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CHAPTER 19PENSIONS AND OTHER POST-EMPLOYMENT BENEFITSLearning Objectives Understand the importance of pensions from a business perspective. Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. Explain what the employer’s benefit...

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

CHAPTER 19 PENSIONS AND OTHER POSTEMPLOYMENT BENEFITS Learning Objectives 1. Understand the importance of pensions from a business perspective. 2. Identify and account for a defined contribution plan and distinguish between defined contribution and defined benefit plans. 3. Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance. 4. Identify transactions and events that change benefit plan assets and a benefit plan surplus or deficit, and calculate the balance of the plan assets and the plan surplus or deficit. 5. Identify the components of defined benefit cost, and account for a defined benefit pension plan under IFRS and ASPE. 6. Account for defined benefit plans with benefits that vest or accumulate other than pension plans. 7. Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures. 8. Identify differences in accounting between IFRS and ASPE, and what changes are expected in the near future. 9. Explain and apply basic calculations to determine current service cost, the defined benefit obligation, and past service cost for a one-person defined benefit pension plan.

Solutions Manual

19.1

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

Summary of Questions by Learning Objectives and Bloom’s Taxonomy Ite m

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2,8

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Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Solutions Manual

Intermediate Accounting, Twelfth Canadian Edition

19.3

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

Summary of Legend: The following abbreviations will appear throughout the solutions manual file. LO BT

Difficulty:

Time: AACSB

CPA CM

Learning objective Bloom's Taxonomy K Knowledge C Comprehension AP Application AN Analysis S Synthesis E Evaluation Level of difficulty S Simple M Moderate C Complex Estimated time to complete in minutes Association to Advance Collegiate Schools of Business Communication Communication Ethics Ethics Analytic Analytic Technology Tech. Diversity Diversity Reflective Thinking Reflec. Thinking CPA Canada Competency Map Ethics Professional and Ethical Behaviour PS and DM Problem-Solving and Decision-Making Comm. Communication Self-Mgt. Self-Management Team & Lead Teamwork and Leadership Reporting Financial Reporting Stat. & Gov. Strategy and Governance Mgt. Accounting Management Accounting Audit Audit and Assurance Finance Finance Tax Tax at i on

ASSIGNMENT CLASSIFICATION TABLE Topics 1.

Pensions from a business perspective.

Solutions Manual

Brief Exercises

Exercises

Problems

1 19.4

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

2.

Defined contribution and defined 2,3 benefit plans.

1, 2, 22

3.

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

4.

Transactions and events that change benefit plan assets.

5,6,7,13

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

Plan’s surplus or deficit position. 5.

1, 2

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 under IFRS and ASPE. *16, *17 15,16,17,19 11,12 21,22

6. Defined benefit plans with benefits that vest or accumulate other than pension plans. 7.

Presentation and disclosure.

8.

Differences between IFRS and ASPE.

*9. One-person plan.

15

14, 16, 17, 18, 22

2, 13, 15

3, 7, 9, 12, 19

4, 6, 7, 10, 11

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10, 11, 13, 15, 16

4,5, 6, 8, 13, 15

16,17

20

14

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

Solutions Manual

19.5

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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

Solutions Manual

Level of Time Difficulty (minutes)

Description Defined contribution plan Defined contribution plan Continuity schedules and calculation of pension expense Preparation of pension work sheet IFRS and ASPE: changes in pension accounts Calculation of actual return Calculation of actual return, gains and losses, pension expense, and reconciliation Preparation of pension work sheet DBO and plan asset continuity schedules Pension expense, journal entries Pension expense, journal entries, work sheet, ASPE, IFRS Pension expense, journal entries, disclosures, effect of ASPE policy choice Pension expense, IFRS and ASPE, reduced past service costs Post-retirement benefit expense, surplus or deficit, and reconciliation Pension expense, work sheet, ASPE, IFRS Post-retirement benefit expense Calculation and entries, IFRS, ASPE Post-retirement benefit work sheet Post-retirement benefit reconciliation schedule Pension calculations and disclosures Calculation of current service cost and DBO Pension expense, journal entries, work sheet, IFRS Contributory plans, accounting for employer vs. accounting for benefit plan, funding, service cost

19.6

Simple Simple Moderate

5-10 10-15 15-20

Moderate Moderate Simple Moderate

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

Moderate Moderate Simple Moderate

30-35 30-35 10-15 25-35

Moderate

25-30

Simple

10-15

Moderate

30-35

Moderate Simple

20-30 10-15

Simple Simple Moderate Moderate Moderate

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

Moderate

20-30

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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

Solutions Manual

Level of Time Difficulty (minutes)

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 Choice of worksheet or schedule preparation – 3 years IFRS 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 – oneperson plan Treatment of a company’s sabbatical leave under IFRS and ASPE; information needed

19.7

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

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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 SFP as at December 31, 2020 shows total shareholders’ equity of $(0.8 million). With annual pension expense of $3 million in 2020, 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 at December 31, 2020, 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% ($2.3 million/$9.8 million) 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.

LO 1 BT: AP Difficulty: M Time: 10 min. AACSB: Analytic CPA: CPA: cpa-t001 cpa-t005 CM: Reporting and Finance

Solutions Manual

19.8

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

BRIEF EXERCISE 19.2 (a)

IFRS

Past service cost recognized immediately in expense Current service cost ($2,735,864 x 5%)............ Pension expense for 2020 (b)

$845,350 136,793 $982,143

ASPE

Past service cost recognized immediately in expense Current service cost ($2,735,864 x 5%) ................ Pension expense for 2020 .....................................

$845,350 136,793 $982,143

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 must be presented separately on the income statement. LO 2,8 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

19.9

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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 SFP 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. 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.

Solutions Manual

19.10

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

BRIEF EXERCISE 19.3 (CONTINUED) 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 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. LO 2 BT: C Difficulty: M Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting

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19.11

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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

LO 3 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

BRIEF EXERCISE 19.5 Ending plan assets Beginning plan assets 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

LO 4 BT: AP Difficulty: S Time: 5 min. AACSB: None CPA: cpa-t001 CM: Reporting

Solutions Manual

19.12

Chapter 19

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Kieso, Weygandt, Warfield, Wiecek, McConomy

Intermediate Accounting, Twelfth Canadian Edition

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. LO 3 BT: AP Difficulty: M Time: 10 min. AACSB: None CPA: cpa-t001 CM: Reporting

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, 2020

$ 980,000

Note: the past service cost of $990,000 from the 2020 plan amendment has already been included in the defined benefit obligation since the plan was amende...