Ekedahl Inc. has sponsored a non-contributory defined benefit pension plan for its employees since 1990. Prior to 2011, the funding of this plan exactly equalled cumulative net pension expense. Other relevant information about the pension plan on January 1, 2011, is as follows:
1. The accrued benefit obligation amounted to $1,250,000 and the fair and market-related value of pension plan assets was $750,000.
2. During 2011, the plan was amended and resulted in unrecognized past service cost of $500,000.
3. The company has 200 employees who are expected to receive benefits under the plan. The employees’ expected period to full eligibility is 13 years with an EARSL of 16 years.
4. Of the 200 employees, 95 employees’ pension benefits have vested, while the remaining 105 employees’ pension benefits will vest over the next 10 years. The amount of past service cost attributed to the 95 employees with vested benefits has been determined to be $245,000.
On December 31, 2011, the accrued benefit obligation was $1,187,500. The fair value of the pension plan assets amounted to $975,000 at the end of the year. A 10% discount rate and an 8% expected asset return rate were used in the actuarial present value calculations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2011 amounted to $50,000. The employer’s contribution to the plan assets was $143,750 in 2011. No pension benefits were paid to retirees during this period.
Instructions
Round all answers to the nearest dollar.
(a) Calculate the amount of past service cost that will be included as a component of pension expense in 2011, 2012, and 2013 under:
1. The immediate recognition approach
2. The deferral and amortization approach under accounting standards for private enterprises
3. The deferral and amortization approach under IFRS
(b) Assuming the deferral and amortization approach is applied, determine the amount of any actuarial gains or losses in 2011 and the amount to be amortized to expense in 2011 and 2012.
(c) Calculate pension expense for the year 2011 under:
1. The immediate recognition approach
2. The deferral and amortization approach under accounting standards for private enterprises
3. The deferral and amortization approach under IFRS
(d) Prepare a schedule reconciling the plan’s funded status with the pension amounts reported on the December 31, 2011 balance sheet as accounted for with the deferral and amortization method under both PE GAAP and IFRS.
(e) Assume that Ekedahl’s pension plan is contributory rather than non-contributory. Would any part of your answers above change? What would be the impact on the company’s financial statements of a contributory plan?
(a) Past service cost was incurred on December 30, 2010, affecting the ABO at December 31, 2010. Pension expense for 2010 was affected only under the immediate recognition approach, and this was for the full $500,000.
Past Service Cost under the immediate recognition approach
| 2011 2012 2013 | | $0 0 0 | | Recognized in full in 2010 |
Past Service Cost under the deferral and amortization approach under PE GAAP
| 2011 2012 2013 | | $38,462 38,462 38,462 | | ($500,000 ÷ 13 years) ($500,000 ÷ 13 years) ($500,000 ÷ 13 years) |
Past Service Cost under the deferral and amortization approach under IFRS
| 2011 2012 2013 | | $270,500 25,500 25,500 | | (245,000 + ($255,000 ÷ 10 years)) ($255,000 ÷ 10 years) ($255,000 ÷ 10 years) |
(b) 12/31/11 Fair value of plan assets $975,000
Less: Expected fair value of assets
1/1/11 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)
12/31/11 New actuarially
calculated ABO 1,187,500
Less: 1/1/11 ABO $1,250,000
Add interest
(10% X $1,250,000) 125,000
Add service cost 50,000
Less benefits 0 1,425,000
Liability gain (237,500)
Unrecognized net gain 12/31/11 $ (258,750)
Amortization in 2011: Nonebecause there was no
beginning balance.
Amortization in 2012 (corridor approach): $8,750
Year | | Accrued Benefit Obligation | | MV of Plan Assets | | Corridor | | Unreco-gnized Net (Gain) | | Amorti-zation |
| | | | | | | | | | |
2011 2012 | | $1,250,000 1,187,000 | | $750,000 975,000 | | $125,000 118,700 | | $ 0) (258,750) | | $ 0* *8,753* |
*$258,750 – $118,700 = $140,050; $140,050 ÷ 16 = $8,753
(c) Pension expense for 2011 under the immediate recognition approach is comprised of the following:
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 2011 under the deferral and amortization approach for PE GAAP is comprised of the following:
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 2011 under the deferral and amortization approach for IFRS is comprised of the following:
Service cost $ 50,000
Interest on accrued benefit obligation* 125,000
Expected return on plan assets** (60,000 )
Amortization of unrecognized past service cost*** 270,500
Pension expense $385,500
***($1,250,000 X 10% = $125,000)
***$750,000 X 8% = $60,000
****$245,000 + $255,000/10
(d) Reconciliation Schedule 2011 for PE GAAP(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)
Accrued pension liability* $ (9,712)
*Proof: January 1, 2011 balance of the Accrued Pension Liability 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 2011, the Accrued Pension Liability:
Opening balance $0
Credit when expense recognized $153,462 cr
Debit when contributions made 143,750dr
Balance, December 31, 2011 $ 9,712 cr
Reconciliation Schedule 2011 for IFRS
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 – $270,500) 229,500
Unrecognized net gain) (258,750)
Accrued pension liability* $ (241,750)
*Proof: Opening balance $0
Credit when expense recognized $385,500 cr
Debit when contributions made 143,750dr
Balance, December 31, 2011 $241,750cr
(e) If Ekedahl’s plan was contributory, the employees would bear part of the cost to fund the pension plan, reducing the net 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 (e) of the previous answers; the reduction of expense from employee contributions would be recorded separately; financial statements would show the net 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.
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