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Defined Benefit Plans

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Other information provided by the actuary and the trustee with respect to 2003 follows: ... Using the information provided, the components of pension expense are: ... – PowerPoint PPT presentation

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Title: Defined Benefit Plans

1
Defined Benefit Plans

A discussion adapted from Bline and Skekel,
Accounting for Postretirement Benefits,
Corporate Accounting Deskbook 1991, New York
Executive Enterprises Publications Co., Inc.

2
A Multiyear Example

The following example for a hypothetical firm
that adopts SFAS No. 87 at the beginning of 2003.
The example firm also elects to disclose any
necessary minimum liability. Each year of the
example is presented as a separate case. The
information in each case will be presented in the
following order

3
A Multiyear Example

Basic facts for the case including the
information obtained from the actuary and the
trustee.
Calculation and recognition of pension expense.
Calculation and recognition of the minimum
pension liability, if applicable, and
Required disclosures of a) pension cost
components and b) reconciliation of the funded
status of the plan to the balance sheet position.

4
2003

Printing, Inc. has had a defined benefit pension
plan for its 2,500 employees for many years. At
the beginning of 2003, Printing, Inc. decided to
adopt the pension accounting procedures specified
in SFAS No. 87. Prior to the adoption of SFAS No.
87, cumulative contributions to the pension plan
had equaled cumulative pension expenses. Thus, no
prepaid or accrued pension cost balance existed.

5
2003

At the transition date, the following information
was obtained from the actuary and the trustee
Projected benefit obligation 1,000,000
Market value of plan assets 870,000

6
More Information

The actuary and management estimated that the
total number of employees will remain constant
for the foreseeable future but that 100 employees
are expected to leave the firm annually.
The discount rate applied by the actuary in
computing the PBO was 9 while the trustees
expected long-term rate of return on plan assets
was 10.
Other information provided by the actuary and the
trustee with respect to 2003 follows

7
PBO Information (from actuary)

Beginning PBO 1,000,000
Adjustment due to plan
amendments 0-
Service cost (add) 50,000
Interest cost (add) 90,000
Benefits paid to retirees (deduct) (80,000)
Expected ending PBO 1,060,000

8
PBO Information (from actuary)

Actual ending PBO 1,060,000
Ending ABO 950,000

9
Market Value of Plan Assets (from trustee)

Beginning market value 870,000
Actual return 87,000
Contribution to plan 100,000
Benefits paid (80,000)
Ending market value 977,000

10
Computation of Pension Expense

Using the information provided, the components of
pension expense are

11
Computation of Pension Expense

Service cost (from actuary) 50,000

12
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000

13
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets

14
Computation of Pension Expense

Expected return on plan assets
Beginning market value 870,000
Expected return x .10
Expected return on plan assets 87,000

15
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)

16
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)
Prior service cost amortization -0-

17
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)
Prior service cost amortization -0-
(Gain) Loss amortization -0-

18
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)
Prior service cost amortization -0-
(Gain) Loss amortization -0-
Transition amortization

19
Expected Total Future Years of Service (from
actuary)

It is assumed that 2,500 employee service years
will be worked in the first year and that the
number of service years will decrease by 100
annually. The expected future years of service
are calculated as follows

20
Expected Total Future Years of Service (from
actuary)

Year 1 2,500
Year 2 2,400
Year 3 2,300
Year 25 100
Total 32,500

21
Expected Total Future Years of Service (from
actuary)

Expected total future years of service/Number of
employees
32,500/2,500 13 years
The expected total future years of service and
the average remaining service life are assumed to
remain constant throughout the example.

22
Computation of Pension Expense

Transition amortization
PBO 1,000,000
Market value of plan assets 870,000
Transition amount 130,000
Average remaining service life 13
Annual transition amortization 10,000

23
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)
Prior service cost amortization -0-
(Gain) Loss amortization -0-
Transition amortization 10,000

24
Computation of Pension Expense

Service cost (from actuary) 50,000
Interest on BPO (from actuary) 90,000
Expected return on plan assets (87,000)
Prior service cost amortization -0-
(Gain) Loss amortization -0-
Transition amortization 10,000
Pension expense 63,000

25
Journal Entry

Pension Expense 63,000
Ppd/accrued pension cost 37,000
Cash 100,000

26
Journal Entry

Pension Expense 63,000
Ppd/accrued pension cost 37,000
Cash 100,000

From prior computation
27
Journal Entry

Pension Expense 63,000
Ppd/accrued pension cost 37,000
Cash 100,000

From trustees report on plan assets
28
Journal Entry

Pension Expense 63,000
Ppd/accrued pension cost 37,000
Cash 100,000

To balance
29
Minimum Liability

An employer must report a pension liability at
least equal to the amount by which its ABO
exceeds its plan assets under SFAS No. 87.
Note This is the minimum liability that can be
reported.

30
Computation of Minimum Liability

ABO 950,000
Market value of plan assets 977,000
Minimum pension liability (27,000)

31
Computation of Minimum Liability

ABO 950,000
Market value of plan assets 977,000
Minimum pension liability (27,000)

From Actuary
32
Computation of Minimum Liability

ABO 950,000
Market value of plan assets 977,000
Minimum pension liability (27,000)

From trustee
33
Computation of Minimum Liability

ABO 950,000
Market value of plan assets 977,000
Minimum pension liability (27,000)

34
Computation of Minimum Liability

ABO 950,000
Market value of plan assets 977,000
Minimum pension liability (27,000)

The minimum pension liability is then compared to
the reported amounts on the balance sheet to see
if an additional adjustment is needed.
35
Minimum Liability to be Journalized

There are 3 balance sheet accounts affected by
pensions
Prepaid (accrued) pension cost
Intangible asset-deferred pension cost
Excess of additional pension liability over
unrecognized prior service cost

36
Minimum Liability to be Journalized

Existing balance sheet accounts
Prepaid pension cost 37,000
Intangible asset-deferred
Pension cost -0-
Excess of additional pension
liability over unrecognized
prior service cost -0-

37
Minimum Liability to be Journalized

Existing balance sheet accounts
Prepaid pension cost 37,000
Intangible asset-deferred
Pension cost -0-
Excess of additional pension
liability over unrecognized
prior service cost -0-

This is the only existing balance at this time.
It is from the journal entry for pension expense.
38
Minimum Liability to be Journalized

Existing balance sheet accounts
Prepaid pension cost 37,000
Intangible asset-deferred
Pension cost -0-
Excess of additional pension
liability over unrecognized
prior service cost -0-

We will talk about these accounts later. For now,
it is sufficient to say the balances are zero.
39
Journal Entry

No minimum liability adjusting entry is required
because

40
Journal Entry

No minimum liability adjusting entry is required
because
The ending market value of plan assets exceeds
the ending ABO

41
Journal Entry

No minimum liability adjusting entry is required
because
The ending market value of plan assets exceeds
the ending ABO
A prepaid pension cost balance exists, and

42
Journal Entry

No minimum liability adjusting entry is required
because
The ending market value of plan assets exceeds
the ending ABO
A prepaid pension cost balance exists, and
No intangible asset or contra owners equity
account exist from previous minimum liability
adjustment entries.

43
Footnote Disclosure

Two schedules are included in the footnotes to
the financial statements
The computation of pension expense for 2003
The reconciliation of the funded status of the
plan and the amounts recorded on the balance
sheet.

44
Pension Cost Disclosure