ACCOUNTING THEORY: TEXT AND READINGS

FINANCIAL ACCOUNTINGRICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEYTHEORY AND ANALYSIS: TEXT AND CASES11TH EDITION

14CHAPTER 14PENSIONS AND OTHERPOSTRETIREMENTBENEFITS

2Accounting for the Cost of Pension PlansTypes of plansDefined contributionDefined benefit

Actuarial funding methods for defined benefit plansCost approachBenefit approachAccumulated benefits approachBenefits/years of service approach3Historical PerspectiveARB No. 47Accounting Research Study No. 8APB Opinion No. 8

Measuring total costAllocating cost to proper accounting periodProviding cash to fund the pension planDisclosure

4APB Opinion No. 8 IssuesNormal cost Past service cost Prior service costActuarial gains and losses

5Accounting Method Under APB No. 8MinimumNormal costInterest on unfunded prior or post service costA provision for any vested benefitMaximumNormal cost10% of past and prior service costInterest equivalent

6APBS Inability to Reach A ConclusionTwo views of pensionsA means of promoting efficiency Therefore, pension costs are associated with the plan and not specific individualsA form of supplemental benefitsTherefore, they are related to specific employees

7The Pension Liability IssueIssues involved in preliminary viewsPeriod over which to recognize pension costsHow to spread pension cost over periodsWhether to include pension information on balance sheets

Balance SheetPension Information8The Pension Liability IssuePosition taken was that liability should be recognized on the balance sheetPension benefit obligation Actuarial present value of accumulated benefits with salary progressionLess pension assetsPlus or minus valuation allowanceOpposition by AICPA

BalanceSheet

9SFAS No. 87 (See FASB ASC 715)Pension information Should be prepared on the accrual basis While retaining three fundamental aspects of previous requirementsDelayed recognition of certain eventsReporting net costOffsetting assets and liabilitiesChanges from APB Opinion No 8:Standardized method of measuring pension costImmediate recognition of a pension liability when the accumulated benefit obligation exceeds the fair value of plan assetsExpanded disclosure requirements

10Pension CostComponents:Service costInterest costReturn on plan assetsAmortization of unrecognized prior service costAmortization of gains and lossesAmortization of transition amountMinimum liability recognitionWhen accumulated benefit obligation exceeds plan assets

11Disclosures Required Under FASB ASC 715A description of the plan includingGroups coveredType of benefit formulaFunding policyTypes of assets heldSignificant nonbenefit liabilities Any matters affecting comparability of information presentedNet periodic pension cost by componentsA schedule reconciling funding status with the amounts reported on the balance sheet by category.

12FASB ASC 715: Theoretical IssuesProjected benefits approachThe settlement rateReturn on plan assetsReporting the minimum liability

13Accounting for the Pension FundRequires information on pension plan financial statementsNet assets available for benefitsChanges in net assetsActuarial present value of accumulated plan benefitsEffects of certain factors

14The Employee Retirement Income Security Act (ERISA)Goals Create standards for the operation of pension funds Correct abuses in the handling of pension fundsConcerned only with funding policiesDoes not impact on the determination of periodic pension expense

15Other Postretirement BenefitsSFAS No. 106 (See FASB ASC 715)Deals with several benefits offered to retired employees The most important are health insurance and life insuranceThese benefits are offered in exchange for current service Similar to defined benefit pension plansShould be accounted for as such over the working life of employeesPrior treatment was pay-as-you-goEconomic consequences arguments of SFAS No. 106

16Accounting Treatment Required By SFAS No. 106 (See FASB ASC 715)Service costInterestAmortization of prior service costsAmortization of transition amountDisclosurePostemployment Benefits

17SFAS No. 132 (See FASB ASC 715 -20-50)New requirements including:Standardization of the disclosure requirements for pensions and other postretirement benefitsRequiring the disclosure of additional information on changes in the benefit obligation and fair value of plan assetsEliminates some other disclosure requirementsThe benefit to financial statement users includes disaggregated information on the six components of pension cost

18SFAS No. 1582005: FASB, in conjunction with IASB, added 2-phase review of accounting for pension plans to agendaAddress info about DBPP & OPBP in Notes, but not in financial statementsOther financial accounting and reporting issues

19SFAS No. 158Requires recognition of:Overfunding or underfunded DBPP or OPBP on statement of financial positionGains and losses, net of tax, and prior service costs and componentsDBPP and OPBP assets and obligations on fiscal year-endDisclose certain items in notes

20SFAS No. 158Completed phase oneNo income statement affectPhase two will reconsiderAll aspects of accounting for DBPPS or OPBPsPossibly requiring companies to disclose gross pension assets and liabilities on balance sheets

21Financial Analysis of Retirement BenefitsIndividual components of pension cost have been found to convey different information to financial statement usersEconomic consequences of SFAS No. 106Hershey Has a defined benefit pension planOffers other postretirement benefits Tootsie RollHas a defined benefit pension plan Offers postretirement health care and life insurance benefit plans

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International Accounting StandardsThe IASC has issued two standards affecting accounting for retirement benefitsA revised IAS No. 19, Retirement Costs and ExpensesIAS No. 26, Accounting and Reporting by Retirement Benefit Plans23

IAS No. 19: Retirement Costs and ExpensesMajor provisions are:For defined contribution plans:Periodic contributions are recognized as expensesFor defined benefit plans:Current service cost should be recognized as an expensePast service costs, experience adjustments and changes in assumptions are to be recognized as expenses in a systematic manner over the working life of current employees. Preferred method is the accrued benefit valuation method but projected benefit valuation method is acceptable

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IAS No. 19: Retirement Costs and ExpensesIASB currently engaged in project to amendMarch 2008: discussion paper issuedIASB to issue 3 disclosure draftsAppropriate discount rate for measuring employee benefitsRecognition and presentation of changes in defined benefit obligations and plan assets, disclosures, and other issuesAccounting for contribution-based promises25

IAS No. 19: Retirement Costs and Expenses(Amendment)June 2011, amendment publishedDeferred initial plans for full review of pension accountingFinal amendment requires other comprehensive income presentation changes for pensions only.26

IAS No. 19: Retirement Costs and Expenses(Amendment)Amendment:Requires recognition of changes in net defined benefit liability (asset)Introduces enhanced disclosures about defined benefit plansModifies accounting for termination benefitsClarifies miscellaneous issuesClassification of employee benefitsCurrent estimates of mortality ratesTax and administrative costsRisk-sharing and conditional indexation featuresIncorporates other matters submitted to IFRS Interpretations Committee27

IAS No. 26: Accounting and Reporting by Retirement Benefit PlansSeparate reporting standards for defined benefit and defined contribution pension plansDefined ContributionObjectivesprovide information about the plan and the performance of investmentsDefined Benefitprovide information that is useful in assessing the relationship between plan resources and future benefits28Copyright 2014 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Prepared by Kathryn Yarbrough, MBA

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