CHAPTER 20

CHAPTER 20

Accounting for Pensions and Postretirement Benefits

ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)

Topics

Brief Questions Exercises Exercises Problems

Concepts for Analysis

1. Basic definitions and

1, 2, 3, 4,

16

concepts related to

5, 6, 7, 8,

pension plans.

9,12, 24

1, 2, 3, 4, 5, 7

2. Worksheet preparation.

3

3, 4, 7, 10, 1, 2, 7, 8, 9,

15, 18

10, 11, 12

3. Income statement

9, 10, 11, 1, 4

recognition, computation 13, 16, 17

of pension expense.

1, 2, 3, 6, 1, 2, 3, 4, 5, 4, 5 11, 13, 14, 6, 9, 11, 12 15, 16, 17, 18

4. Balance sheet recognition, 15, 20,

2

computation of pension 22, 23

expense.

3, 9, 11, 12, 1, 2, 3, 4,

13, 14

5, 6, 7, 8,

9, 11, 12

2, 5, 7

5. Corridor calculation.

18

7

8, 14, 16, 2, 3, 5, 6, 7, 3, 4, 5, 6

17, 18

8, 9, 11, 12

6. Prior service cost.

12, 13, 20 5, 8, 9, 10 1, 2, 3, 5, 1, 2, 3, 4,

1, 4

9, 11, 12, 5, 6, 7, 8,

13, 14

9, 11, 12

7. Gains and losses.

14, 21, 22 7, 9

8, 9, 13, 14, 1, 2, 3, 5, 6, 7, 4, 5, 6

16, 17

8, 9, 11, 12

8. Disclosure issues.

23

10

9, 11, 12 11, 12

3, 4

9. Special Issues.

25

*10. Postretirement benefits. 26, 27, 28, 29

11, 12

19, 20, 21, 13, 14 22, 23, 24

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

20-1

ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)

Learning Objectives

1. Distinguish between accounting for the employer's pension plan and accounting for the pension fund.

2. Identify types of pension plans and their characteristics.

3. Explain alternative measures for valuing the pension obligation.

4. List the components of pension expense.

Brief Exercises

1, 2, 4

5. Use a worksheet for employer's pension plan

3

entries.

6. Describe the amortization of prior service costs. 5

7. Explain the accounting for unexpected gains and 9 losses.

8. Explain the corridor approach to amortizing gains 7 and losses.

9. Describe the requirements for reporting pension 6, 8, 9, 10 plans in financial statements.

*10. Identify the differences between pensions and postretirement healthcare benefits.

11, 12

*11. Contrast accounting for pensions to accounting 11, 12 for other postretirement benefits.

Exercises

Problems

1, 2, 6, 11, 12, 13, 15

3, 4, 7, 10, 11, 14, 18

1, 2, 4, 7, 8, 9, 10, 11, 12

1, 2, 5, 7, 12, 13

1, 2, 3, 4, 6, 7, 8, 9, 10, 11, 12

12, 13

1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12

8, 12, 13, 16, 17, 18

3, 4, 5, 6, 7, 8, 11, 12

9, 11,12, 13

1, 2, 3, 4, 8, 11, 12

19, 20, 21, 22, 23, 24

13, 14

19, 20, 21, 21, 13, 14 22, 23, 24

20-2

ASSIGNMENT CHARACTERISTICS TABLE

Item E20-1 E20-2 E20-3 E20-4 E20-5 E20-6 E20-7 E20-8 E20-9 E20-10 E20-11 E20-12 E20-13

E20-14 E20-15 E20-16

E20-17 E20-18 *E20-19 *E20-20 *E20-21 *E20-22 *E20-23 *E20-24

P20-1 P20-2 P20-3 P20-4 P20-5

P20-6

P20-7 P20-8 P20-9 P20-10 P20-11 P20-12 *P20-13 *P20-14

Description Pension expense, journal entries. Computation of pension expense. Preparation of pension worksheet. Basic pension worksheet. Application of years-of-service method. Computation of actual return. Basic pension worksheet. Application of the corridor approach. Disclosures: Pension expense and other comprehensive income. Pension worksheet. Pension expense, journal entries, statement presentation. Pension expense, journal entries, statement presentation. Computation of actual return, gains and losses, corridor test, and pension expense. Worksheet for E20-13. Pension expense, journal entries. Amortization of accumulated OCI (G/L), corridor approach, pension expense computation. Amortization of accumulated OCI balances. Pension worksheet-missing amounts. Postretirement benefit expense computation. Postretirement benefit worksheet. Postretirement benefit expense computation. Postretirement benefit expense computation. Postretirement benefit worksheet. Postretirement benefit worksheet-missing amounts.

2-year worksheet. 3-year worksheet, journal entries, and reporting. Pension expense, journal entries, amortization of loss. Pension expense, journal entries for 2 years. Computation of pension expense, amortization of net gain or loss-corridor approach, journal entries for 3 years. Computation of prior service cost amortization, pension expense, journal entries, and net gain or loss. Pension worksheet. Comprehensive 2-year worksheet. Comprehensive 2-year worksheet. Pension worksheet-missing amounts. Pension worksheet. Pension worksheet. Postretirement benefit worksheet. Postretirement benefit worksheet-2 years.

Level of Difficulty

Simple Simple Moderate Simple Moderate Simple Moderate Moderate Moderate Moderate Moderate Moderate Complex

Time (minutes)

5?10 10?15 15?25 10?15 15?25 10?15 15?25 20?25 25?35 20?25 20?30 20?30 35?45

Complex Moderate Moderate

40?50 15?20 25?35

Moderate Moderate Moderate Moderate

Simple Simple Moderate Moderate

Moderate Complex Complex Moderate Complex

30?40 20?25 15?20 25?30 10?12 10?12 15?20 25?30

40?50 45?55 40?50 30?40 45?55

Complex 45?60

Moderate Complex Moderate Moderate Moderate Moderate Moderate Moderate

35?45 45?60 40?45 25?30 35?45 35?45 30?35 40?45

20-3

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Item CA20-1 CA20-2 CA20-3 CA20-4 CA20-5 CA20-6 CA20-7

Description Pension terminology and theory. Pension terminology. Basic terminology. Major pension concepts. Implications of FASB Statement No. 87. Gains and losses, corridor amortization. Nonvested employees--an ethical dilemma.

Level of Difficulty Moderate Moderate

Simple Moderate Complex Moderate Moderate

Time (minutes)

30?35 25?30 20?25 30?35 50?60 30?40 20?30

20-4

ANSWERS TO QUESTIONS

**1. A private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the company's practices.

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributory plan the employer bears the entire cost.

**2. A defined contribution plan specifies the employer's contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employer's profit, or compensation levels.

A defined benefit plan specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits.

In a defined contribution plan, the employer's obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined benefit plan, the employer's obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits.

**3. The employer is the organization sponsoring the pension plan. The employer incurs the costs and makes contributions to the pension fund. Accounting for the employer 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 which receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients. Accounting for the fund involves identifying receipts as contributions from the employer sponsor, income from fund investments, and computing the amounts due to individual pension recipients. Accounting for the pension costs and obligations of the employer is the topic of this chapter; accounting for the pension fund is not.

**4. When the term "fund" is used as a noun, it refers to assets accumulated in the hands of a funding agency for the purpose of meeting pension benefits when they become due. When the term "fund" is used as a verb, it means to pay over to a funding agency (as to fund future pension benefits or to fund pension cost).

**5. An actuary's role is to ensure that the company has established an appropriate funding pattern to meet its pension obligations, to make predictions and assumptions about future events and conditions that affect pension costs, and to assist the accountant in measuring facets of the pension plan that must be reported (costs, liabilities and assets). In order to determine the company's pension obligation, the actuary must first determine the expected benefits that will be paid in the future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disablement and retirement, changes in compensation, and changes in discount rates to reflect the time value of money.

**6. In measuring the amount of pension benefits under a defined benefit pension plan, an actuary must consider such factors as mortality rates, employee turnover, interest and earnings rates, early retirement frequency, and future salaries.

20-5

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