I Want The World to Know TV

Ch 20 Pensions and Other 1. Chapter 20 discusses the various aspects of accounting for the cost of pension plans. Accounting for pension costs is somewhat comp 2. (S.O. 1) A is an arrangement whereby an employer provides benefits 4. (S.O. 2) The most common ty pes of pension arrangements are In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. The formula might consider such factors as age, length of service, employer’s profits, and compensation level. The tion plan is straightforward. The employer’s responsibility is simply to make a contribution each year based on the formula established in the plan. Thus, the employer’s annual cost is the amount it is obligated to contribute to the pension trust. If the contribution is made in full eac h year no pension asset or liability is reported 5. A defined benefit plan defines the benefits that the employee will receive at the time of 6. (S.O. 3) Most account ants agree that an employer’s is the deferred compensation obligation it has to its employees for their services under the terms of the pension plan. However, there are three ways to measure this liability. One approach is to base the obligation on the vested benefits current employees are entitled to. The vested benefits pension obligation is co mputed using current salary levels and includes only vested benefits. A second appr oach to the measurement of the pension obligation is to base the computation on all years of servic e performed by employees under the plan-both vested and nonvested using current salary levels. This measurement of the pension obligation is called the accumulated benefit obligation. A third measurement technique bases the computation on both ve sted and nonvested service using Because future salaries are expected to be higher than current salaries, this approach, known as the projected benefit obligation, results in the largest measurement of the pension obligation. 7. Regardless of the approach used, the esti mated future benefits to be paid are discounted to present value. While the a ccumulated benefit obligation is used in certain situations, the profession generally has d benefit obligation to measure the liability for the pension obligation. 8. Prior to issuance of FASB Statement No. 87, accounting for pension plans followed noncapitalization approach. Noncapitalization, often refe 9. (S.O. 4) There is now broad agreement th at pension cost should be accounted for on the accrual basis. Accounting for pension plans requires measurement of the cost and its Service Cost. The expense caused by the increas e in pension benefits payable (the projected benefit obligat ion) to employees because of t heir services rendered during the current year. Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Interest. Because a pension is a deferred compens ation arrangement, it is recorded on a discounted basis. Interest ex pense accrues each year on th e projected benefit obligation 155,000 in the computation of pension 10. (S.O. 5) In illustrating the accounting for t hese factors the text material makes use of Pension Expense Items Cash Prepaid/ Accrued Cost Benefit Obligation Plan The left-hand “General Journa l Entries” columns of the work 11. Memo Record Items Pension Expense Cash Prepaid/ Accrued Cost Benefit Obligation Plan (a) Service Cost (b) Interest Cost 32,000 Cr. 3,500 Dr. 27,000 Cr. 450,000 Dr. 31,500 Cr. 30,000 Dr. 32,000 Dr. 17,000 Dr. 17,000 Cr. 491,500 Cr. 495,000 Dr. *$450,000 X .07 12. To illustrate the use of Balance, 1/1/07 (a) Service Cost (b) Interest Cost Items Pension Expense Cash Prepaid/ Accrued Cost Benefit Obligation Plan (f) Prior Service Cost (g) (h) Interest Cost 29,000 Cr. 3,500 Dr. 42,000 Cr. 495,000 Dr. 533,500 Cr. 42,000 Dr. 31,000 Dr. 28,000 Cr. 17,500 Cr. 574,845 Cr. 531,000 Dr. Service Cost nized Prior Service Cost 42,000 Dr. 495,000 Dr. 22,845 Cr. 37,345 Cr. 29,000 Dr. 24,000 Cr. (k) Contributions (l) Benefits Journal Entry for 2003 31,000 Cr. The pension reconciliation schedule is as follows: Projected benefit obligat ion (Credit) $(574,845) Funded status (43,845) Unrecognized prior service cost (Debit) 24,500 Prepaid/accrued pension cost (Credit) $ (19,345 Gain or Loss 13. (S.O. 7) Because of the co ncern to companies th at pension plans woul and unexpected swings in pensi on expense, the profe ssion decided to reduce the volatility by using smoothing techniques. Balance, 12/31/07 (f) Prior Service Cost Balance, 1/1/08 (g) Service Cost (h) Interest Cost Projected Benefit Obligatio n $3,600,000 $4,100,000 $4,400,000 Obligation Corridor (Current Year) 2007 $3,600,000 $4,100, 000 $410,000 $ -0- $ -0- 2008 4,100,000 4,300,000 430,000 900,000 58,750(a) 2009 4,400,000 4, 200,000 440,000 1,641, 250(b) 150,156(b) (a) $900,000 – 430,000 = (b) $900,000 – 58,750 + 800,000 = $1,641,250 $1,641,250 – 440,000 = $1, The loss recognized in 2007 w ould increase pension expense by $58,750. This amount is far less than the $900,00 0 that would be recogn ized if the corridor me thod was not applied. The rationale for the corridor is that gains and losses result from refinement s in estimates as well as real changes in economic value and that, over ti me, some of these gains and 16. Continuing the Oehler Company illustration into 2009, the following facts apply to the Annual service cost for 2009 $29,000 Items Pension Expense Cash Prepaid/ Accrued Cost Benefit Obligation Plan (m) Service Cost (o) (p) Unexpected loss (q) Amortization of (r) Contributions PSC Balance, 12/31/04 29,000 Dr. 40,239 Dr. *9,170 Cr. 53,069 Dr. 32,000 Cr. 21,000 Dr. 29,000 Cr. 531,000 Dr. **15,916 Cr. 24,500 Dr. 28,000 Dr. 40, 239 Cr. 9,170 Dr. 640,000 Cr. 571,000 Dr. nized Prior Service Cost 21,000 Cr. 21,069 Cr. 20,000 Cr. 32,000 Dr. 15,916 Dr. 20,000 Dr. (s) Benefits (t) Liability increase Journal Entry for 2004 28,000 Cr. The pension reconciliation schedule is as follows: Projected benefit obligat ion (Credit) $(640,000) Funded status (69,000) Unrecognized prior service cost (Debit) 3,500 Prepaid/accrued pension cost (Credit) $ (40,414 Balance, 12/31/08 Journal Entry for 2009 Balance, 12/31/09 Minimum Liability 17 (S.O. 9) FASB Statement No. 87 requires immediate recognition of a liability (called the ) when the accumulated benefit obligat ion exceeds the fair value of 2008 2009 Accumulated benefit obligatio n $(450,000) $(560,000) $(670,000) 531,000 571,000 Unfunded accumulated benefit obligation (min. liability) $ (29,000) (99,000) Accrued pension cost 19,345 40,414 Additional liability (9,655) (58,586) Unrecognized prior service cost 24,500 3,500 Contra equity charge $ -0- $ (55,086 When a company recognizes a minimum liability 20. (S.O. 10) If the amount paid (credit to Cash) by the employer to the pensio n trust is less than the annual provision (debit to Pensio n Expense), a credit balance accrual in the amount of the difference arises . This accrued pension cost us ually appears in the long-term liability section and sh ould be titled Accrued Pension Cost, Liabilit y for Pension Expense Not Funded, or Due to Pension Fund. Classification as a curre nt liability occurs when the liability requires the disbur sement of cash within the next year. When the cash paid to is greater than the amount c harged to expense, a deferred charge equal to the difference arises. This deferra l should be reported as Prepaid Pension Cost, Deferred Pension Expense, or Prepaid Pension Expense in the current assets section if it is current in nature and 22. The Pension Reform Act of 1974 (ERISA) set out specific requirements for companies . These requirements are designed to safeguard employees’ pension rights, specifically in the areas of fund ing, partic and vesting. The Act also created the Pension Benefit Guaranty Corporation (PBGC) to administer terminated plans and to impose liens on the corporate assets for certain unfunded pension liabilities. 23. prevents companies from recapturing exce *24. (S.O. 11) Health care and other The material in this chapter can be covered in four class periods. Acc pension plans is technically complex and concept ually challenging for most students. The use Illustration 20-1 can be used to describe basic features of different types of pension plans. 1. Definition of pension plan: an arrangement whereby an employer provides benefits to b. benefits for vested employees only at current salaries. c. benefits for vested and nonvested employees at current salaries. d. Projected benefit obligation: present value of benefits for vested and nonvested employees at future salaries Illustration 20-2 can be used to identify and define the basic components that make up 1. Service cost: the actuarial present value of benef its attributed by the pension benefit formula to employee service during t he period. Increases pension expense. 2. Interest on the liability: the interest for the period on Illustration 20-3 provides a numerical example of the amortization of unrecognized prior 5. (L.O. 7) Illustration 20-4 provides a numerical example of t he corridor approach in amortizing unrecognized gains or losses. c. Single-occurrence gains or losses are recognized immediately. Illustration 20-5 provides an example of a pensio D. (L.O. 9) Minimum Liability. 1. FASB requires immediate re cognition of a liability when the accumulated benefit e. Table indicating allocati Illustration 20-6 ension reconciliation schedule. F. Other Aspects. 1. The Pension Reform Act of 1974. Mandated many pension plan requiremen ts; including minimum funding, participation, and vesting. 2. Pension terminations. a. SFAS No. 88 requires recognition in earnings Illustration 20-7 (2) Illustration 20-8 3. Components of postr PENSION RECONCILIATION SCHEDULE