Many business organizations have been concerned with providing for employee retirement since the late 1800s

Many business organizations have been concerned with providing for employee retirement since the late 1800s. During recent decades, a marked increase in this concern has resulted in the establishment of private pension and other post-retirement benefit plans in most companies of any size.

The substantial growth of these plans, both in the numbers of employees that they cover and in the types and value of retirement benefits, has increased the significance of the cost of these benefit plans in relation to the financial position, results of operations, and cash flows of many companies. In working with the benefit plans, accountants encounter a variety of terms. Each benefit plan component must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities that offer these plans.

Instructions

(a) How does a contributory plan differ from a non-contributory plan?

(b) Differentiate between accounting for the employer and accounting for the benefit plan.

(c) Explain the terms “funded” and “accrued benefit liability or asset” as they relate to the employer and the benefit plan itself.

(d) Distinguish between each of the following sets of terms as they relate to pension plans and their treatment under ASPE and IFRS:

1. Current service cost and past service cost

2. Asset experience gain/loss and liability experience gain/loss

(e) Explain how the accounting for other post-retirement benefit plans with benefits that vest or accumulate differs from the accounting for defined benefit pension plans, if there is any difference.

(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 fund, 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 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.  

(d) Terms and their definitions as they apply to accounting for pension plans follow:

    1. 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 defer-and-amortize approach, these are deferred and amortized over an appropriate period of time.  In the case of PE GAAP, these costs are amortized over the period to full eligibility for the employee or some shorter period. Under IFRS, these past service costs are deferred and amortized over any remaining vesting period.

    2. Asset experience 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 in order to smooth out wide swings that may occur in the actual return. Liability 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 projected benefit obligation. This would also involve a change in assumptions used by the actuary in calculating the ABO (for example, a change in the interest rate used to discount the pension cash flows).

      Under the defer-and–amortize approach allowed under PE GAAP and IFRS, either the corridor approach can be used, or some shorter period 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 PBO and pension assets at the beginning of the year) be amortized over the remaining service period of the employee group. IFRS allows one additional choice which is to recognize all actuarial gains and losses immediately into OCI. 

      Under the immediate recognition approach, allowed only under PE GAAP, the actuarial gains and losses are all immediately recognized into income.

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 more complex

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  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.