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CHAPTER ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS This IFRS Supplement provides expanded discussions of accounting guidance under International Financial Reporting Standards (IFRS) for the topics in Intermediate Accounting. The discussions are organized according to the chapters in Editions) and therefore can be used to supplement the U.S. GAAP requirements as presented in the textbook. Assignment material is provided for each sup- plement chapter, which can be used to assess and reinforce student understanding of IFRS. ExpenseCash General Journal EntriesMemo Record ILLUSTRATION 20-1 Basic Format of Pension U.S. GAAP ERSPECTIVE IFRS and U.S.GAAP separate defined benefit plans.The contribution plans is similar. Pension Expense 10,000 Dr. 8,000 Dr. 7,000 Cr. 111,000 Dr. 9,000 Dr. 10,000 Dr. 10,000 Cr. 9,000 Dr. 8,000 Cr. 8,000 Cr. 100,000 Cr. 9,000 Cr. 10,000 Cr. 7,000 Dr. 112,000 Cr. 1,000 Cr.* 1,000 Cr.** Balance, Dec. 31, 2011 **$112,000 – $111,000 = $1.000 General Journal EntriesMemo Record ILLUSTRATION 20-2 Defined benefit obligation (Credit)$(112,000) ILLUSTRATION 20-3 2011 U.S. GAAP ERSPECTIVE Both IFRS and U.S.GAAP service cost (PSC) (referred to as prior service cost in U.S.GAAP) in the same manner.However,IFRS recognizes any vested amounts immediately and over the average remaining period to vesting.U.S.GAAP remaining service lives of employees. As a result, Hitchcock reports amortization of past service cost of £120,000 in 2011 As indicated earlier, Hitchcock measures past service cost due to an increase in the liability resulting from the amendment (referred to as positive past service cost). It is also possible to decrease past service costs by decreasing the defined benefit obligation (referred to as negative past service cost). Negative past service cost arises when an entity changes the benefits attributable to past service cost so that the present value of the defined benefit obligation decreases. Both positive and negative past service cost adjustments are handled in the same manner, that is, adjust income immediately if vested and amortize the unvested amount over the average remaining period until vest- ILLUSTRATION 20-4 Service Cost Amortization Beginning Balance Amortization (Expense)Ending Balance in Yearin Unrecognized PSCVestedUnvestedUnrecognized PSC 2011£300,000£60,000£60,000£180,000 201260,000120,000 201360,00060,000 201460,000Ñ0Ñ Annual Pension ExpenseCash General Journal EntriesMemo Record (f) Past service cost Balance, Jan. 1, 2012 24,960 Cr. 25,960 Cr. 20,000 Cr. 20,000 Cr. 9,500 Dr. 19,360 Dr. 11,100 Cr. 44,960 Dr. 27,200 Dr. 27,200 Cr. (g) Service cost ILLUSTRATION 20-5 Defined benefit obligation (Credit)$(214,460) ILLUSTRATION 20-6 U.S. GAAP ERSPECTIVE U.S.GAAP does not permit income immediately (either To illustrate the corridor approach, data for Callaway Co.Õs defined benefit obliga- Beginning-of-the-Benefit Fair Value of /  20121,300,000 1,700,000170,000 20131,500,000 2,250,000225,000 20141,700,000 1,750,000175,000 *The corridor becomes 10% of the larger (in colored type) of the defined benefit 200 50 0 20112012201320142015 Corridor ILLUSTRATION 20-8 201120122013 Defined benefit obligation£2,100,000£2,600,000£2,900,000 Benefit Plan Unrecognized YearObligation (For Current Year) 2011£2,100,000£2,600,000 £Ð0Ð £Ð0Ð 20122,600,0002,800,000 20132,900,0002,700,000 If the average remaining service life of all active employees is 5.5 years, the schedule In essence, these gains and losses are subject to Unexpected Gain or Loss Remaining Service Life ILLUSTRATION 20-10 The IASB recently issued an exposure draft to further modify its pension standard.The proposed revisions will eliminate corridor amortization and require expanded recognition of ExpenseCash Past Service Cost Memo Record ILLUSTRATION 20-11 Defined benefit obligation (Credit)$(265,000) ILLUSTRATION 20-12 Immediate Recognition of Actuarial Gains and Losses The IASB indicates that the corridor approach results in the minimum amount recog- WentworthÕs 2011 revenues are 100,000, and expenses for 2011 (excluding pension expense) are 70,000. If Wentworth reports the adjustment of actuarial gains and losses Interest on defined benefit obligation210 Expenses (excluding pension expense)70,000 Pension expense2,290 Statement of Comprehensive Income Expenses (excluding pension expense)70,000 100)2,190 Actuarial loss on defined benefit plan100 Total comprehensive income ILLUSTRATION 20-15 Comprehensive Income Reporting of Actuarial ILLUSTRATION 20-16 Before After CurtailmentGain (Loss)Curtailment Defined benefit obligation (Credit) **10% U.S. GAAP ERSPECTIVE For defined benefit plans,U.S. REPORTING PENSION PLANS IN FINANCIAL STATEMENTS extensive reporting and disclosure requirements. Acompany reports the pension AUTHORITATIVE LITERATURE QUESTIONS cost recognized as pension expense? What are Òliability gains and losses,Ó and how are they Describe the immediate recognition approach for unrec- Bill Haley is learning about pension accounting. He is con- BRIEF EXERCISES EXERCISES As a result of the operation of the plan during 2010, the following additional data are provided by the actuary. Service cost for 2010$90,000 PROBLEMS Instructions (Round all amounts to the nearest euro.) Prepare a schedule, based on the average remaining life per employee, showing the unrecognized past service cost that would be amortized as a component of pension expense for 2010, 2011, and Compute pension expense for the year 2011. Prepare the journal entries required to report the accounting for the companyÕs pension plan for 2011. USING YOUR JUDGMENT Financial Reporting Problem Marks and Spencer plc (M&S) The financial statements of www.wiley.com/ Instructions What kind of pension plan does M&S provide its employees? BRIDGE TO THE PROFESSION Professional Research Jack Kelly Company has grown rapidly since its founding in 2002. To instill loyalty in its employees, Kelly ularly any gains or losses that develop in the plan. Kelly has asked you to conduct some research on the Instructions Access the IFRS authoritative literature at the IASB website ( http://eifrs.iasb.org/ · IFRS Supplement