Hass
Foods Inc. sponsors a post-retirement medical and dental benefit plan for its
employees. The company adopted the provisions of IAS 19 beginning January 1,
2011. Assume that Hass is permitted to account for any transitional balances on
a prospective basis, recognizing the transitional costs on a straight-line
basis over five years. The following balances relate to this plan on January 1,
2011:
Plan
assets ……………………………………………$ 780,000
Accrued
post-retirement benefit obligation ………….3,439,800
Past
service costs ……………………………………… –0–
As
a result of the plan’s operation during 2011, the following additional data
were provided by the actuary:
1.
The service cost for 2011 was $273,000.
2.
The discount rate was 9%.
3.
Funding payments in 2011 were $234,000.
4.
The expected return on plan assets was $35,100.
5.
The actual return on plan assets was $58,500.
6.
The benefits paid on behalf of retirees from the plan were $171,600.
7.
The average remaining service life to full eligibility was 20 years.
Instructions
(a)
Calculate the post-retirement benefit expense for 2011.
(b)
Prepare a continuity schedule for the accrued benefit obligation and for the
plan assets from the beginning of the year to the end of 2011.
(c)
At December 31, 2011, prepare a schedule reconciling the plan’s funded status
with the post-retirement amount reported on the balance sheet.
(d)
Explain in what ways, if any, the accounting requirements for this plan are
different from the requirements for a defined benefit pension plan.
(a) Post-retirement
benefit expense – 2011
Annual service cost $ 273,000
Interest
on Post-retirement benefit obligation
($3,439,800 X 9%) 309,582
Expected
return on plan assets (35,100)
Amortization
of transition amount
($2,659,800* / 5) 531,960
$1,079,442
* The transition amount is determined as the
difference between the accrued post-retirement benefit obligation and the plan
assets ($3,439,800 – $780,000 = $2,659,800).
(b) Continuity
of Post-Retirement Benefit Obligation – 2011
Post-retirement
benefit obligation, 1/1/11 $3,439,800
Annual
service cost 273,000
Interest
cost ($3,429,800 x 9%) 309,582
Benefits
paid out (171,600 )
Accrued benefit
obligation, 12/31/11 $3,850,782
Continuity
of Fund Assets – 2011
Plan assets,
1/1/11 $780,000
Actual return
on assets 1/1/11 58,500
Contributions 234,000
Benefits paid
out (171,600)
Plan assets, 12/31/11 $900,900
(c) Reconciliation Schedule 2011
Post-retirement
benefit obligation (credit) $(3,850,782)
Fair value
of plan assets (debit) 900,900
Post-retirement
benefit obligation in excess of
plan assets (funded status) (credit) (2,949,882)
Unrecognized
transition amount
($2,659,800
– $531,960) (debit) 2,127,840
Unrecognized
experience gain on assets (credit) (23,400)*
Accrued
post-retirement liability (credit)** $ (845,442)
*$23,400 = $58,500 – $35,100; actual return exceeds expected.
**Proof:
Accrued
Post-retirement Liability, 1/1/11 $ 0
Expense
recognized - credit this account 1 ,079,442
Contribution
by company – debit this account ( 234,000)
Account
balance December 31. 2011 (credit)
$845,442
(d) 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.
The two are also identical in calculating
the current expense when there is a transitional amount. Under the prospective
approach, a large unrecognized transitional amount is set up which must then be
amortized over up to five years from the date of adoption of the standard.
Alternatively, the company can choose to recognize the whole transitional
amount as its defined benefit liability at the time the standard is adopted.
The following worksheet is not required but is
provided to illustrate the similarities with accounting for pension benefits.
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Hass Foods Inc.
Post-retirement Benefits Work Sheet—2011
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General Journal Entries
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Memo Record
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Items
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Net Periodic
Post-retirement
Expense
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Cash
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Accrued
Postretire-ment Liab.
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Accrued
Postretire-
ment Benefit
Obligation
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Plan
Assets
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Unrecognized
Transition
Amount
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Unrecognized
Net Gain
or Loss
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Balance, Jan. 1, 2011
(a) Service cost
(b) Interest cost
(c) Expected return
(d) Unexpected gain
(e) Contributions
(f) Benefits
(g) Amortization:
Transition***
Expense entry, 12/31
Contribution
Balance, Dec. 31/11
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** 273,000 Dr.**
** 309,582 Dr.**
** 35,100 Cr.**
**
** 531,960 Dr.**
**1,079,442 Dr.**
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234,000 Cr.
00,000 Dr.
234,000 Cr.
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1,079,442 Cr.
234,000 Dr.
845,442 Cr.
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3,439,800 Cr.
273,000 Cr.
309,582 Cr.
171,600 Dr.
000
,000 Dr.
3,850,782
Cr.
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780,000 Dr.
35,100 Dr.
23,400 Dr.
234,000 Dr.
171,600 Cr.
00
0,000 Dr.
900,900 Dr.
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2,659,800 Dr.
531,960 Cr.
000,000 Dr.
2,127,840
Dr.
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23,400 Cr. **
0,000
Cr.
23,400 Cr.
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***$3,439,800 X .09 = $309,582
***$58,500 – $35,100 = $23,400
***$2,659,800 ÷ 5 =
$531,960
