1 Employee Compensation—Payroll, Pensions, and Other Compensation Issues chapter 17.
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Transcript of 1 Employee Compensation—Payroll, Pensions, and Other Compensation Issues chapter 17.
1
Employee Employee Compensation—Compensation—
Payroll, Pensions, Payroll, Pensions, and Other and Other
Compensation Compensation IssuesIssues
chapterchapter 1717
2
1. Account for payroll and payroll taxes, and understand the criteria for recognizing a liability associated with compensated absences.
2. Compute performance bonuses and recognize the issues associated with postemployment benefits.
3. Understand the nature and characteristics of employer pension plans, including a detailed discussion of defined benefit plans.
4. Use the components of prepaid/accrued pension costs and changes in the components to compute the periodic expense associated with pensions.
5. Prepare required disclosures associated with pensions, and understand the accounting treatment for pension settlements and curtailments
6. Describe the few remaining differences between U.S. pension accounting standards and the provisions of IAS 19.
7. Explain the differences in accounting for pensions and postretirement benefits other than pensions.
Learning Objectives
3Employee CompensationEmployee CompensationEvent LineEvent Line
PayrollPayroll
Compensated Compensated AbsencesAbsences
Compensated Compensated AbsencesAbsences
Stock OptionsStock Optionsand Bonusesand Bonuses
Stock OptionsStock Optionsand Bonusesand Bonuses
Postemployment Postemployment BenefitsBenefits
Postemployment Postemployment BenefitsBenefits
Pensions and Postretirement
Benefits Other Than Pensions
Pensions and Postretirement
Benefits Other Than Pensions
Time
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Payroll and Payroll Taxes
1. Federal old-age, survivors’, and disability (tax to both the employee and employer)
2. Federal hospital insurance (tax to both employer and employee)
3. Federal unemployment insurance (tax to employer only)
4. State unemployment insurance (tax to employer only)
5. Individual income tax (tax to employee only but withheld and paid by employer)
Social security and income tax legislation Social security and income tax legislation impose five taxes based on payrolls:impose five taxes based on payrolls:Social security and income tax legislation Social security and income tax legislation impose five taxes based on payrolls:impose five taxes based on payrolls:
5
Payroll and Payroll Taxes
FICAFICAFICAFICAThe FICA tax rate and the maximum amount taxable continue to change. As of 2002 …
the rate is 6.20% on annual wages up to $84,900. This affect both employer and
employee.
The FICA tax rate and the maximum amount taxable continue to change. As of 2002 …
the rate is 6.20% on annual wages up to $84,900. This affect both employer and
employee.
Federal Hospital InsuranceFederal Hospital InsuranceFederal Hospital InsuranceFederal Hospital Insurance
There is no upper limit on this tax. The 2002 rate is1.45% for both employer and employee.
There is no upper limit on this tax. The 2002 rate is1.45% for both employer and employee.
a.k.a. Social Security
a.k.a. Medicare Tax
6
Payroll and Payroll Taxes
Federal Unemployment InsuranceFederal Unemployment InsuranceFederal Unemployment InsuranceFederal Unemployment Insurance
The employer pays 6.2% on the first $7,000 earned by each employee. A
credit of 5.4% may be applied based on state unemployment tax (see below),
therefore making it 0.8%
The employer pays 6.2% on the first $7,000 earned by each employee. A
credit of 5.4% may be applied based on state unemployment tax (see below),
therefore making it 0.8%
Work for
Food
State Unemployment InsuranceState Unemployment InsuranceState Unemployment InsuranceState Unemployment Insurance
The employer usually pays 5.4% to the state on the first $7,000 earned
by each employee.
The employer usually pays 5.4% to the state on the first $7,000 earned
by each employee.
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Payroll and Payroll Taxes
Employers are required to withhold income tax from wages paid to their employees. Withholding
tables provide information about how much to withhold from each employee. These deductions
are affected by the number of exemptions claimed.
Employers are required to withhold income tax from wages paid to their employees. Withholding
tables provide information about how much to withhold from each employee. These deductions
are affected by the number of exemptions claimed.
Income TaxIncome TaxIncome TaxIncome Tax
8
Salary Expenses and Liabilities
The employee’s gross earnings are an expense to the employer.
Withholdings are an expense to the employee, not to the employer.
Withholdings become a liability to the employer only because the employer keeps money earned by employees and pays obligations on their behalf.
9
Accounting for a Payroll
Eg. Total salary for 15 employees = $16,000. State unemployment tax = 5.4%. Income tax with-holding = $1,600. Combined FICA = 7.65%. This employer would make the following entry to record salary expense:
Salaries Expense 16,000 FICA Taxes Payable 1,224 Employees Income Taxes Payable 1,600 Cash 13,176
To record payment of payroll and related employee withholdings.
ContinuedContinued
10
Employers make this entry to record their portion of FICA and other payroll taxes e.g. SUT & FUT:
Accounting for a Payroll
Payroll Tax Expense 2,216FICA Taxes Payable 1,224 State Unemployment Taxes Payable 864Federal Unemployment Taxes Payable 128
To record the payroll tax liabilityof the employer.
0.0765 x $16,000
0.054 x $16,000 0.008 x $16,000
Payroll taxes are:
•An expense to the employer.
•A liability to the employer until they are paid.
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Compensated Absences
Compensated absences include payments by employers for vacation, holiday, illness, or other personal activities.
Compensated absences include payments by employers for vacation, holiday, illness, or other personal activities.
FASB Statement No. 43 requires a liability to be recognized for compensated absences that—
(1) Have been earned through services already rendered
(2) Vest or can be carried forward to subsequent years
(3) Are estimable and probable
12
Compensated Absences
The entry to record the accrued vacation on December 31, 2004, would be:
Wages Expense 7,000Vacation Wages Payable 7,000 To record accrued
vacation wages ($700 x10 weeks). ContinuedContinuedContinuedContinued
S&N Corporation has 20 employees who are paid an average of $700 per week. During 2004, a total of 40 vacation weeks was earned by all employees, but only 30 weeks of vacation were taken.
13
Compensated AbsencesIn 2005, when the additional vacation weeks are taken, the average rate has increased to $800 per week.
Wages Expense 1,000Vacation Wages Payable 7,000
Cash 8,000 To record payment at current rates of previously
earned vacation time ($800 x 10 weeks).
Compensated absences are not tax deductible until payment is made, while they are deductible under GAAP, once accrued. This gives right to deferred tax!
14Stock-Based Compensation (recall ACC301 - Chapter 11) and Bonuses
ContinuedContinuedContinuedContinued
Photo Graphics, Inc. gives it store managers a 10% bonus based on individual store earnings. The bonus is to based on income after deducting the bonus, but before deduction for income taxes. Store X has income for the year of $100,000.
B = 0.10($100,000 – B)
B = $10,000 – 0.10BB + 0.10B = $10,000
1.10B = $10,000
B = $9,091 (rounded)
15Major Categories of Pension Plans
1. Government plans, primarily social security
2. Individual plans, such as individual retirement accounts (IRAs)
3. Employer plans:
•Noncontributory – only the employer pays
•Contributory – the employee also pays
•Defined Contribution – benefits vary
•Defined Benefit – contributions vary
•Vested Benefits - Vesting occurs when an employee has met certain specified requirements and is eligible to receive pension benefits at retirement even if the employee stops working for the employer
16
Defined Benefit Pension Plans
EmployerEmployerCurrent Current
EmployeesEmployees
Services
Wages and Salaries
Pension Pension FundFund
Con
trib
utio
ns
Retired Retired EmployeesEmployeesDefined Benefits
17Issues in Accounting for Defined Benefit Plans
1. The amount of net periodic pension expense to be recognized on the income statement.
2. The amount of pension liability or asset to be reported on the balance sheet.
3. Accounting for pension settlements, curtailments, and terminations.
4. Disclosures needed to supplement the amounts reported in the financial statements.
18
Simple Illustration
Lorien Bach is 35 years old and has worked for Thakkar for 10 years. Her salary for 2004 was $40,000. Pension payments begin after the employee turns 65. The annual year-end payment is equal to 2% of the highest salary times the number of years with the company.
Thakkar knows for certainty that Bach will live until she is 75. Thakkar uses a discount rate of 10%. As of January 1, 2005, Thakkar had a pension fund of $10,000. During 2005 an additional $1,500 was contributed. The fund earned $350 and the average return is 12%.
ContinuedContinuedContinuedContinued
19
Simple Illustration
Estimation of Pension ObligationEstimation of Pension Obligation
(2% x 10 years) x $40,000 = $8,000
The annual amount that Bach should received on her
retirement
ContinuedContinuedContinuedContinued
20
Accumulated benefit obligation (ABO)
Simple Illustration
Accumulated Benefit Obligation (ABO)Accumulated Benefit Obligation (ABO)
X X X X X X X X X X$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
$8,000
PV of a an annuity of $8,000 per year for ten
years deferred for 30 years is
$2,81730 years
ContinuedContinuedContinuedContinued
21
Simple Illustration
Projected Benefit Obligation (PBO)Projected Benefit Obligation (PBO)
ContinuedContinuedContinuedContinued
Assume Thakkar Company expects Assume Thakkar Company expects Bach’s 2004 salary of $40,000 to increase Bach’s 2004 salary of $40,000 to increase
5% every year until retirement.5% every year until retirement.
Assume Thakkar Company expects Assume Thakkar Company expects Bach’s 2004 salary of $40,000 to increase Bach’s 2004 salary of $40,000 to increase
5% every year until retirement.5% every year until retirement.
(2% x 10 years) x $172,877 = $34,575 (rounded)
PV = $40,000, N = 30, I = 5%
The PBO is the PV
The PBO is the PV
of ten equal deferred
of ten equal deferred
payments of $34,575
payments of $34,575
(= (= $12,176$12,176).).
The PBO is the PV
The PBO is the PV
of ten equal deferred
of ten equal deferred
payments of $34,575
payments of $34,575
(= (= $12,176$12,176).).
22
Simple Illustration
Accrued Pension LiabilityAccrued Pension Liability
PBO, January 1, 2005 $12,176Pension fund at fair value,
January 1, 2005 (10,000) Accrued pension liability* $ 2,176
FASB Statement No. 87 stipulates that these two items be offset against one
another and a single amount be shown.
FASB Statement No. 87 stipulates that these two items be offset against one
another and a single amount be shown.
* - The reverse direction would give rise to Prepaid pension cost
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Simple Illustration – Other Issues
1. Interest Cost1. Interest Cost
PBO, Beginning Discount Interest of Period x Rate = Cost$12,176 x 0.10 = $1,218
a.k.a. settlement interest rate
2. Service Cost2. Service Cost
Bach’s work for Thakkar during the year 2005 results in an increase in forecasted annual benefits to Bach because the payments are calculated on 11 years of service.
The impact of this one extra year of service is to increase the December 31, 2005 PBO balance by $1,339. Therefore, the service cost element of pension expense for the year is $1,339.
24
Simple Illustration – Other Issues
3. Return on the Pension Fund 3. Return on the Pension Fund
ContinuedContinuedContinuedContinued
Pension expense is reduced by the return on the pension fund for the year. Because Thakkar expects a 12% rate
of return, the original $10,000 will have a return of
$1,200 in 2005.
25
Simple Illustration
PBO, End of Year – The Liability sidePBO, End of Year – The Liability side
ContinuedContinuedContinuedContinued
Service cost and interest
cost
PBO, beginning
of year+ –
Retirement benefits
paid±
Change in actuarial
assumptions
26
Simple Illustration
Fair Value of Pension Fund (FVPF)– The Asset sideFair Value of Pension Fund (FVPF)– The Asset side
ContinuedContinuedContinuedContinued
Employer contribu-
tions
Fair value of pension
fund, beginning
of year
+ –Retirement
benefits paid
±Actual return on pension
fund
27
Simple Illustration
Accrued Pension LiabilityAccrued Pension Liability
ContinuedContinuedContinuedContinued
As of December 31, 2005, the PBO for Thakkar is As of December 31, 2005, the PBO for Thakkar is $14,733 and the total FVPF is $12,700 ($10,000 + $14,733 and the total FVPF is $12,700 ($10,000 +
$1,200 return + $1,500 new contributions).$1,200 return + $1,500 new contributions).
As of December 31, 2005, the PBO for Thakkar is As of December 31, 2005, the PBO for Thakkar is $14,733 and the total FVPF is $12,700 ($10,000 + $14,733 and the total FVPF is $12,700 ($10,000 +
$1,200 return + $1,500 new contributions).$1,200 return + $1,500 new contributions).
PBO, December 31, 2005 $14,733Pension fund at fair value,
December 31, 2005 (12,700) Accrued pension liability $ 2,033
28
Simple Illustration
Thakkar would make the following entries for 2005:
Pension Expense 1,357Prepaid/Accrued Pension Cost 1,357
Prepaid/Accrued Pension Cost 1,500Cash 1,500
New contributions to pension fund
Service cost ($1,339) + Interest cost ($1,218) – Expected return ($1,200)
Note - A compound entry could have been made
29Comprehensive Pension Illustration - The Basic Spreadsheet Approach – see page 1060
Formal Accounts Memorandum AccountsPrepaid/ Periodic
Net Accrued Pension Fair ValuePension Pension Cost/Expense of PlanExpense Cash Cost Items PBO Assets (FVPF)
Beginning Balances(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
(e) PSC Amortization(g) Deferred Loss
(h) Amort. of Deferred Loss
Summary Journal Entries(1) Accrual Pension
Expense Accrual
(2) Annual Pension Contribution
(3) Minimum Liability Adjustment
UnrecognizedPrior Service
Cost
30
Formal Accounts
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Left Side of Work SheetLeft Side of Work Sheet
31
Formal Accounts
• Records total pension costs accrued.• Debited for the sum of all periodic
pension cost items.
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
32
Formal Accounts
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
• Records cash expended for contributions to plan assets.
• Debited for actual amount of cash contributed to pension fund.
33
Formal Accounts
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
• Reflects changes in net pension asset or liability.
• Debited for cash contributions to pension plan assets.
• Credited for net pension cost.
34
Formal Accounts
Right Side of Work SheetRight Side of Work Sheet
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
PeriodicPension
Cost Items
35
Memorandum Accounts
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
PeriodicPension
Cost Items
• Records noncurrent asset arising from recognition of additional pension liability for unfunded pension plans.
• Account balance should not exceed the sum of unrecognized transition loss plus prior service costs.
36
Memorandum Accounts
Actuarial present value of pension benefits. Uses the benefits per year of service approach. Assumes future compensation levels.
PBOEoY
=PBOBoY
+Service
CostInterest
Cost+ ±
Change inActuarial
Assumptions
RetirementBenefits
Paid–
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
PeriodicPension
Cost Items
37
Memorandum Accounts
• Amount that could be received from the sale of plan assets in a current sale between a willing buyer and seller.
• Increased by employer/employee contributions.• Decreased by benefits paid.FVPFEoY
= FVPFBoY
+ Contributions –Benefits
Paid±
ActualReturn
on Assets
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
PeriodicPension
Cost Items
38
Memorandum Accounts
When a pension plan is initially adopted or amended to provide increased benefits, employees are granted additional benefits for services performed in years prior to the plan’s adoption or amendment.
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
PeriodicPension
Cost Items
39Thornton Electronics, Inc.—Pension Work Sheet for 2005
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
40
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
41
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
42
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
43
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
44
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
(b) 165,000 (165,000)
45
Actual Return on the Pension Fund
Actual Return on the Pension Fund
Fair value of pension fund, 12/31/05 $1,513,500Fair value of pension fund, 1/1/05 1,385,000Increase in fair value $ 128,500Add benefits paid 125,000Deduct contributions made (115,000) Actual return on the pension fund $ 138,500
Thornton Electronics, Inc.—Pension Work Sheet for 2005
46
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost(c) Actual Return
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
47
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
(b) 165,000 (165,000)
(c) (138,500) 138,500
48
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost(c) Actual Return(d) Benefits Paid
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
49
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
(b) 165,000 (165,000)
(c) (138,500) 138,500(d) 125,000 (125,000)
50
Amortization of Unrecognized Prior Service CostAmortization of Unrecognized Prior Service Cost
Ten percent (15 employees) are expected to retire or quit with vesting privileges.
N(N + 1)2
x D = Total future years of service
10(10 + 1)2
x 15 = 825
150825
x $75,000 = $13,636
15 employees
for 10 years
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
51
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost(c) Actual Return(d) Benefits Paid(e) PSC Amortization
Left Side of Work SheetLeft Side of Work Sheet
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
52
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
(b) 165,000 (165,000)
(c) (138,500) 138,500(d) 125,000 (125,000)
(e) 13,636 (13,636)
53
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost(c) Actual Return(d) Benefits Paid(e) PSC Amortization1) Annual Pension
Expense Accrual $115,136 (115,136 )
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
Left Side of Work Sheet
Left Side of Work Sheet
54
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 1/1/05 $ (40,000 )
(a) Service Cost(b) Interest Cost(c) Actual Return(d) Benefits Paid(e) PSC Amortization1) Annual Pension
Expense Accrual $115,136 (115,136 )
ContinuedContinuedContinuedContinued
Thornton Electronics, Inc.—Pension Work Sheet for 2005
Left Side of Work Sheet
Left Side of Work Sheet
Contribution (115,000) 115,000(2) Annual Pension
55
Right Side of Work SheetRight Side of Work Sheet ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
Balance $(1,500,000) $1,385,000 $75,000(a) $ 75,000 (75,000)
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
(b) 165,000 (165,000)
(c) (138,500) 138,500(d) 125,000 (125,000)
(e) 13,636 (13,636)(1)(2) 115,000
56
NetPensionExpense Cash
Prepaid/AccruedPension
Cost
Balance, 12/31/05 $ (40,136 )
Left Side of Work Sheet
Left Side of Work Sheet
ContinuedContinuedContinuedContinued
Only column added on the left side of the
work sheet
Only column added on the left side of the
work sheet
Thornton Electronics, Inc.—Pension Work Sheet for 2005
57
Right Side of Work SheetRight Side of Work Sheet
ContinuedContinuedContinuedContinued
ProjectedBenefit
Obligation
Fair Value of Pension
Fund
UnrecognizedPrior Service
Cost
12/31/05 $(1,615,000) $1,513,500 $61,364
Thornton Electronics, Inc.—Pension Work Sheet for 2005
PeriodicPensionExpense
Items
58Thornton Electronics, Inc.—Pension Work Sheet for 2005
Prepaid/Accrued Pension Cost 115,000Cash 115,000 To record 2005 contribution to the pension plan.
Prepaid/Accrued Pension Cost 115,000Cash 115,000 To record 2005 contribution to the pension plan.
Pension Expense 115,136 Prepaid/Accrued Pension Cost 115,136 To record accrual of net pension expense for 2005
Pension Expense 115,136 Prepaid/Accrued Pension Cost 115,136 To record accrual of net pension expense for 2005
59Corridor Amortization of Unrecognised Net Pension Gain/ Loss
• If actual return of pension fund > estimated return, then the difference = Gain to be deferred
–The financial statement effect =
• Increase Pension Expense & Decrease Net Pension Liability
–The Memorandum entries =
• Debit Pension expense & Credit Unrecognized Net Pension Gain/Loss
• If actual return of pension fund < estimated return, then the difference = Loss to be deferred
–The financial statement effect =
• Decrease Pension Expense & Increase Net Pension Liability
–The Memorandum entries =
• Credit Pension expense & Debit Unrecognized Net Pension Gain/Loss
a. Differences between actual & expected return
60Corridor Amortization of Unrecognised Net Pension Gain/ Loss
• If PBO should increase
b. Differences in Actuarial estimates of BPO
•The financial statement effect = nil
•The Memorandum entries =
Credit PBO & Debit Unrecognized Net Pension Gain/Loss
61Corridor Amortization of Unrecognised Net Pension Gain/ Loss
– market-related value of plan assets at the beginning of the year.
• Amortization is required only on portion of unrecognized net gain or loss that exceeds 10% of the greater of:– PBO, or
• May use any amortization method that equals or exceeds straight-line amortization over remaining expected service years of covered employees, and is consistently applied.
See Thornton Electronics 2006 & 2007 pages 1063-1067
62
Minimum Pension LiabilityMinimum Pension Liability
• Net amount of pension liability that must be reported for underfunded plans.
• Measured as difference between ABO and Fair Value of Plan Assets.
• Net amount of pension liability that must be reported for underfunded plans.
• Measured as difference between ABO and Fair Value of Plan Assets.
Minimum Pension ABO – FV Plan Liability Assets=
See pages 1067 – 1068: Quite Interesting!
63
Deferred Pension Cost
Clapton Corporation computes the following balances as of December 31, 2005:
Clapton Corporation computes the following balances as of December 31, 2005:
Accumulated benefit obligation $1,250,000Fair value of the pension fund 1,140,000Accrued pension cost 16,000Unrecognized prior service cost 80,000
If an employer is required to record an additional pension liability as a result of applying the minimum
liability provisions, FASB Statement No. 87 indicates that the offsetting charge should be to the Deferred Pension Cost account, which is an intangible asset.
64
Deferred Pension Cost
The minimum pension liability is $110,000 ($1,250,000 – $1,140,000). An additional pension liability of $94,000 ($110,000 –
$16,000) would be recorded.
The minimum pension liability is $110,000 ($1,250,000 – $1,140,000). An additional pension liability of $94,000 ($110,000 –
$16,000) would be recorded.
Deferred Pension Cost 80,000Excess of Additional Pension Liability over Unrecognized Prior Service Cost* 14,000
Additional Pension Liability 94,000 To recognize additional pension liability.
* This is a contra equity account reported as part of “Accumulated other comprehensive income”
65
Disclosure of Pension Plans
Statement No. 132 requires the following major disclosure requirements for most publicly traded companies:
1. A reconciliation between the beginning and ending balances for the projected benefit obligation
2. A reconciliation between the beginning and ending balances in the fair value of the pension fund
3. A disclosure of the accumulated benefit obligation when the ABO exceeds the fair value of the pension fund
4. The funded status of the plans, the amounts not recognized in the balance sheet, and the amount recognized in the balance sheet
ContinuedContinuedContinuedContinued
66
Disclosure of Pension Plans
5. The components of pension expense for the period
6. Any effects on the other comprehensive income section as a result of changes in the additional pension liability
7. The assumptions used relating to (a) discount rate, (b) rate of compensation increase, and (c) expected long-term rate of return on the pension fund
8. Certain information about postretirement benefits
67
Disclosure of Pension Plans
Statement No. 132 added that an employer must disclose the amount of pension expense
recognized for defined contribution plans separately form the amount of expense recognized for defined benefit plans.
In addition, the nature and effect of any significant changes during the period should be
disclosed.
Statement No. 132 added that an employer must disclose the amount of pension expense
recognized for defined contribution plans separately form the amount of expense recognized for defined benefit plans.
In addition, the nature and effect of any significant changes during the period should be
disclosed.
68Pension Settlements and Curtailments
Curtailment of a pension plan arises from an event that significantly reduces the benefits that will be provided for present employees’
future services. E.g. discontinuation of a segment or the suspension of a plan
Curtailment of a pension plan arises from an event that significantly reduces the benefits that will be provided for present employees’
future services. E.g. discontinuation of a segment or the suspension of a plan
• Termination of an employee earlier than expected• Termination or suspension of a pension plan
Settlement of a pension plan occurs when an employer takes an irrevocable action that relieves the employer of primary responsibility for all or part of
the obligation. E.g. the purchase of an annuity or a lump-sum cash payment to the employee
69International Pension Accounting Standards
IFRS 19 was revised to require that a company’s pension obligation be measured using the same approach as is used under U.S. GAAP.
IFRS 19 was revised to require that a company’s pension obligation be measured using the same approach as is used under U.S. GAAP.
IFRS 19 does not include any provision for the recognition of an additional minimum liability.
IFRS 19 does not include any provision for the recognition of an additional minimum liability.
IFRS 19 does not allow the recognition of a net pension asset unless the amount is less than the discounted present value of any employee refunds to the company plus any anticipated reductions in future pension contributions.
IFRS 19 does not allow the recognition of a net pension asset unless the amount is less than the discounted present value of any employee refunds to the company plus any anticipated reductions in future pension contributions.
UK’s FRS 17 – Pension gains and losses are recognized immediately