Sm19 - Chapter 19 textbook solutions PDF

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CHAPTER 19 PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS ASSIGNMENT CLASSIFICATION TABLE Topics

Brief Exercises

  1.

Pensions from a business  perspective.

1

  2.

Defined contribution plans.

2,3

1, 2, 22

1, 2

  3.

Defined benefit plans.

3

22

1, 2, 5, 6, 7  10,11,12 13

  4.

Employer’s benefit obligation.

4

3, 4, 5,7,8,9,  3,4,5,6,7,  11,12,14,15, 9,10,11,12, 17,19,21  13,14

  5.

Transactions and events that  change benefit plan assets. 

5,6

3, 4, 5, 6, 7, 8 3,4,5,6,7,9, 9,11,12,14,15 10,11,12, 17,19,21 13

  6.

Plan’s surplus or deficit position.  6,7,13

  7.

Pension expense and accounting  7,8,9,10,11 3,4,5,7,8,9,10 3, 4, 5, 6, 7, 11,12,13,14, 8, 9, 10,  for a defined benefit pension plan  12,13,14 15,16,17,19  11,12 *16, *17 under IFRS and ASPE 21,22

Exercises

Problems

5,7,8,9,11,12 3,4,5,6,7, 9 14,15,19,21 10,11,12,13

ASSIGNMENT CLASSIFICATION TABLE (CONTINUED) Topics

Brief Exercises Exercises

Problems

  8.    Defined benefit plans with  15 benefits that vest or  accumulate other than pension  plans.

14, 16, 17,  2, 13, 15 18, 22

  9.

3, 7, 9, 12,  19

Presentation and disclosure.

  10. Differences between IFRS and  ASPE.  *11. One-person plan.

4, 6, 7, 10, 11

2, 15

10, 11, 13,  4,5, 6, 8, 13, 15 15, 16

16,17

20

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

14

ASSIGNMENT CHARACTERISTICS TABLE Item E19-1 E19-2 E19-3 E19-4 E19-5 E19-6 E19-7 E19-8 E19-9 E19-10 E19-11 E19-12 E19-13 E19-14 E19-15 E19-16 E19-17 E19-18 E19-19 E19-20 *E19-21 E19-22

Description Defined Contribution Plan. Defined Contribution Plan. Calculation of pension expense – IFRS. Preparation of work sheet for E19-3. Defined benefit plan, changes in pension  accounts Calculation of actual return. Calculation of expense, reconciliation. Pension work sheet for E19-7. Continuity schedules, expense Calculation of pension expense. Calculation of pension expense, worksheet. Calculation of pension expense, effect of ASPE  policy choice Pension expense. Post-retirement benefit expense. Calculation of pension expense. Post-retirement benefit expense. Post-retirement benefit work sheet for E19-16. Post-retirement benefit reconciliation schedule. Pension calculations and disclosures. Calculation of current service cost and DBO –  one person plan. Expense, worksheet, entries Terms related to defined benefit plans

Level of Time Difficulty (minutes) Simple Simple Moderate Moderate Moderate

  5-10 10-15 15-20 15-25 25-30

Simple Moderate Moderate Moderate Simple Moderate Moderate

5-10 35-45 30-35 30-35 10-15 25-35 25-30

Simple Moderate Moderate SImple Simple Simple Moderate Moderate

10-15 30-35 20-30 10-15 15-20 5-10 25-35 25-30

Moderate Moderate

25-35 20-30

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED) Item P19-1 P19-2 P19-3 P19-4 P19-5 P19-6 P19-7 P19-8 P19-9 P19-10 P19-11 P19-12 P19-13 *P19-14 P19-15 

Description Journal entries for a long-term disability benefit. Defined benefit plan for sabbatical leave. IFRS - Three-year continuity schedules, entries,  ASPE expense comparison, user interest. Three-year continuity schedules, ASPE and  IFRS ASPE versus IFRS – not using worksheet. One-year events, reconciliations, IFRS and  ASPE Two-years - Pension expense, journal entries,  note disclosure and worksheet, ASPE One-year - calculation of expense and balance  sheet account – and reconcile ASPE and IFRS Choice of worksheet or schedule preparation – 3 years ASPE (same as P19-10) Choice of worksheet or schedule preparation – 3 years IFRS (same as P19-9)  One-year pension events; contributory vs. noncontributory - IFRS One-year contributory plan: work sheet, entries  reconciliation; effect of changes in DBO   assumptions – IFRS and ASPE differences Post-retirement benefit expense, continuity of  DBO and plan assets. Calculation of DBO and past service cost – one  person plan Treatment of a company’s sabbatical leave  under IFRS and ASPE; information needed

Level of Time Difficulty (minutes) Moderate Complex Complex

20-25 35-45 45-55

Moderate

40-50

Complex Complex

40-50 30-35

Complex

45-55

Moderate

30-40

Moderate

35-45

Moderate

35-45

Moderate

20-30

Moderate

30-40

Moderate

30-35

Complex

40-45

Moderate

30-40

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 19-1 (a)

With $9 million in total assets less $9.8 million in total liabilities, the company’s statement of financial position as of December 31, 2017 shows total shareholders’ equity of $(0.8 million). With annual pension expense of $3 million in 2017, it appears that the pension plan may have contributed to a loss situation, and a decrease to retained earnings which may have led to retained earnings becoming a deficit and shareholders’ equity becoming negative. The pension plan has a $2.3 million deficiency ($11.3 million obligation less $9 million plan assets) as of December 31, 2017, resulting in a net defined benefit liability of $2.3 million. Not enough information is provided to determine if the pension plan deficit increased during the year, but the overall deficit position of the plan is significant given the negative shareholders’ equity position of the company. The net defined benefit liability represents 23.5% 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 Current service cost ($2,735,864 * 5%)

$845,350 136,793

Pension expense for 2017

$982,143

(b)

ASPE

Past service cost recognized immediately in expense Current service cost ($2,735,864 * 5%)

$845,350 136,793

Pension expense for 2017

$982,143

That is, there is no difference in pension expense between IFRS and ASPE in this case. However, under ASPE, the past service cost would be considered a remeasurement that should either be presented separately on the income statement or disclosed in the notes to the financial statements.

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. 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 rest 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 lives of the employees. Therefore, accounting for a DB pension plan is much more complex. The pension cost and defined benefit obligation depend 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 (in hundreds of thousands) Defined benefit obligation, opening balance Interest cost Current service cost Benefits paid to retirees Past service cost Defined benefit obligation, ending balance

$138 14 32 (12) 20 $192

BRIEF EXERCISE 19-5 Ending plan assets Beginning plan asset Increase in plan assets Deduct: Contributions $170,000 Less: benefits paid (130,000) Actual return on plan assets

$1,753,000 1,359,000 394,000

(40,000) $ 354,000

BRIEF EXERCISE 19-6 (in hundreds of thousands) Plan assets, opening balance Actual return on plan assets Contributions from employer Benefits paid to retirees

$150 17 30 (12)

Plan assets, ending balance

$185

Defined benefit obligation (BE 19-4) $(192 ) Plan assets at fair value

185

Plan’s surplus (deficit) $ (7 ) Since the defined benefit obligation exceeds the plan assets, the plan is in a deficit position.

BRIEF EXERCISE 19-7 Defined benefit obligation Fair value of plan assets

$3,400,000 2,420,000

Plan deficit, and net defined benefit liability, December 31, 2017

$ 980,000

Note: the past service cost of $990,000 from the 2016 plan amendment has already been included in the defined benefit obligation since the plan was amended on December 31, 2016.

BRIEF EXERCISE 19-8 (in hundreds of thousands) Past service cost Current service cost Net interest cost 11% ($11 – $11) Pension expense Remeasurement gain or loss (OCI): Actuarial loss on fund assets (11% X $100) - $9 2 Actuarial loss on DBO Total remeasurement loss (OCI)

$35 19 0 $54

15 $17

Under IFRS, the pension plan results in total pension expense and decrease in net income and retained earnings of $54, and total remeasurement loss (OCI) and decrease in accumulated other comprehensive income of $17. Combined, this reduces shareholders’ equity by $54 + $17 = $71.

BRIEF EXERCISE 19-9 Current service cost Net interest/finance cost ($210,000 - $238,500*) X 10% Pension expense *Average assets: ($200,000 + ½ of $77,000) Remeasurement gain or loss (OCI): Actuarial gain on fund assets $25,000 – ($238,500 X 10%) Actuarial loss on DBO Net remeasurement loss (OCI)

$58,000 (2,850) $55,150

$(1,150) 14,000 $ 12,850

Under IFRS, the pension plan results in total pension expense and a related decrease in net income and retained earnings of $55,150, and a remeasurement loss (OCI) and decrease in accumulated other comprehensive income of $12,850, for a total reduction in shareholders’ equity of $68,000. BRIEF EXERCISE 19-10 Current service cost Net interest/finance cost ($210,000 - $238,500*) X 10% Actuarial gain on fund assets $25,000 – ($238,500 X 10%) Actuarial loss on DBO Pension expense *Average assets: ($200,000 + ½ of $77,000)

$58,000 (2,850) (1,150) 14,000 $68,000

Under ASPE, the pension plan results in total pension expense and a related decrease in net income and retained earnings of $68,000, for a total reduction in shareholders’ equity of $68,000.

BRIEF EXERCISE 19-11 IFRS RUI CORPORATION General Journal Entries

Items Balance, 1/1/17 Service cost Net interest/finance cost Remeasurement gain on plan assets Past service cost Contributions Benefits paid Expense entry Contribution entry Bal. 12/31/17

Remeasurement Annual (Gain) Pension Loss (OCI) Expense

Cash

Memo Record Net Def. Benefit Defined Liability/ Benefit Asset Obligation -0-

27,500 Dr

250,000 Cr 250,000 Dr 27,500 Cr

0 Dr

25,000 Cr

29,000 Dr.

29,000 Cr

25,000 Dr 5,000 Dr

5,000 Cr

5,000 Cr

Plan Assets

20,000 Cr 000 Dr29, 56,500 Dr ________ 51,500 Cr 20,000 Cr 20,000 Dr 31,500 Cr

17,500 Dr

20,000 Dr 17,500 Cr

314,000 Cr 282,500 Dr

BRIEF EXERCISE 19-12 ASPE RUI CORPORATION General Journal Entries

Items Balance, 1/1/17 Service cost Net interest/finance cost Remeasurement gain on plan assets Past service cost Contributions Benefits paid Expense entry Contribution entry Bal. 12/31/17

Annual Pension Expense

Cash

Memo Record

Net Def. Benefit Defined Liability/ Benefit Asset Obligation -0-

27,500 Dr

250,000 Cr 250,000 Dr 27,500 Cr

0 Dr

25,000 Cr

5,000 Cr 29,000 Dr.

29,000 Cr

20,000 Cr 000 Dr29, 51,500 Dr ________ 51,500 Cr 20,000 Cr 20,000 Dr 31,500 Cr

Plan Assets

25,000 Dr 5,000 Dr

17,500 Dr

20,000 Dr 17,500 Cr

314,000 Cr 282,500 Dr

BRIEF EXERCISE 19-13 Plan deficit, January 1, 2017 $1,100 - $1,000

$

100

Pension events during 2017: Current service cost

+90

Finance/interest cost on DBO* 6% X $1,100

+66

Actual return on plan assets*

-55

Contributions into plan Plan benefits paid (decreases both plan assets and DBO)

-92

Plan amendment, December 31, 2017 Plan deficit, December 31, 2017

No effect +40 $ 149

*Or net interest/finance cost: 6% X 100 = +$6 increased by the actuarial loss on the assets of $55 – (6% X $1,000) = loss of +$5 = $11. Regardless of approach, the net effect is an increase in the deficit of $11. Proof (not required): DBO, Dec. 31/17: $1,100+$66+$90-$64+40 Assets, Dec. 31/17: $1,000+$55+$92-$64 Plan deficit, December 31, 2017

BRIEF EXERCISE 19-14

$1,232 1,083 $ 149

Based on the actuarial report, there is a $41,300 actuarial loss. (a)

Under IFRS, the entire $41,300 actuarial loss is recognized immediately as a 2017 remeasurement loss in other comprehensive income. Pension expense reported in net income is not affected.

(b)

Under ASPE, the entire $41,300 actuarial loss is also recognized as a remeasurement loss, but it is included immediately in 2017 pension expense and deducted in determining net income.

BRIEF EXERCISE 19-15 (a)

IFRS

Current service cost Net interest/finance cost ($65,500 - $48,000)

Post-retirement benefit expense in net income

$130,000 17,500

$147,500

Note: The remeasurement gain of $6,000 is reported in OCI under the assumption that the plan covers such benefits as life insurance and medical and dental benefits. If the plan covers benefits that had considerably less measurement uncertainty, the gain would be included in the benefit expense in net income. (b) ASPE Current service cost Net interest/finance cost ($65,500 - $48,000) Re-measurement gain on plan assets ($54,000 - $48,000)

$130,000 17,500 (6,000)

Post-retirement benefit expense $141,500

in net income

*BRIEF EXERCISE 19-16 (a)

Effect on 2017 net income of plan amendment for past service cost under ASPE:

Post-plan amendment benefit obligation Pre-plan amendment benefit obligation Past service cost to recognize in expense in 2017

$156,239 137,888 $ 18,351

Pension expense will increase and net income will decrease by $18,351 in 2017 under ASPE. (The net interest/finance cost also increases as the weighted average balance of the DBO during the year increases by $18,351 for the whole year.) (b) If Saver applies IFRS instead of ASPE, the effect would be identical. Past service cost is one of the components of pension expense that is included in net income. BRIEF EXERCISE 19-17 (a)

Effect on 2017 net income of actuarial revaluation of the defined benefit obligation under ASPE:

Post-actuarial revaluation of benefit obligation Pre-actuarial revaluation of benefit obligation Remeasurement loss to recognize in 2017 expense

$156,239 137,888 $ 18,351

Pension expense will increase and net income will decrease by $18,351 in 2017 under ASPE. (The net interest/finance cost also increases as the weighted average balance of the DBO during the year increases by $18,351 for the whole year.)

(b) If Saver applies IFRS instead of ASPE, the effect would be different. Under IFRS, the remeasurement loss is recognized in OCI directly, not as part of pension expense in net income. (However, because the DBO still increases, the net interest/finance cost will also increase.)

SOLUTIONS TO EXERCISES EXERCISE 19-1 (5-10 minutes) (a) Pension Contributions Payable....................... 29,300 Cash..........................................................

29,300

(b) Pension Expense for December 2017: $276,100 x 7% = $19,327 (c) Current liability: Pension Contributions Payable ($276,100 X 5%) + $19,327

$ 33,132

This assumes amounts for previous months were remitted as required each month. At December 31, 2017, 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: ...