuity of Fund Assets – 2014 Plan assets, 1/1/14 $460,000 Actual return on plan assets 39,100 Contributions 36,800 Benefits paid out (32,200)

Plan assets, 12/31/14 $503,700 Continuity of Fund Assets – 2015 Plan assets, 1/1/15 $503,700 Actual return on plan assets 50,370 Contributions ($43,700 + $69,000) 112,700 Benefits paid out (37,720)

Plan assets, 12/31/15 $629,050 Continuity of Fund Assets – 2016 Plan assets, 1/1/16 $629,050 Actual return on plan assets 55,200 Contributions ($59,800 + $80,500) 140,300 Benefits paid out (48,300)

Plan assets, 12/31/16 $776,250


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-3 (Continued) (d) Pension expense – 2014

Current service cost $ 36,800 Interest on defined benefit obligation 46,000 Expected return on plan assets ($460,000 x 10%) (46,000) $ 36,800

Pension expense – 2015

Current service cost $ 43,700 Interest on defined benefit obligation 87,860 Expected return on plan assets ($503,700 x 10%) (50,370) Past service cost 368,000 $449,190


Current service cost $ 59,800 Interest on defined benefit obligation 97,244 Expected return on plan assets ($629,050 x 10%) (62,905) $94,139

(e) Journal entries: 2014 Pension Expense ............................................. 36,800 Remeasurement (Gain) Loss – OCI ................ 6,900* Net Defined Benefit Liability/Asset ......... 43,700

Net Defined Benefit Liability/Asset ................. 36,800 Cash .......................................................... 36,800

*$6,900 = ($460,000 X 10%) – $39,100; expected return exceeds actual


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-3 (Continued) 2015 Pension Expense ............................................. 449,190 Net Defined Benefit Liability/Asset ......... 449,190 Net Defined Benefit Liability/Asset ................. 112,700 Cash .......................................................... 112,700

2016 Pension Expense ............................................. 94,139 Remeasurement (Gain) Loss - OCI ................. 122,521** Net Defined Benefit Liability/Asset ......... 216,660 Net Defined Benefit Liability/Asset ................. 140,300 Cash .......................................................... 140,300

**$122,521 = ($629,050 X 10%) – $55,200 + $114,816; expected return exceeds actual + actuarial loss

(f) Reconciliation Schedule 2014

Defined benefit obligation $(510,600) Fair value of plan assets 503,700 Defined benefit obligation in excess of plan assets (funded status), and net defined benefit

(liability)/asset $(6,900)

Reconciliation Schedule 2015

Defined benefit obligation $(972,440) Fair value of plan assets 629,050 Defined benefit obligation in excess of plan assets (funded status), and net defined benefit (liability)/asset $(343,390)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-3 (Continued) Reconciliation Schedule 2016

Defined benefit obligation $(1,196,000) Fair value of plan assets 776,250 Defined benefit obligation in excess of plan assets (funded status), and net defined benefit (liability)/asset $(419,750) (g) Pension expense – 2014

Current service cost $36,800 Interest on defined benefit obligation 46,000 Actual return on assets (39,100) $43,700


Current service cost $ 43,700 Interest on defined benefit obligation 87,860 Actual return on plan assets (50,370) Past service cost 368,000 $ 449,190


Current service cost $ 59,800 Interest on defined benefit obligation 97,244 Actual return on plan assets (55,200) Actuarial loss on DBO 114,816

$ 216,660



PROBLEM 19-4 (a) ASPE—defer and amortize: At January 1, 2013, note that the balance of the net defined benefit liability on the opening statement of financial position must be = the funded status because there is no information about unrecognized amounts at that date. The net defined benefit liability, therefore, was $175,000 - $165,000 = $10,000 cr. 2013 Accrued benefit obligation, 1/1/13 $175,000

Past service cost, 1/1/13 78,000 253,000 Interest cost ($253,000 x 7%) 17,710 Current service cost 35,000 Benefits paid out (24,000) ABO, 12/31/13 $281,710


Plan assets, 12/31/13 $198,200 Net actuarial gain in 2013 = the difference between the actual return of $13,200 and the expected return of $11,550 (or 7% X $165,000) = $1,650. Accounts reported on the statement of financial position: Accrued benefit obligation $(281,710) Plan assets at fair value 198,200 ABO in excess of plan assets (83,510) Unrecognized past service cost $78,000 – ($78,000/3) 52,000 Unrecognized net actuarial gain (1,650) Net defined benefit (liability)/asset ($33,160)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-4 (Continued) 2014 Accrued benefit obligation, 1/1/14 $281,710

Interest cost ($281,710 x 7%) 19,720 Current service cost 47,250 Benefits paid out (26,000) ABO, 12/31/14 $322,680


Plan assets, 12/31/14 $228,092 Net actuarial loss in 2014 = the difference between the actual return of $11,892 and the expected return of $13,874 (or 7% X $198,200) = $1,982. Accumulated unrecognized actuarial loss + $1,982 - $1,650 = $332. Accounts reported on the statement of financial position: Accrued benefit obligation $(322,680) Plan assets at fair value 228,092 ABO in excess of plan assets (94,588) Unrecognized past service cost: $78,000 – ($78,000 X 2/3) 26,000 Unrecognized net actuarial loss: 332 Net defined benefit (liability)/asset ($68,256) 2015 Accrued benefit obligation, 1/1/15 $322,680

Interest cost ($322,680 x 7%) 22,588 Current service cost 52,500 Benefits paid out (28,000) ABO, 12/31/15 $369,768


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-4 (Continued) Plan assets, 1/1/15 $228,092 Actual return on plan assets ($228,092 x 7%) 15,966 Contributions 44,000 Benefits paid out (28,000)

Plan assets, 12/31/15 $260,058 Expected and actual returns are the same in 2015. All of the past service cost has been amortized by Dec. 31/15. Accounts reported on the statement of financial position: Accrued benefit obligation $(369,768) Plan assets at fair value 260,058 ABO in excess of plan assets (109,710) Unrecognized net actuarial loss (assets) 332 Net defined benefit (liability)/asset ($109,378) (b) Pension expense 2013:

Current service cost $ 35,000 Interest on accrued benefit obligation 17,710 Expected return on plan assets (7% of $165,000) (11,550) Amortization of past service cost ($78,000 / 3) 26,000 $67,160

Pension expense 2014: Current service cost $47,250 Interest on accrued benefit obligation 19,720 Expected return on plan assets (13,874) Amortization of past service cost ($78,000 / 3) 26,000 $ 79,096

Pension expense 2015: Current service cost $52,500 Interest on accrued benefit obligation 22,588 Expected return on plan assets (15,966) Amortization of past service cost ($78,000 / 3) 26,000



$85,122 PROBLEM 19-4 (Continued) Note that the statement of financial position net defined benefit liability account can be proved as follows: Opening balance + expense – contributions = ending balance 2013: 10,000 + 67,160 – 44,000 = 33,160 2014: 33,160 + 79,096 – 44,000 = 68,256 2015: 68,256 + 85,122 – 44,000 = 109,378 (c) 2013

Defined benefit obligation, 1/1/13 $175,000 Past service cost, 1/1/13 78,000 253,000 Interest cost ($253,000 x 7%) 17,710 Current service cost 35,000 Benefits paid out (24,000) DBO, 12/31/13 $281,710


Plan assets, 12/31/13 $198,200 Account reported on the statement of financial position: Defined benefit obligation $(281,710) Plan assets at fair value 198,200 Net defined benefit (liability)/asset ($83,510) 2014 Defined benefit obligation, 1/1/14 $281,710

Interest cost ($281,710 x 7%) 19,720 Current service cost 47,250 Benefits paid out (26,000)



DBO, 12/31/14 $322,680


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-4 (Continued) Plan assets, 1/1/14 $198,200 Actual return on plan assets ($198,200 x 6%) 11,892 Contributions 44,000 Benefits paid out (26,000)

Plan assets, 12/31/14 $228,092 Accounts reported on the statement of financial position: Defined benefit obligation $(322,680) Plan assets at fair value 228,092 Net defined benefit (liability)/asset ($94,588) 2015 Defined benefit obligation, 1/1/15 $322,680

Interest cost ($322,680 x 7%) 22,588 Current service cost 52,500 Benefits paid out (28,000) DBO, 12/31/15 $369,768


Plan assets, 12/31/15 $260,058 Accounts reported on the statement of financial position: Defined benefit obligation $(369,768) Plan assets at fair value 260,058 Net defined benefit (liability)/asset $(109,710)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-4 (Continued)

(d) Pension expense 2013:

Current service cost $ 35,000 Interest on defined benefit obligation 17,710 Expected return on plan assets (11,550) Past service cost 78,000 $119,160

Remeasurement (gain) loss - OCI 2013: Expected return on plan assets $ 11,550 Actual return on plan assets (13,200)

$(1,650) Pension expense 2014:

Current service cost $47,250 Interest on defined benefit obligation 19,720 Expected return on plan assets (13,874) $53,096

Remeasurement (gain) loss - OCI 2014: Expected return on plan assets $ 13,874 Actual return on plan assets (11,892)

$1,982 Pension expense 2015:

Current service cost $52,500 Interest on defined benefit obligation 22,588 Expected return on plan assets (15,966) $59,122

Remeasurement (gain) loss - OCI 2015: Expected return on plan assets $ 15,966 Actual return on plan assets (15,966) $0


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-4 (Continued) (e) The deferral and amortization approach results in a more

stable expense number on the income statement. The deferral and amortization approach may result in increased expense each year, yet the expense under the immediate recognition approach is much more volatile. Note that the total expense is very close over the three year period under both methods.

(f) The immediate recognition approach results in a better

measure of the company’s net obligation on the statement of financial position in terms of expected future cash flows.



PROBLEM 19-5 (a) Immediate Recognition Approach (IFRS)

Pension Expense

2013 2014 2015 Current service cost 12,000 13,000 12,500 Interest cost (8% x 75,000; 93,000; 109,440) 6,000 7,440 8,755 Expected return (8% x 75,000; 93,500; 114,500) (6,000) (7,480) (9,160) Past service cost 75,000 0 0 Total 87,000 12,960 12,095

Remeasurement (Gain) Loss - OCI

2013 2014 2015 Expected return (8% x 75,000; 93,500; 114,500) 6,000 7,480 9,160 Actual return (6,500) (10,000) (8,000) Total (500) (2,520) 1,160

Plan Assets

Opening balance 0 93,500 114,500 Contributions ($75,000 original + $12,000) 87,000 15,000 12,000 Actual return 6,500 10,000 8,000 Benefits paid 0 (4,000) (5,000) Ending balance 93,500 114,500 129,500

Defined Benefit Obligation

Balance January 1 0 93,000 109,440 Past service cost 75,000 Current service cost 12,000 13,000 12,500 Interest cost 6,000 7,440 8,755 Benefits paid 0 (4,000) (5,000) Ending balance 93,000 109,440 125,695

Funded Status

Defined benefit obligation 93,000 CR 109,440 CR 125,695 CR Plan Assets 93,500 DR 114,500 DR 129,500 DR Funded status and Net Defined Benefit Asset on statement of financial position (net asset)

500 DR 5,060 DR 3,805 DR


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-5 (Continued) (b) Deferral and Amortization Approach (ASPE)

Pension Expense

2013 2014 2015 Current service cost 12,000 13,000 12,500 Interest cost (8% x 75,000; 93,000; 109,440;) 6,000 7,440 8,755 Expected return (8% x 75,000;93,500;114,500 ) (6,000) (7,480) (9,160) Amortization of past service costs (75,000/4) 18,750 18,750 18,750 Total 30,750 31,710 30,845

Plan Assets

Opening balance 0 93,500 114,500 Contributions ($75,000 + $12,000) 87,000 15,000 12,000 Expected return 6,000 7,480 9,160 Asset gain (loss) (Actual return – expected return)

500 2,520 (1,160)

Benefits paid 0 (4,000) (5,000) Ending balance 93,500 114,500 129,500

Accrued Benefit Obligation

Opening balance 0 93,000 109,440 Past service cost, 1/1/13 75,000 Service cost 12,000 13,000 12,500 Interest cost 6,000 7,440 8,755 Benefits paid 0 (4,000) (5,000) Ending balance 93,000 109,440 125,695

Funded Status

Accrued benefit obligation 93,000CR 109,440 CR 125,695 CR Plan Assets 93,500 DR 114,500 DR 129,500 DR Funded status (net asset) 500 DR 5,060 DR 3,805 DR Unrecognized amounts: Past Service Costs 56,250 DR 37,500 DR 18,750 DR Net actuarial gains 500 CR 3,020 CR 1,860 CR Net defined benefit asset on statement of financial position

56,250 DR 39,540 DR 20,695 DR


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-5 (Continued) (c) Conclusions: The pension expense is higher in the first year using the immediate recognition approach because the full amount of the past service costs must be recognized in this year. Using the deferral and amortization approach, a portion of the past service costs are recognized in 2013, but $56,250 (or $75,000 - $18,750) is deferred to the period from 2014-2016. As a result, pension expense is higher under the deferral and amortization approach for 2014 and 2015. There is no difference in the plan asset balances under the two methods. The amount reported on the statement of financial position is significantly different between the two methods, because the past service costs have not been fully recognized in expense and in the statement of financial position account under the defer and amortize approach, nor have the net actuarial gains yet been recognized. Under the immediate recognition approach, net actuarial gains are recognized immediately in OCI, and past service costs are expensed immediately, and both affect the statement of financial position account. Recommended approach: In order to be ready for the implementation of IFRS when the company goes public, it would be best to implement the “immediate recognition” approach under ASPE. The difference between it and the IFRS version of the same method is that under the ASPE version, net actuarial gains or losses are recognized immediately in net income (instead of in OCI, as under the IFRS version). In addition, the ASPE immediate recognition approach currently calls for the funding basis ABO to be used rather than the accounting measure of the DBO.



PROBLEM 19-6 (a) Pension expense for 2013 comprises the following: Current service cost $213,200 Interest on accrued benefit obligation (10% X $1,430,000) 143,000 Expected return on plan assets*(10% X $1,040,000) (104,000) Amortization of unrecognized gain or loss in 2013 0 Amortization of unrecognized past service cost 45,882* Pension expense $298,082 *Amortization: $390,000 ÷ 8.5 years = $45,882 (b) 2013 Increase/Decrease in Unrecognized Actuarial Gains/Losses (1) 12/31/13 actuarially calculated ABO $1,825,200 Less: Accrued benefit obligation per memo record: 1/1/13 ABO $1,430,000 Add interest (10% X $1,430,000) 143,000 Add service cost (given) 213,200 Less benefit payments 0 1,786,200 Liability loss $39,000 (2) Expected return on plan assets at 1/1/13 $104,000 (10% X $1,040,000) Less: Actual return on plan assets 80,600 Asset loss 23,400 Net loss at 12/31/13 $62,400 Plan Assets – 2013: 1/1/13 Plan Assets $1,040,000 Add actual return 80,600 Add funding ($213,200 + $106,600) 319,800 Less benefit payments 0 Plan assets, Dec. 31/13 1,440,400


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-6 (Continued) No amortization occurs in 2013 because no balance existed in the Unrecognized Net Gain or Loss account at the beginning of 2013. The $62,400 net loss in the Unrecognized Net Gain or Loss account becomes the beginning balance in 2014. The corridor at 1/1/14 is 10% of the greater of $1,825,200 (ABO) or $1,440,400 (market-related asset value). Since the amount of loss of $62,400 is less than the corridor amount of $182,520, there does not have to be any amortization in 2014.

(c) Journal Entries—2013 Pension Expense ............................................ 298,082 Net Defined Benefit Liability/Asset ........ 298,082 Net Defined Benefit Liability/Asset ................ 319,800 Cash ......................................................... 319,800 (d) Reconciliation of Pension-Related Amounts Dr (Cr)

Accrued benefit obligation $(1,825,200) Fair value of plan assets 1,440,400 Accrued benefit obligation in excess of plan assets (funded status) (384,800) Unrecognized net (gain) or loss ( 62,400 Unrecognized past service cost ($390,000 – $45,882) 344,118 Net defined benefit (liability)/asset $ 21,718 Proof: Opening balance of statement of financial position account of $0 + expense amount credited to account of $298,082 – contributions charged to the account of $319,800 = ending balance of $21,718 debit.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-6 (Continued) (e) The liability loss that relates to the disposal of the business

segment would be shown in the Discontinued Operations section of the income statement on a net of tax basis. The loss would not be amortized using the corridor approach. The credit side of the entry would increase the net defined benefit liability/(asset).



PROBLEM 19-7

(a) Calculation of pension expense: 2013 2014 Current service cost

Interest cost ($600,000 X .09) and ($700,000 X .09) Expected return on plan assets Amortization of unrecognized past service cost Pension expense

($ 60,000) (

54,000) (24,000)

( 10,000) ($100,000

)

($ 90,000) (

63,000) ( (30,000)

( 12,000) ($135,000

)

Note: there is no amortization of the unrecognized net actuarial loss at January 1, 2013 because the $50,000 loss is within the 10% corridor of 10% of $600,000 (ABO) (see part (d)); nor of the January 1, 2014 amount of $50,000 because it is within the 10% corridor of 10% of $700,000 (see part (d)).

(b) Journal Entries—2013 Pension Expense ............................................. 100,000 Net Defined Benefit Liability/Asset ........ 100,000 Net Defined Benefit Liability/Asset ................ 110,000 Cash ......................................................... 110,000

Journal Entries—2014 Pension Expense ............................................ 135,000 Net Defined Benefit Liability/Asset ........ 135,000 Net Defined Benefit Liability/Asset ................ 120,000 Cash ......................................................... 120,000



(c) Note X: The company sponsors a defined benefit pension

plan covering the following group of employees and providing the following benefits. For the year ended December 31, 2014, the net expense for the company’s pension plan is $135,000. The present value of the accrued benefit obligation at December 31, 2014, is $788,000 (1) and the market related value of the fund assets is $465,000 (1) based on the fair market value of the assets on that date. This results in an underfunded obligation of $323,000. The company has unrecognized past service costs of $228,000 and an unrecognized net actuarial loss of $50,000. Employer contributions during 2014 amounted to $120,000 and benefits of $65,000 (1) were paid out. At December 31, 2014, the net defined benefit liability is $45,000 (1).

Reconciliation of Pension-Related Amounts Accrued benefit obligation $(788,000) Fair value of plan assets 465,000 Accrued benefit obligation in excess of plan assets (funded status) (323,000) Unrecognized net (gain) or loss ( 50,000 Unrecognized past service cost 228,000 Net defined benefit (liability)/asset ($ 45,000)

Other information to be disclosed: assumptions that underlie the plan such as the discount rate, the rate of increase in compensation levels, and the expected long-term rate of return on plan assets, as well as significant accounting policies governing the pension plan.

(1) Calculations are shown on the following page using a pension worksheet. It is assumed that there were no actuarial gains and losses on the accrued benefit obligation in 2014. There would be no experience gain or loss on plan assets since expected return is equal to actual return.



PROBLEM 19-7 (Continued) Manon Corporation Pension Work Sheet—2013 and 2014 (d) General Journal Entries Memo Record

Items


Cash

Net. Def. Benefit

Liab/Asset

Accrued Benefit

Obligation

Plan Assets

Unreco-gnized

Past Service Cost

Unreco-gnized

Net Gain or Loss 2

Balance, Jan. 1, 2013 (a) Service cost (b) Interest cost (c) Expected return (d) Amortization of PSC (e) Funding (f) Benefits Expense entry, 12/31/13 Contribution, 2013 Balance, Dec. 31, 2013 (g) Service cost (h) Interest cost (i) Expected return (j) Amortization of PSC (k) Funding (l) Benefits Expense entry, 12/31/14 Contribution, 2014 Balance, Dec. 31, 2015

60,000 Dr. 54,000 Dr. 24,000 Cr. 10,000 Dr.

000,000 Dr. 100,000 Dr.

90,000 Dr. 63,000 Dr. 30,000 Cr. 12,000 Dr.

000,000 Dr. 135,000 Dr.

110,000 Cr. 000,000 Dr.

110,000 Cr.

120,000 Cr. 000,000 Dr.

120,000 Cr.

40,000 Cr.

100,000 Cr. 110,000 Dr. 30,000 Cr.

135,000 Cr. 120,000 Dr. 45,000 Cr.

600,000 Cr. 60,000 Cr. 54,000 Cr.

14,000 Dr. 0,000,000 Cr.

700,000 Cr.

90,000 Cr. 63,000 Cr.

65,000 Dr.

0,000,000 Cr. 788,000 Cr.

260,000 Dr. 1

24,000 Dr.

110,000 Dr. 14,000 Cr.

0,000,000 Cr.

380,000 Dr.

30,000 Dr.

120,000 Dr. 65,000 Cr.

0,0 00,000 Cr. 465,000 Dr.

250,000 Dr.

10,000 Cr.

0,00,000

240,000 Dr.

12,000 Cr.

000,000 Dr. 228,000 Dr.

50,000 Dr.

0,00,000

50,000 Dr.

00 0,000 50,000 Dr.

1 Beginning balance of plan assets calculated from ending balance provided and transactions during the year. 2 The unrecognized loss does not need to be amortized over 2014 and 2015 since it does not exceed the greater of 10% of the beginning balances of ABO and plan assets. (f) $14,000 calculated by using beginning and ending balances of ABO as provided (l) $65,000 calculated by using beginning and ending balances of Plan Assets as provided.



PROBLEM 19-8 (a) Pension expense under the immediate recognition approach

under ASPE: Current service cost $ 107,500 Interest on benefit obligation ($750,000 x 6%) 45,000 Actuarial loss related to benefit obligation 15,500 Actual loss on plan assets 9,500 Past service cost expense 240,000 $417,500

Pension expense under the defer and amortize approach under ASPE:

Current service cost $ 107,500 Interest on benefit obligation ($750,000 x 6%) 45,000 Expected return on plan assets ($320,000 x 7%) (22,400) * Amortization of Past service cost ($240,000 / 21) 11,429 $ 141,529

*Actual return of ($9,500) – expected return of $22,400 = actuarial loss on assets in 2013 of $31,900. (b) Reconciliation of Pension Expense Immediate Recognition Approach expense: $417,500 Difference in past service cost Less: Past service cost: ($240,000) Add: Amortization of past service cost: 11,429 (228,571) Difference in return on plan assets Less: Actual loss on plan assets: (9,500) Less: Expected return on plan assets: (22,400) (31,900) Difference in actuarial loss related to benefit obligation Less: Actuarial loss on accrued obligation: (15,500) Deferral and Amortization Approach Expense: $141,529



Note for Instructors: In reality, there will be other differences usually because the ABO for funding purposes is usually lower than the ABO for accounting purposes and this will affect the interest cost.

(c) Continuity Schedule of Accrued Benefit Obligation under the immediate recognition approach: Accrued benefit obligation, 1/1/13 $510,000 Recognition of Past service costs $240,000

Interest cost ($510,000 + $240,000) x 6% 45,000 Current service cost 107,500 Benefits paid out (48,000) Actuarial loss related to benefit obligation 15,500 ABO, 12/31/13 $870,000

Plan assets, 1/1/13 $320,000 Actual return on plan assets (9,500) Contributions ($107,500 + $240,000) 347,500 Benefits paid out (48,000)

Plan assets, 12/31/13 $610,000 Amount reported on the statement of financial position: Accrued benefit obligation $(870,000) Plan assets at fair value 610,000 ABO in excess of plan assets (260,000) Net defined benefit (liability)/asset ($260,000)

An easier method is as follows: Jan. 1/13 balance of statement of financial position account = $190,000 cr.

From expense entry = 417,500 cr.

From contributions entry = 347,500 dr.

Balance, Dec. 31/13 = $260,000 cr.



PROBLEM 19-8 (Continued)

(c) Continuity Schedule of Accrued Benefit Obligation under the deferral and amortization approach: Accrued benefit obligation, 1/1/13 $510,000 Recognition of past service costs $240,000

Interest cost ($510,000 + $240,000) x 6% 45,000 Current service cost 107,500 Benefits paid out (48,000) Actuarial loss related to benefit obligation 15,500 ABO, 12/31/13 $870,000

Plan assets, 1/1/13 $320,000

Actual return on plan assets (9,500) Contributions ($107,500 + $11,429) 118,929 Benefits paid out (48,000)

Plan assets, 12/31/13 $381,429 Amount reported on the statement of financial position: Accrued benefit obligation $(870,000) Plan assets at fair value 381,429 ABO in excess of plan assets (488,571) Unrecognized past service costs (240,000 – 11,429) 228,571 Unrecognized actuarial loss (15,500 + 31,900) 47,400 Net defined benefit (liability)/asset ($212,600)

An easier method is as follows: Jan. 1/13 balance of statement of financial position account = $190,000 cr.

From expense entry = 141,529 cr.

From contributions entry = 118,929 dr.

Balance, Dec. 31/13 = $212,600 cr.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-8 (Continued) (d) The immediate recognition approach results in a cash

outflow of $347,500 as both the current year’s service cost ($107,500) and the entire past service cost ($240,000) are funded in the current year. The entire $240,000 of past service cost is funded in the current year because it was expensed in the current year in accordance with the advice from the actuary.

The deferral and amortization approach results in a cash

outflow of $118,929 from the current year service cost ($107,500) and the amortization of the past service cost ($11,429).

Note to Instructors/Students: In reality, the funding would

not likely vary depending on the accounting policy chosen. Often, pension funding is determined by minimum funding requirements set out in legislation, although the advice of the actuary and the cash position of the company can be important variables in the decision.



PROBLEM 19-9

(a) Continuity Schedule of Accrued Benefit Obligation: 2013 2014 2015 Accrued benefit obligation at

beginning of year Current service cost Interest cost Benefits paid out Net actuarial loss (gain) Accrued benefit obligation at end of year

$ 0 55,000 0 a

8,900)

$63,900

$ 63,900 85,000 7,029 b (30,000 ) (24,500 )) $101,429

$ 101,429 119,000 8,114 c (35,000 ) 84,500) $278,043

a No interest is calculated since there was no obligation at the beginning of the year. b $7,029 = $63,900 X 11% c $8,114 = $101,429 X 8%

(b) Continuity Schedule of Plan Assets: 2013 2014 2015 Plan assets at beginning of

year Expected return on assets Net actuarial gain (loss) Benefits paid out Contributions Plan assets at end of year

$ 0 0 a 0 0 50,000) $50,000

$ 50,000 4,000 b 1,000 c (30,000 ) 60,000 $85,000

$ 85,000 6,800 d 18,200 (35,000 ) 95,000) $170,000

a No interest is calculated since there were no plan assets during the year. b $4,000 = $50,000 X 8% c $1,000 = $85,000 – $50,000 – $4,000 – $60,000 + $30,000 d $6,800 = $85,000 X 8%


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-9 (Continued) (c) Pension expense for 2013 consisted only of the current

service cost component amounting to $55,000. There were no past service costs, net gains or losses, pension assets, or accrued benefit obligation as of January 1, 2013.

Pension expense for 2014 comprised the following: Current service cost $85,000 Interest on accrued benefit obligation 7,029 Expected return on plan assets (4,000) Amortization of unrecognized net gain or loss* 251 Amortization of unrecognized past service cost 0 Pension expense $88,280 Pension expense for 2015 comprised the following: Current service cost $119,000 Interest on accrued benefit obligation 8,114 Expected return on plan assets (6,800) Amortization of unrecognized net gain or loss (671) Amortization of unrecognized past service cost 0 Pension expense $119,643 Amortization of net actuarial gain/loss:

Year

Accrued Benefit

Obligation (a)

Plan

Assets (a)

Corridor (b)

Cumulative Unrecognized

(Gain) Loss (a)

Minimum Amortization

of (Gain) Loss 2013 2014 2015

$ 0 63,900 101,429

$ 0 50,000 85,000

$ 0 6,390 10,143

$( 0) ( 8,900)

(16,851) (d)

$( 0) ( ) ( 251) (c)( )

(671) (e) (a) As of the beginning of the year. (b) The corridor is 10 percent of the greater of accrued benefit obligation

or plan assets. (c) $8,900 – $6,390 = $2,510; $2,510/10 = $251 (d) $8,900 – $251 – $25,500 = ($16,851) (e) $16,851 – $10,143 = $6,708; $6,708/10 = $671



PROBLEM 19-9 (Continued) Dubel Toothpaste Corporation (d) Pension Work Sheet—2013, 2014 and 2015 General Journal Entries Memo Record

Items


Cash

Net Defined

Benefit Liab/Asset

Accrued Benefit

Obligation

Plan Assets

Unreco-gnized

Net Gain or Loss

Balance, Jan. 1, 2013 (a) Service cost (b) Interest cost (c) Expected return (d) Funding (e) Benefits (f) Actuarial loss Journal entries, 12/31/13 Balance, Dec. 31, 2013 (g) Service cost (h) Interest cost (i) Expected return (j) Amortization of loss (k) Funding (l) Benefits (m) Actuarial gain Journal entries, 12/31/14 Balance, Dec. 31, 2014 (n) Service cost (o) Interest cost (p) Expected return (q) Amortization of gain (r) Funding (s) Benefits (t) Actuarial loss/gain Journal entries, 12/31/15 Balance, Dec. 31, 2015

55,000 Dr.

00,000 Dr. 55,000 Dr.

85,000 Dr. 7,029 Dr. 4,000 Cr. 251 Dr.

000,00 Dr. 88,280 Dr.

119,000 Dr. 8,114 Dr. 6,800 Cr. 671 Cr.

000,000 Dr. 119,643 Dr.

50,000 Cr.

000000 Dr. 50,000 Cr.

60,000 Cr.

000,00 Dr. 60,000 Cr.

95,000 Cr.

000,000 Dr. 95,000 Cr.

0 Cr.

5,000 Cr. 5,000 Cr.

28,280 Cr. 33,280 Cr.

24,643 Cr. 57,923 Cr.

55,000 Cr.

8,900 Cr. 0,00,000 Cr. 63,900 Cr.

85,000 Cr. 7,029 Cr.

30,000 Dr. 24,500 Dr. 0,00,00 Cr. 101,429 Cr.

119,000 Cr. 8,114 Cr.

35,000 Dr. 84,500 Cr. 0,000,0 Cr. 278,043 Cr.

50,000 Dr.

0,00,000 Cr. 50,000 Dr.

4,000 Dr.

60,000 Dr. 30,000 Cr. 1,000 Dr. 0,0000 Cr. 85,000 Dr.

6,800 Dr.

95,000 Dr. 35,000 Cr. 18,200 Dr. 0,0,000 Cr. 170,000 Dr.

8,900 Dr. 0,00000 C 8,900 Dr.

251 Cr.

25,500 Cr. 000,00 Dr. 16,851 Cr.

671 Dr.

66,300 Dr. 00,000 Dr. 50,120 Dr.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-9 (Continued) (e) Pension Reconciliation Schedule—2015 Accrued benefit obligation $(278,043) Plan assets at fair value 170,000 Accrued benefit obligation in excess of plan assets (funded status) (108,043) Unrecognized net (gain) or loss 50,120 Net defined benefit (liability)/asset $ (57,923) The pension is underfunded by $108,043 at December 31,

2015. The amount shown as a net defined benefit liability on Dubel’s statement of financial position at December 31, 2015 is $57,923. The difference is due to the unamortized portion of the unrecognized loss of $50,120 which will be amortized over the average remaining service life of the employees.

(f) The Company can elect to recognize 100% of the actuarial gains and losses as they are incurred or use any other systematic method of amortization as long as the amount amortized exceeds the minimum amount established by the corridor method. If this alternative is selected, amounts within the corridor can be recognized as expense in the year.



PROBLEM 19-10

(a)Past service cost was incurred on December 30, 2012, affecting the DBO at December 31, 2012. Pension expense for 2012 is affected only under the immediate recognition approach, and this would be for the full $500,000.

Past Service Cost under the immediate recognition approach under ASPE 2013

2014 2015

$0 0 0

Recognized in full in 2012

Past Service Cost under the deferral and amortization approach under ASPE 2013

2014 2015

$38,462 38,462 38,462

($500,000 ÷ 13 years) ($500,000 ÷ 13 years) ($500,000 ÷ 13 years)

Past Service Cost under the immediate recognition approach under IFRS 2013

2014 2015

$0 0 0

Recognized in full in 2012



(b) 12/31/13 Fair value of plan assets $975,000 Less: Expected fair value of assets 1/1/13 fair value $750,000 Add expected return (8% X $750,000) 60,000 Add contributions 143,750 Less benefits 0 953,750 Asset gain (21,250) 12/31/13 New actuarially calculated ABO 1,187,500 Less: 1/1/13 ABO $1,250,000 Add interest (10% X $1,250,000) 125,000 Add current service cost 50,000 Less benefits 0 1,425,000 Liability gain (237,500) Unrecognized net actuarial gain 12/31/13 $ (258,750) Amortization in 2013: None because there was no beginning balance. Amortization in 2014 (corridor approach): $8,750

Year

Accrued Benefit

Obligation

MV of Plan

Assets

Corridor

Unreco-gnized

Net (Gain)

Amorti-zation

2013 2014

$1,250,000 1,187,500

$750,000 975,000

$125,000 118,750

$ 0) (258,750)

$ 0* *8,750*

*$258,750 – $118,750 = $140,000; $140,000 ÷ 16 = $8,750



(c) Pension expense for 2013 under the immediate recognition approach under ASPE is comprised of the following: Current service cost $50,000 Interest on accrued benefit obligation* 125,000 Expected return on plan assets** (60,000) Actuarial gain on ABO (237,500) Actuarial gain on plan assets (21,250) Pension expense $(143,750) ***($1,250,000 X 10% = $125,000)

Pension expense for 2013 under the deferral and amortization approach under ASPE is comprised of the following: Current service cost $50,000 Interest on accrued benefit obligation* 125,000 Expected return on plan assets** (60,000) Amortization of unrecognized past service cost 38,462 Pension expense $153,462 ***($1,250,000 X 10% = $125,000) ***$750,000 X 8% = $60,000 Pension expense for 2013 under the immediate recognition approach under IFRS is comprised of the following: Current service cost $ 50,000 Interest on defined benefit obligation* 125,000 Expected return on plan assets, using discount rate (75,000) Pension expense $100,000 ***$1,250,000 X 10% = $125,000 ***$750,000 X 10% = $75,000


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-10 (Continued) (d) Reconciliation Schedule 2013 for ASPE (defer and amortize

approach) Accrued benefit obligation $(1,187,500) Fair value of plan assets 975,000 ABO in excess of plan assets (funded status) (212,500) Unrecognized past service cost ($500,000 – $38,462) (461,538 Unrecognized net (gain) or loss (258,750) Net defined benefit (liability)/asset* $ (9,712) *Proof: January 1, 2013 balance of the Net Defined Benefit Liability/Asset account was equal to the funded status of $500,000 ($1,250,000 - $750,000) – the unrecognized past service cost of $500,000 = $0. During 2013, the Net Defined Benefit Liability/Asset: Opening balance $0 Credit when expense recognized $153,462 cr Debit when contributions made 143,750 dr Balance, December 31, 2013 $ 9,712 cr

(e) If Ekedahl’s plan was contributory, the employees would bear part of the cost to fund the pension plan, reducing the net pension expense by the amount of the employee contribution. In a non-contributory plan, the employer bears the entire cost of the pension plan. The plan status as contributory versus non-contributory would not change any portion of parts (a) to (d) of the previous answers; the reduction of pension expense from employee contributions would be recorded separately; the financial statements would show the net pension expense. The funding journal entry would still show a credit to cash. In a contributory plan, the cash would be provided from the employer’s own account and a portion would come from amounts withheld from employee pay. The statement of cash flows would show a smaller net cash outflow for a contributory plan since the employees would be providing a portion of the cash funding to the plan.



PROBLEM 19-11 (a) The pension work sheet for Beaton and Gunter Inc. for the

year ended December 31, 2014 is presented on the following page. It is assumed that the company is following IFRS because it is a subsidiary of a multinational company that is likely a public company.

(b) The journal entries required to reflect the accounting for

Beaton and Gunter Inc.’s pension plan for the year ended December 31, 2014, are as follows:

Pension Expense ............................................. 540,625

Remeasurement Gain (OCI) ..................... 40,625 Net Defined Benefit Liability/Asset ......... 500,000 Net Defined Benefit Liability/Asset ................. 575,000 Cash .......................................................... 575,000 Cash* ............................................................... 81,250 Pension Expense ..................................... 81,250

* In effect, when the payroll transaction took place, the employees contributed $81,250 as their share of the pension cost.

(c) Pension Reconciliation Schedule—2014 Defined benefit obligation $(12,243,750) Plan assets at fair value 10,006,250 Defined benefit obligation in excess of plan assets (funded status), and Net defined Benefit (liability)/asset $(2,237,500)



(d) If interest rates in the economy are falling this will translate to a lower discount rate being used to calculate the DBO. This will increase the DBO and therefore also increase the amount by which the pension fund is underfunded.



PROBLEM 19-11 (Continued) Beaton and Gunter Inc. Pension Work Sheet—2014 General Journal Entries Memo Record

Items

Remeasure- ment (Gain) Loss - OCI


Cash

Net Def. Ben.

Liability/ Asset

Defined Benefit

Obligation

Plan Assets

A Balance, Jan. 1, 2014 (a) Service cost (b) Interest cost (c) Expected return (d) Funding (e) Employee contr. (f) Benefits paid (g) Act. gain on assets (h) Liability loss Expense entry, 12/31/14 Funding entry Balance, Dec. 31, 2014

671,875 Cr. 631,250 Dr. 40,625 Cr.

425,000 Dr. 568,750 Dr. 453,125 Cr.

81,250 Cr.

459,375 Dr.

575,000 Cr. 81,250 Dr.

00,000 Dr.

493,750 Cr.

2,312,500 Cr.

418,750 Cr. 493,750 Dr.

2,237,500 Cr.

11,375,000 Cr. 425,000 Cr. 568,750 Cr.

756,250 Dr.

631,250 Cr. 0 Cr.

12,243,750 Cr.

9,062,500 Dr.

453,125 Dr. 575,000 Dr.

756,250 Cr. 671,875 Dr.

10,006,250 Dr.

(c) $9,062,500 X 5% = $453,125



PROBLEM 19-12 (a) The pension work sheet for Glomski Corporation for the

year ended May 31, 2013 is presented on the following page. (b) The journal entries required to reflect the accounting for

Glomski Corporation’s pension plan for the year ended May 31, 2013, are as follows:

Pension Expense ................................................. 2,960 Net Defined Benefit Liability/Asset ............. 2,960 Net Defined Benefit Liability/Asset ..................... 425 Cash .............................................................. 425



PROBLEM 19-12 (Continued) (a) Glomski Corporation

Pension Work Sheet—For the Year Ended May 31, 2013 General Journal Entries Memo Record

Items


Cash

Net Def. Ben. Liab

/Asset

Accrued Benefit

Obligation

Plan

Assets

Unrecognized Past

Service Cost June 1, 2013 (a) Service cost (b) Interest cost (c) Expected return (d) Contributions (e) Benefits paid (f) Amortization of past service cost Expense entry Contribution entry Balance, May 31, 2013

3,000 Dr. 1,446 Dr. 1,736 Cr.

250 Dr. 2,960 Dr.

425 Cr.

000 Cr.

425 Cr.

400 Cr.

2,960 Cr. 425 Dr. 2,935 Cr.

24,100 Cr. 3,000 Cr. 1,446 Cr.

500 Dr.

00,000 Cr. 28,046 Cr.

21,700 Dr.

1,736 Dr. 425 Dr. 500 Cr.

00,00 0 Cr.

23,361 Dr.

2,000 Dr.

250 Cr. 0

,000 Dr. 1,750 Dr.

(a) Per actuary’s report. (b) $24,100 X .06. (c) $21,700 X .08. (f) Amortization of unrecognized past service cost from plan amendment over 8-year average period to full eligibility.



PROBLEM 19-13

(a) Post-retirement benefit expense – 2014

Current service cost $ 273,000 Interest on Post-retirement benefit obligation ($3,439,800 X 9%) 309,582 Return on assets, using discount rate ($2,780,000 X 9%) (250,200) $332,382

(b) Continuity of Post-Retirement Benefit Obligation – 2014 Defined post-retirement benefit obligation, 1/1/14 $3,439,800

Current service cost 273,000 Interest cost ($3,429,800 x 9%) 309,582 Benefits paid out (171,600) Defined post-retirement benefit obligation, 12/31/14$3,850,782

Continuity of Fund Assets – 2014 Plan assets, 1/1/14 $2,780,000 Actual return on plan assets 1/1/14 58,500 Contributions 234,000 Benefits paid out (171,600)

Plan assets, 12/31/14 $2,900,900


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition PROBLEM 19-13 (Continued) (c) Reconciliation Schedule 2014

Post-retirement benefit obligation (credit) $(3,850,782) Fair value of plan assets (debit) 2,900,900 Post-retirement benefit obligation in excess of plan assets (funded status) (credit) / Net Defined Post-retirement (Liability)/Asset (credit)* (949,882) *Proof: Net Defined Post-retirement Liability, Jan.1 $659,800cr Expense recognized 332,382cr Remeasurement (gain) loss – OCI 191,700cr Contribution by company 234,000dr Account balance December 31, 2014 $949,882cr (d) The basic concepts and measurement methodology for

post-retirement benefits that accumulate are the same as for pension benefits. The recognition and measurement criteria for the obligation and plan assets are the same, as is the actuarial valuation method, the attribution period, and the calculation of the current cost of benefits.



PROBLEM 19-13 (Continued) The following worksheet is not required but is provided to illustrate the similarities with accounting for pension benefits.

General Journal Entries

Items

Remeasure-ment (gain) loss - OCI

Net Periodic Post-

retirement Expense

Cash

Net Defined Post-retire-ment Liab.

Defined Post-retire-

ment Benefit Obligation

Plan Assets

Balance, Jan. 1, 2014 (a) Service cost (b) Interest cost (c) Expected return (d) Actuarial loss (e) Contributions (f) Benefits paid Expense entry, 12/31 Contribution Balance, Dec. 31/14

191,700 Dr.**

191,700 Dr.

** 273,000 Dr.** ** 309,582 Dr.**

** 250,200 Cr.*** **

**332,382 Dr.**

234,000 Cr.

234,000 Cr.

659,800 Cr.

524,082 Cr. 234,000 Dr.

949,882 Cr.

3,439,800 Cr. 273,000 Cr. 309,582 Cr.

171,600 Dr. 000

,000 Dr. 3,850,782 Cr.

2,780,000 Dr.

250,200 Dr. 191,700 Cr.

234,000 Dr. 171,600 Cr.

00 0,000 Dr.

2,900,900 Dr.

***$3,439,800 X .09 = $309,582 $2,780,000 X .09 = $250,200 ***$58,500 – $250,200 = $191,700


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition (a) Amounts

using original

assumptions

Amounts using

revised assumptions

Pension benefits earned to December 31, 2015

$9,000 1

$8,700 2

PV of annuity at Dec. 31, 2047 75,455 3 69,101 4 DBO at Dec. 31, 2015 11,692 5 7,929 6 1 2% X $150,000 X 3 years = $9,000 2 2% X $145,000 X 3 years = $8,700 3 $9,000 X PV factor (6%, 12 years) = $9,000 X 8.38384 (Table A-4) = $75,455 4 $8,700 X PV factor (7%, 12 years) = $69,101 Since the tables do not include 7%, the calculation was done using a financial calculator:

PV $ ?


5 $75,454 X PV factor (6%, 32 years) = $75,454 X 0.15496 (Table A-2) = $11,692 6 $69,101 X PV factor (7%, 32 years) = $7,929

PV $ ?


*PROBLEM 19-14


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *PROBLEM 19-14 (Continued) The calculations could also be done using Excel:

Excel formula: =PV(rate,nper,pmt,fv,type) The DBO at December 31, 2015, using the revised assumptions would be $7,929. This represents an actuarial gain of $3,763 ($11,692 – $7,929) since the revised DBO is lower than the DBO calculated under the original assumptions. (b) 6% discount

rate 8% discount

rate Pension benefits earned to December 31, 2015

$8,700

$8,700

PV of annuity at Dec. 31, 2047 72,939 1 65,564 2 DBO at Dec. 31, 2015 11,303 3 5,586 4 DBO at Dec. 31, 2015 using 7% (7,929 ) (7,929 ) Change in DBO $ 3,374 $(2,343) Percentage change 43% increase 30% decrease 1 $8,700 X PV factor (6%, 12 years) = $8,700 X 8.38384 (Table A-4) = $72,939 2 $8,700 X PV factor (8%, 12 years) = $8,700 X 7.53608 (Table A-4) = $65,564 3 $72,939 X PV factor (6%, 32 years) = $72,939 X 0.15496 (Table A-2) = $11,303 4 $65,564 X PV factor (8%, 32 years) = $65,564 X 0.08520 (Table A-2) = $5,586


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *PROBLEM 19-14 (Continued) (c) Assuming the plan was 100% funded previously (DBO =

Fund assets), the decrease in DBO would make the plan overfunded by $11,692 - $7,929 = $3,763.

Pension expense for 2015 would not be affected if the ASPE

deferral and amortization approach is used since the change took place at December 31, 2015. The amortization of the actuarial gain would be based on beginning-of-year balances, and since the actuarial gain took place at the end of the year, there would be no amortization in 2015. In 2016, the actuarial gain would be amortized based on the excess of the gain over 10% of the greater of DBO and plan assets at January 1, 2016 (i.e. the corridor approach). This excess, if any, would be amortized over the employee’s average remaining service period of 31 years. Any amortization of the actuarial gain would be included as a reduction of 2016 pension expense.

If the ASPE immediate recognition approach is used, the

actuarial gain of $3,763 would reduce the 2015 pension expense and reduce the DBO (and increase funded status) by $3,763.

If the IFRS immediate recognition approach is used, the actuarial gain of $3,763 would be recorded as a credit to remeasurement (gain) loss – OCI and reduce the DBO (and increase funded status) by $3,763.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *PROBLEM 19-14 (Continued) (d) Before credit

for prior service

After credit for prior service

Pension benefits earned to December 31, 2016

$14,500 1

$31,900 2

PV of pension earned at Dec. 31, 2046

115,169 3

253,372 4

DBO at Dec. 31, 2016 15,129 5 33,285 6 DBO, at Dec. 31/16 after prior service recognized

$33,285

DBO, at Dec. 31/13 before service recognized

( 15,129)

Past service cost incurred $18,156


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *PROBLEM 19-14 (Continued) 1 2% X $145,000 X 5 years = $14,500 2 2% X $145,000 X 11* years = $31,900 * 11 years = 6 years past service cost before 2012 plus 5 years from 2012 to 2016. 3 $14,500 X PV factor (7%, 12 years) = $115,169 Since the tables do not include 7%, the calculation was done using a financial calculator:

PV $ ?


4 $31,900 X PV factor (7%, 12 years) = $253,372

PV $ ?


5 $115,169 X PV factor (7%, 30 years) = $15,129

PV $ ?



Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition *PROBLEM 19-14 (Continued) 6 $253,372 X PV factor (7%, 30 years) = $33,285

PV $ ?



Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition TIME AND PURPOSE OF WRITING ASSIGNMENTS WA 19-1 (Time 30–40 minutes) Purpose−to provide the student with an opportunity to determine the appropriate accounting for a sabbatical benefit under ASPE and IFRS and to list the information needed to prepare adjusting entries. WA 19-2 (Time 30–35 minutes) Purpose—to provide the student with the opportunity to discuss some of the more traditional issues related to pension reporting. Specifically, the student is asked to define a contributory versus a non-contributory plan, distinguish between a funded and unfunded plan, and differentiate between accounting for the employer and the benefit plan. In all cases, the treatment under IFRS and ASPE is explored. The student must also discuss the advantages and disadvantages of immediate recognition versus the defer-and-amortize approaches. WA 19-3 (Time 20-30– minutes) Purpose—to provide the student with the opportunity to compare the immediate recognition approach and the defer-and-amortize approach. WA 19-4 (Time 20–30 minutes) Purpose—to provide students with an opportunity to research actions companies are taking to reduce post employment costs. WA 19-5 (Time 15–20 minutes) Purpose—to provide the student with an opportunity to understand why the ceiling test must be made and how it is done. WA 19-6 (Time 15–20 minutes) Purpose—to provide the student with an opportunity to understand the differences between ASPE and IFRS and the conceptual reasons for any differences.



SOLUTIONS TO WRITING ASSIGNMENTS WA 19-1 (a) This benefit relates to a compensated absence. It is a defined benefit plan

which is service related (the benefit is earned by the employee over a five-year period and then vests in the employee). Under both ASPE and IFRS, the company should accrue the cost of the benefit and the related liability over the five years in which the employee obtains full eligibility for benefits. Under ASPE, the company can use the immediate recognition method that measures the accrued benefit obligation using the funding valuation method. All past service costs and actuarial gains and losses are immediately recognized, as well as the actual return on any plan assets.

As an alternative, ASPE also currently allows the deferral and amortization

method. Under this approach, the accrued benefit obligation is estimated using the projected benefits valuation method which is an accounting specified approach. Under this method, any past service costs that arise can be deferred and amortized over the remaining period to full eligibility for the sabbatical or a shorter period. Actuarial gains and losses related to these plans are also deferred and amortized over some reasonable period (EARSL or some shorter period).

(b) The accountant must have the following information or make assumptions

about them: − employee turnover data: i.e., Probability that some employees will not

satisfy the minimum five year service requirement. This information would not necessarily be needed by the assistant controller, but would be needed by the actuary. Projected salary in the sabbatical year. This information would not necessarily be needed by the assistant controller, but would be needed by the actuary.

− appropriate discount rate to use in discounting benefits to their present value (market rates). Under ASPE, this discount rate can either be the current yield on high quality corporate bonds, or the settlement date rate. IFRS requires that the current yield on high quality corporate bonds be used.

− Valuation of the accrued benefit obligation at the report date (or within 3 months under ASPE if applying the defer-and-amortize approach), expected earnings rates on plan assets, if any, required only for the defer-and-amortize method under ASPE and the immediate recognition approach under IFRS.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-1 (Continued)

− Actual return on any plan assets supporting the obligation. Fair value of

the plan assets (or an option under ASPE is the market-related value). (c) Yes, the answer to part (a) could change. The accounting method

described in (a) is based on the assumption that the employees are receiving compensation in the sixth year based on past services and that in the sixth year they are not providing active service to the company. If the company dictates their activities during the sabbatical year and the activities benefit the company, this would be considered active service. The sabbatical year would then not be a compensated absence, but rather a salary for active service even if the service is in alternative activities such as research and promotion. The company would then not need to accrue the compensated absence in the preceding years, and it would account for the payments in the sabbatical year in the same way as for regular salary payments. This treatment is the same under both IFRS and ASPE.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-2 (a) In a contributory pension plan, the employees bear part of the cost of the

stated benefits whereas in a non-contributory plan, the employer bears the entire cost.

(b) The employer is the organization sponsoring the pension plan. The

employer incurs the costs and makes contributions to the pension fund. For the employer the accounting 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 that receives the contributions from

the employer, administers the pension assets, and makes the benefit payments to the pension recipients. For the plan, the accounting involves identifying receipts as contributions from the employer sponsor and as income from fund investments as well as computing the amounts due to individual pension recipients. (NB: accounting for the benefit costs and obligations of the employer is the topic of this chapter; accounting for the fund or plan is not.)

(c) Relative to the benefit plan, the term “funded” refers to the fact that assets are accumulated over the period the employee provides service to the organization so that monies will be available to pay the benefits when they are due. The relationship between pension fund assets and the present value of expected future pension benefit payments indicates the funded status of the plan; thus, the benefit plan may be fully funded, over-funded, or under-funded. Relative to the employer, the term “funded” has a similar meaning. Some plans are pay-as-you-go and others (i.e. funded plans) have assets set aside as the employees provide services.

Relative to the benefit plan, the accrued benefit liability or asset is what is

reported on the balance sheet of the employer. Under the immediate recognition method, this balance would generally be the same as the funded status of the plan. Under the defer-and-amortize approach, this balance is the funded status of the plan adjusted for any past service costs or actuarial gains and losses not yet amortized.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-2 (Continued) (d) Terms and their definitions as they apply to accounting for pension plans

follow: 1. Current service cost is the actuarial present value of benefits attributed

by the pension benefit formula to employee service during that period. Under the defer and amortize approach and the immediate recognition approach, the current service cost is expensed in the year.

Past-service cost represents the retroactive benefits granted in a plan

amendment (or initiation). 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. Under the immediate recognition approach, these are all immediately expensed. Under the (ASPE) defer-and-amortize approach, these are deferred and amortized over an appropriate period of time. More specifically under this approach, these costs are amortized over the period to full eligibility for the employee or some shorter period.

2. Remeasurement gain/loss refers to the difference between the actual

return on plan assets and the expected return. The expected return is used as part of the pension expense calculation under IFRS (and under ASPE defer and amortize) in order to smooth out wide swings that may occur in the actual return. Actuarial experience gain/loss refers to changes in actuarial assumptions (for example, changes in mortality rate, turnover rate, disability rate, and salary amounts) that cause a change in the defined benefit obligation. This would also involve a change in assumptions used by the actuary in calculating the DBO (for example, a change in the interest rate used to discount the pension cash flows). IFRS recognizes actuarial gains and losses, and remeasurement gains and losses, immediately into OCI. Under ASPE immediate recognition, such gains or losses would be recognized immediately in net income.

Under the (ASPE) defer-and–amortize approach, either the corridor

approach or some shorter period can be used to recognize these gains and losses. The corridor approach requires the excess of the experience gain or loss over the corridor amount (10% of the greater of ABO and pension assets at the beginning of the year) be amortized over the remaining service period of the employee group.

(e) The basic concepts and measurement methodology for post-retirement

benefits that accumulate are the same as for pension benefits. The recognition and measurement criteria for the obligation and plan assets are the same, as is the actuarial valuation method, the attribution period, and the calculation of the current cost of benefits. However, under IFRS, a distinction is made between plans that are more uncertain and require


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-2 (CONTINUED)

more complex assumptions such as post-employment pension plans and health-care benefit plans, and other plans. These other plans would include paid leave, sabbaticals, long term disability which increases with length of service, deferred compensation and profit sharing and bonus plans. For these types of plans, any past service costs or actuarial gains and losses must be recognised immediately into income (not OCI).


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-3

The immediate recognition approach recognizes all changes to the funded status of the plan immediately into income, and the funded status is reported on the statement of financial position. The accrued benefit obligation is determined using the funded valuation approach prepared by the actuary. Accordingly, there are no unamortized amounts with respect to past service costs or actuarial gains and losses that will be recognized in future periods. The advantages are that the accounting is simplified, since unamortized balances do not need to be tracked and estimates of deferral periods need not be determined. Finally, the net liability (or asset) reported reflects the actual funded status of the plan in most cases. (Where the plan is in a surplus position, the amount of the asset reported will be limited to the amount of expected future funding benefit the company will receive.) The disadvantage of this method is that the pension expense will be more variable year over year due to expensing past services costs and actuarial gains and losses when they arise (immediately). Over time, actuarial gains and losses would likely reverse and have an overall immaterial impact. In addition, these actuarial gains and losses are out of management control, and therefore might give a false impression of the management’s ability to manage the firm’s results and risk.

The defer-and-amortize approach calculates the accrued benefit obligation using the projected benefit approach which is strictly a method developed for accounting purposes. The defer-and-amortize approach allows for past service costs and actuarial gains and losses to be deferred and amortized over some reasonable length of time (as defined within the accounting standards) which results in delaying their recognition. The rationale for delaying the recognition is that management expects future benefits to arise from the provision of these past service adjustments to the plans. Consequently, these past service costs should be recognized over the future periods in which the benefits are expected to be realized. Actuarial gains and losses arise due to unexpected changes in the market value of plan assets and changes in actuarial assumptions impacting the amount of the benefit obligation. Both of these changes are beyond the control of management and are likely to reverse over time. By deferring the recognition of past service costs and actuarial gains and losses over defined periods (or in some cases, not recognizing at all), net earnings is less volatile with respect to these changes. This is seen as an advantage by some preparers of financial statements. The disadvantage of the defer-and-amortize approach is that the amount reported on the statement of financial position for the accrued benefit liability or asset, is not equal to the funded status of the plan. In some cases, this account may even be reported as an asset, when in reality the plan is actually in a deficit and is under-funded. To compensate for this, the notes must describe and reconcile the funded status to the reported amount and indicate balances of unamortized amounts for past service costs and actuarial gains and losses.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-4 The following is a summary of what Canadian companies have been doing in

recent years in response to rising post-employment health-care costs and the risks that are associated with defined benefit pension plans.

(a) Elimination of retiree benefits:

• The most drastic response.

• Significant employee discontent is likely.

• Unilaterally reducing or eliminating post-retirement benefits may prompt retirees and/or active employees to bring a legal action against the employer.

• Reserving the right to amend or terminate post-retirement benefits is expressly needed.

• An employer may consider providing employees with a lump-sum payment in exchange for the elimination or reduction of post-retirement benefits.

(b) Stricter eligibility requirements:

• Imposing more stringent eligibility requirements with respect to new hires will have little impact on an employer’s present bottom line since new hires generally do not reach retirement age for quite some time.

(c) Capping of benefits. (d) Switching to defined contribution:

• Employees would be taking on more risk but continue to be protected against catastrophic expenses.

• Employees could manage their share of the risk by adjusting future contribution and coverage levels to match their personal situation.

• Some companies implement defined contribution plans for new employees, while retaining a defined benefit plan for existing employees.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-5 IFRIC 14 outlines the calculation for the asset ceiling test and its rationale. Since the surplus in the plan assets arguably belongs to the employees and not the company, limitations must be put on the amount of asset that a company can report when the funded status is a surplus. Under IFRIC 14, a company is allowed to show as an asset (related to the surplus of the pension plan) economic benefits available to the entity in the form of refunds or reductions in the future contributions that would be made to the plan. But only under the condition that the entity has an unconditional right to realize these benefits at some point, either during the life of the plan or when the plan is settled. The ceiling or maximum amount is determined by calculating the present value of the future cost savings over the shorter period of the expected life of the plan and the expected life of the entity. And this calculation is based on the conditions prevailing at the report date.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition WA 19-6 There are many differences between IFRS and ASPE with respect to measurement and reporting for pension and other employee future benefits. Primarily, ASPE has been written to keep recognition and measurement issues simple and therefore requiring less cost and time to calculate and report. ASPE has also been designed with the creditor in mind as the primary user, rather than outside shareholders and creditors. Given that creditors generally have access to management; the disclosure has also been simplified. Other differences are highlighted below:

a) ASPE has more choices available on reporting pensions and other future benefits. An enterprise may choose to follow the immediate recognition approach which results in the accrued benefit liability or asset being equal to the actual funded status of the plan in most cases (unless the plan is in a surplus position and then only the amount of future benefits accruing to the enterprise would be reported as an asset, which might be lower than the actual surplus). This is similar to the approach used under IFRS. However, under ASPE the accrued benefit obligation is determined using the funding valuation basis and all past services and actuarial gains and losses are immediately recognized into income. This method is simpler and less costly to implement and maintain.

b) ASPE also allows the defer-and-amortize (D&A) approach to be followed.

For past service costs, ASPE D&A requires amortization over the time to full eligibility or any shorter period. For actuarial gains and losses, ASPE D&A allows the corridor approach to be used, with amortization over EARSL or some shorter period.

c) For immediate recognition under IFRS, remeasurement gains and losses

(actuarial gains and losses) are recognized directly into OCI and do not impact current earnings. As ASPE does not have OCI, this is not an option.

d) There are differences in the discount rates that can be used for the

determination of the obligation. ASPE allows a choice of either the current yield rate on high quality corporate bonds (as does IFRS) or the current settlement rate (which is not allowed under IFRS). These options again make it easier to determine the information for the private enterprise.

e) For the value of the plan assets at the report date, IFRS requires that the

fair value be used. Under ASPE, there is a choice to use either the fair value of the plan assets or a market-related value which is a calculated amount that recognizes changes in the value of the assets over no more than a five year period.



WA 19-6 (CONTINUED)

f) For other types of employee future benefits which are not complex, ASPE

would allow treatment similar to that of the pension plans. For IFRS, the only difference is that past service contributions and actuarial gains and losses would be immediately recognized (not included in OCI).

g) The disclosure under ASPE is greatly reduced in comparison with IFRS,

keeping in mind that the primary users of ASPE statements are creditors that would likely have access to information from management. This is not the case for IFRS prepared statements, where all types of investors and creditors could be users, so there is a significant amount of disclosure required.



CASES

Note: See the Case Primer on the Student website, as well as the Summary of the Case Primer in the front of the text. Note that the first few chapters in volume 1 lay the foundation for financial reporting decision making. CA 19-1 Overview:

•Delmar Manufacturing Inc. (DM) is operating in a stable environment but current income has been impacted by the cost of expansion and construction of a manufacturing facility in another province.

•Users – The Management and Pension Committee of DM will be reviewing the impact on the financial statements that the pension accounting entries and presentation will have. There may be a greater preference for DM to adopt the accounting policy choice that allows for less volatility in net income.

•Role – as a consultant an objective and transparent financial reporting objective is adopted. Consideration of future accounting changes and the impact to DM is specifically requested.

•GAAP – DM is private and has the option to follow ASPE. Differences between IFRS and ASPE are specifically requested for this case. The company follows the immediate recognition approach and does not plan to change the accounting policy for pensions.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition CA 19-1 (Continued) Issue: Treatment of the specific pension components DM’s Net Benefit Obligation for 2012 presented on the financial statements is net of Fund Assets of $980,000. Therefore, the pension obligation must be $3,145,000*. *(Benefit Obligation $3,145,000 less Fund Assets $980,000 yields the Net Benefit Obligation of $2,165,000 on DM’s financial statements) IFRS – immediate recognition (DBO) – Defined Benefit Obligation

ASPE –immediate recognition (ABO) -- Accrued Benefit Obligation

Current service cost of $236,000 is recorded in net income as pension expense.

Past service costs: DM must recognize the entire $96,000 in the 2013 fiscal year within net income.

Current year expense of $236,000 is recorded in net income as pension expense.

Past service costs – the full amount must be recognized in the 2013 fiscal year.

Continued


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition CA 19-1 (Continued) IFRS – immediate recognition (DBO) – Defined Benefit Obligation


Interest expense: the discount rate used to compute interest accrued on the defined benefit obligation (DBO) for 2013 must be equivalent to the yield on a high-quality debt instrument – in DM’s case the 9% current yield on high-quality corporate bonds.

Interest expense for 2013 is calculated as: [DBO on Jan 1 $3,145,000 + the immediate recognition of past service cost $96,000 reduced by the average of retirement payments of $34,000 (or 34,000/2) paid throughout the year] x 9% = 290,160. This amount must be recorded within net income for 2013 as net interest.

The same 9% rate must be applied to the expected return on plan assets.

Interest expense: the discount rate used to compute the interest accrued on the accrued benefit obligation (ABO) for 2013 has a similar requirement as IFRS – current market rate on a high-quality debt instrument.

DM can use the 8% settlement rate to calculate interest on the ABO if it plans to purchase an insurance contract to settle its liability. As DM has specifically eliminated this option the 9% better reflects the expected settlement cost of the liability.

The interest expense is

calculated in the same manner as under IFRS.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition CA 19-1 (Continued) IFRS – immediate recognition (DBO) – Defined Benefit Obligation


The expected return on plan assets under IFRS must be calculated using the current yield on high-quality bonds (9%). This is applied to the weighted average fund asset balance of $1,007,000

[($980,000+$1,034,000)/2 = $1,007,000]

Total expected return on plan assets is $90,630.

A combined net interest of $199,530 will be reflected in the expense and in net income.

The total difference of $74,130 ($90,630 - $16,500) is treated as a re-measurement loss and is recorded in OCI.

The actual return on fund assets of $16,500 is included in pension expense and therefore in net income (as are all changes in the surplus/deficit of the plan).

The actuarial loss must be reflected immediately – the $55,000 resulting from the change in assumptions and the $19,000 resulting from the change in expected and actual actuary costs is accounted for in comprehensive income – through the OCI. A total of $74,000 in OCI for fiscal 2013.

Under ASPE – the actuarial loss is immediately recorded in net income.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition CA 19-1 (Continued) Conclusion: The case illustrates the treatment options under the IFRS and ASPE – immediate recognition. Issue: Presentation of the final obligation on the financial statements IFRS ASPE The DBO calculated by

management represents the benefit obligation used in the net benefit calculation.

The net obligation owing or receivable from the plan is presented on the Balance Sheet.

The overall funded status of the plan under IFRS is calculated as follows:

DBO at Dec 31 $3,808,690

-FV of PA at Dec 31 $1,050,500

Net Defined Benefit Liability is $2,758,190.

The ABO calculated by management may represent the benefit obligation used in the net benefit calculation. The final benefit obligation on the financial statements must be updated by the actuary.

The net obligation owing or receivable from the plan is presented on the Balance Sheet.

The overall funded status of the plan under ASPE is calculated as:

DBO at Dec 31 $3,808,690

-FV of FA at Dec 31 $1,050,500

If management’s estimates result in the same calculation as the actuary, the Net Defined Benefit Liability is $2,758,190.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition CA 19-1 (Continued) IFRS ASPE The DBO at the end of the

period is calculated as: DBO – Jan 1 $3,145,000

+current service cost 236,000

+past service costs 96,000

- benefits paid (34,000)

+interest expense 291,690

+actuarial loss 74,000

DBO – Dec 31 $3,808,690

The ABO at the end of the period is calculated in the same manner as under IFRS. The difference in ASPE is the variability in the pension expense. Under ASPE the actuarial loss of $74,000 is reflected in the pension expense.

The Plan Assets at the end of the period is calculated as: PA – Jan 1 $980,000 +contributions 88,000 +actual return 16,500 -benefits paid to retirees (34,000) PA – Dec 31 $1,050,500 The difference in the

The Fund Assets at the end of the period is calculated in the same manner as under IFRS. The difference in ASPE is that the actual return is reflected in the pension expense.



expected return and the actual return is reflected in the OCI.

Under IFRS, DM can segregate the benefit costs (service cost, interest cost and expected return) on the income statement or present as a combined benefit cost.

Same applies under ASPE.

Recommendation: DM is private and can choose to follow the ‘defer and amortize’ approach for pension accounting. ASPE guidance is transitioning towards eliminating this approach for the future. It is advisable for DM to continue to follow the immediate recognition approach, which is more transparent.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition IC 19-1 Overview

- Public company since shares trade on national stock exchange – therefore IFRS constraint

- May be some bias to show company in best light given significant bank loans – debt to equity ratio is a key ratio as bank will assess and likely use in setting cost of capital – capital intensive given large expenditures in exploration and development (therefore debt likely high)

- Investors will likely want information about potential reserves and also riskiness of assets

- Environmentalists will use the statements as evidence of whether the company is being environmentally responsible and not making excess profits at the expense of the environment

- Since the funding for the new benefit plan is based on net income, any issue that affects net income will be a significant one – especially for the employees who are part of the plan.

- As controller – will want to be transparent yet not expose the company to any additional risks from environmentalists nor increase the cost of capital


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition IC 19-1 (Continued) Analysis and recommendations Mine A depreciation Componentize railway cars/rails Do not

- Should treat cars and tracks as separate and amortize over different period or using different method since they have differing lives and usage.

- The mineral property depreciation should be based on reserves and depletion whereas the railway system on usage.

- The company may be able to salvage and sell the railway system at the end – or reuse.

- Better to separate the equipment from the property – more transparent.

- Mine will last 10 years and so just amortize all over 10 years.

- Costs to componentize not worth it – costs exceed benefits.

- Will likely abandon mine after that so likely little residual value in railway cars and tracks.

Recommendation: It is more transparent to separate out the significant components and depreciate separately. Depletion Based on high estimate of reserves (3X higher so significant difference)

Based on low estimate of reserves

- Lower depletion - Difficult to estimate

however engineers and geologists have established the higher level – for sure more than the low end estimate which is overly conservative

- Higher – so more conservative

- Significant uncertainty since engineers and geologists not able to come up with concrete number

- Will be able to refine as the mining progresses


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition IC 19-1 (Continued) Recommendation: It would be prudent to use the lower estimate of reserves due to the significant uncertainty. Mine B exploration costs Capitalize Expense

- Interest costs must be capitalized as long as they are directly related to the producing mine.

- All other costs related to bringing the mine into production are capitalized as long as directly related.

- May include senior management salaries as need to spend more time due to political instability in country – need to negotiate directly related to getting the mine ready.

- The company believes that the mine will contribute to future cash flows that they have access to – otherwise they would not be spending the money on developing the property.

- Significant uncertainty as to whether sufficient gold ore actually exists of commercial grade.

- One time fee – like a bribe – should likely expense if normal cost of doing business in this type of environment.

- May need to disclose. - Senior management salary

fixed cost and would spend this anyway – more like overhead – normal ongoing cost of doing business.

Recommendation: Overall, the company believes that the land is worth developing and therefore the costs should be capitalized.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition IC 19-1 (Continued) Mine C ARO Accrue Do not

- Must accrue if likely and measurable – since they are in the business of mining – must be able to measure the estimated cost of cleanup.

- It appears as though it is measureable since management knows that it will be material.

- Environmentalist would find this useful info and therefore full recognition would give it prominence and visibility.

- Even if abandoned – still have a responsibility to clean up.

- Will likely abandon and therefore expenditure on ARO not probable.

- Not yet required by law therefore no legal obligation.

Recommendation: Probably better to accrue. Oil rigs Capitalize maintenance Expense

- Future benefit – 2 years and therefore meets the definition of an asset.

- Cost versus benefits – not worth it to capitalize since the benefit is only two years.

- More like an ongoing cost of doing business – need to maintain the equipment to keep it in good working order.

Recommendation: It is better to expense as it is normal maintenance. Gas in caves – expense since will not be able to sell. This is an ongoing cost of doing business.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition IC 19-1 (Continued) Treat ore piles as inventory or leave as part of mine – likely the latter since not yet refined. Other issue: Details about the new long-term benefit plan for the employees are needed. There may be recognition and measurement issues that need to be resolved, depending on the plan specifications.



RESEARCH AND FINANCIAL ANALYSIS RA19-1 BCE INC. All of the answers below are taken from Note 20 of the 2011 financial statements. (a) The plan asset and accrued benefit obligation balances at the end of years

2011 and 2010 are presented below.

(in $millions ) Dec. 31, 2011 Dec. 31, 2010 Accrued benefit obligation 17,472 16,298 Plan assets 16,384 14,835 Funded status–deficit 1,088 1,463

The plan deficit is $1,088 million before taking into account the effect of the asset limit of $169 million (the effect of the asset limit was $192 million in 2010 - see Note 20 for details). The under-funded status has improved since the end of the 2010 mainly because the employer made a large contribution of $1.44 billion in 2011 compared to $1.27 billion in 2010. At the same time, the actual return on the plan assets was a gain of $774 million in 2011 compared to a gain of $1,458 million in 2010. While the actuarial losses on the ABO decreased from $1,770 million in 2010 to $647 million in 2011. Plans in a net deficit position total $1,288, and those in a net surplus position total $31. (b) The reconciliation of the funded status of these plans at December 31, 2011,

to the amounts reported on the balance sheet is as follows:

(in $millions) Dec. 31,

2011 Funded status–deficit $ (1,088) Effect of asset limit (169) Net accrued benefit liabiility (1,257) Reported in non-current assets: Employee benefit asset $ 31 Reported in non-current liabilities: Employee benefit obligation * $ (1,288)


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA19-1 (CONTINUED) The company is showing an employee benefit obligation of $1,288 relating to its pension benefits, which exceeds its funded status deficit due mainly to the effect of the asset limit requirements. This is much more realistic than what BCE reported in 2009 under the defer and amortize approach. (You may wish to refer to the 2009 BCE annual report for 2009 available on SEDAR for further details). (c) The company’s results are shown below in the table: (in $millions)

Expected return on plan assets 1,018 Actual return on plan assets 774

(d) The expense reported for the defined benefit pension plans is $89 million. The main components of the cost of the defined benefit pension plans were as follows: Current service cost 220 Interest cost 887 Expected return on plan assets (1,018) 89 This is substantially lower than the expense under the immediate recognition of ASPE, mainly because under IFRS actuarial losses reported in OCI totalling $962 million would have been charged directly to expense. (e) BCE has other post-employment plans that provide for health and life insurance coverage, but these plans are being phased out over the 10 years ending December 31, 2016. The company also provides some workers with disability plans, workers’ compensation and medical benefits to former employees until their retirement commences. These plans were a large deficit position at December 31, 2011 and 2010 of $1,678 million and $1,614 million. The company has few assets to fund these plans. For 2011 and 2010, the company reported related ABO’s of $1,895 and $1,823 million respectively. (f) The total expense for the defined contribution plans were: $61 million and $47 million for 2011 and 2010, respectively.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA 19-2 CANADIAN NATIONAL RAILWAY (a) As indicated from the notes, the pension plans were in a surplus in 2010, but moved into a deficit position for 2011. At December 31, 2010 and 2011, the surplus (deficit) amounts were $US 197 million and $US (829) million, respectively. (b) The expense is reported as a negative $US 80 million in 2011 and negative $US 70 million in 2010 (that is, it is in an income position for both years). This is a relatively small change year over year (relative to the size of the overall pension plan). The expected return on the plan assets has caused a plan to be in an income, rather than an expense position for both years. This expected gain was higher than the current service cost and the interest cost for both years. This could be because the plan assets were greater than the obligation in 2010 and at the beginning of 2011. This would cause returns on assets to be higher. However it should be noted that in 2011, the company had an actual return that was much lower than their expected return ($36 million vs. $1,005 million). If this does not improve in 2012, it could eventually lead to pension cost to be in an expense position (in 2012 or 2013). (c) The amount of cash flow incurred to fund the plan for 2011 was $US 458 million and $US 411 million for 2010. Differences in the year over year amounts to fund the plan could be based on the number of employees still in the plan or the amount of surplus being used to fund the plan in 2010. In the case of CN, it is likely that with the large surplus in 2010, the company was able to make lower contributions in 2010. In both years, the amount of the expense is lower than the actual amount required to fund the plan (as indicated by the surplus turning into a deficit position over the two year period). (d) This is an interesting question for the company (and other companies that have moved from “Defer and Amortize” to “Immediate Recognition”). Since they moved from the defer-and-amortize approach several years ago, the financial statement presentation is more realistic than it has been. However, under IFRS the company is able to record remeasurement gains and losses (and actuarial gains and losses) in OCI. In this respect, the company can still “defer” the impact of actual losses from the plan on EPS. This reflects the expectation that the losses may reverse eventually and be replaced with higher than expected gains. Overall, the increase in accumulated OCI loss related to the pension plan in 2011 was $US 1,560 million (reported separately in CNR’s annual report). For the knowledgeable user, since all of the information is provided in the notes, they can easily make any adjustments to the expense that they wish in their analysis. Given this, we could conclude that the information is faithfully represented.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA19-3 RESEARCH TOPIC (a) Relevant rates used to calculate pension information: 2011

Air Canada

2012 Bank of

Montreal

2011 Rona Inc.

Discount rate Rate of compensation increase Expected long-term rate of return on plan assets

5.2%

2.50%

6.9%

5.1%

3.3%

5.9%

5.0%

3.7%

6.0%

(b) The discount rates are fairly similar for all three companies. The expected rates of compensation increases though are different. Air Canada’s rate of 2.5% is the lowest, with RONA and Bank of Montreal having similar rates of 3.3% and 3.7%. This difference will have a significant impact on the projected amount of the accrued benefit obligation. The expected rates of returns are similar ranging from 5.9% for the Bank of Montreal to Air Canada of 6.9%. However, even seemingly small differences in these percentages can be significant (e.g., the difference of 6.0% vs. 6.9% for RONA and Air Canada is a 15% difference in discount rates). Differences in discount rates like these can result in significant differences in the determination of the underlying amounts such as the DBO or ABO.

(c) The changes in the assumptions during the period covered in the notes of

the companies’ financial statements are presented below.

Air Canada Bank of Montreal RONA

Discount rate Decreased by 0.3% from 5.5%

to 5.2%

Decreased by 0.1% from 5.2%

to 5.1%

Decreased by 0.5% from 5.5%

to 5.0% Rate of compensation increase

No change, remains at 2.5%

Increased 0.1% from 3.2% to

3.3%

Increased by 0.1% from 3.6%

to 3.7% Expected long-term rate of return on plan assets

Decreased 0.1% from 7.0% to

6.9%

Decreased 0.4% from 6.3% to

5.9%

No change, remains at 6%


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA19-3 (Continued)

The most significant change was in the discount rate used. All three companies decreased their discount rates with the range being 0.1% to 0.5%. This will result in a lower interest cost which will decrease the pension expense, and increase the accrued benefit obligation. The small increase in the rate of expected compensation increase for Bank of Montreal and RONA will increase their pension expense and the obligation. In addition, an increase in the rate of compensation would also result in an actuarial loss. Increases in pension expense resulting from changes in assumptions would have the effect of increasing the accrued pension liability (or decreasing a prepaid pension cost), all else being equal.

(d) Air Canada: The company provides to its employees defined benefit and

defined contribution retirement benefits and other post-employment benefits such as health, life and disability. Assumptions stated: Discount rate is 5.2% and rate increase in health care costs are 7.5%, with cost trend rates declining to 5.0% by 2015.

Bank of Montreal: The company provides defined benefit and defined

contribution pension plans for its employees, in addition to health and dental and life insurance benefits for retirees and current employees. Assumptions stated: Discount rate is 5.1%, Rate of compensation increase is 3.3%, and ultimate health care cost trend rate is 5.4%.

RONA Inc.: RONA provides defined benefit and defined contribution

pension plans for its employees. It does not provide any post-employment medical plans.

The types of assumptions made are standard among companies, depending

on the actual post-employment benefits provided. The rates applied in quantifying the components of the medical benefits are similar, although within a broader range of 5.0% to 7.5%. These rates will have a significant effect on the health-care plans obligation and related expense, but the long run trends expected are more similar for Air Canada and the Bank of Montreal.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA19-3 (Continued) (e) Below is the information on the defined benefit pension plan and post-

retirement benefit plans for 2011 fiscal year end (2012 for Bank of Montreal).

Air Canada

$millions Bank of

Montreal $millions

RONA $thousands

Defined benefit plans

Funded status (deficit) surplus

(4,519) (210) (4,610)

Actual amount (liabilities)/assets reported

(4,519) 465 (6,192)

Difference 0 (675) 1,582 Other employee benefits

Funded status (deficit) surplus

(1,116) (1,068) N/A

Actual amount (liabilities)/assets reported

(1,044) (989) N/A

Difference (72) (79) N/A There were some significant differences in the values recognized in the

financial statements for the defined benefit liabilities or assets and the actual funded status of the plans. For example, the difference of $1,582 for RONA relates to the fact that RONA does not have an unconditional right to any surpluses in individual plans, so the liability reported is greater than the funded status deficit at the financial reporting date. The $675 difference for the Bank of Montreal relates to use of the deferral and amortization method by the bank for 2012. The difference relates mainly to a loss on the benefit liability not yet recorded relating to changes in assumptions. The new standard requiring use of immediate recognition must be adopted by the bank for its fiscal year starting November 1, 2013, so by the end of fiscal 2013-2014 the difference is likely to be eliminated.


Kieso, Weygandt, Warfield, Young, Wiecek, McConomy Intermediate Accounting, Tenth Canadian Edition RA19-4 RESEARCH TOPIC

The AcSB has proposed replacing existing CICA Handbook Section 3461

with Section 3462. Currently, under Section 3461 of ASPE, a company can use either the deferral and amortization approach or the immediate recognition approach for accounting for their pension benefits. Under the new proposals, the deferral and amortization approach would be eliminated.

In addition, new Section 3462 would require that plan obligations and plan

assets be measured at the balance sheet date, rather than having the option of using a date of up to three months prior to the balance sheet date.

The new section also utilizes similar terminology to that used under IAS 19

(for example, using the term defined benefit obligation, rather than accrued benefit obligation; and using the term defined benefit liability (asset) on the balance sheet rather than the term accrued benefit liability (asset)). This should help to minimize confusion when comparing the financial statements for companies using IFRS vs. ASPE.

Under the new section, companies would no longer need to refer to the

expected rate of return on plan assets when calculating pension expense (as was done under the deferral and amortization method). The actual rate of return is used under the immediate recognition approach of ASPE when determining pension expense. Since ASPE does not utilize OCI, there is no need to consider the expected rate of return (it is still referred to under IFRS for determination of remeasurement gains and losses relating to plan assets, with such gain and losses flowing through OCI).

Companies would use the same discount rate to determine the limit on the

carrying amount of a defined benefit asset as they use for the DBO. This is a change, as they used to use the expected rate of return on plan assets for calculating the limit on the carrying amount of a defined benefit asset. Companies would also use the same discount rate as used for the DBO in order to determine remeasurement gains or losses related to plan assets (similar to IFRS). However, while such remeasurement gains or losses would be charged to OCI under IFRS, under the new ASPE section the remeasurement gains or losses would just be required to be disclosed (not recorded separately).



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