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: None
because 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 143,750
dr
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 143,750
dr
Balance, December
31, 2011 $241,750
cr
(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.
