Defined Benefit Plans Part 3

1
Defined Benefit Plans Part 3

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

2
Basic Facts 2005

• The rate of return on plan assets for 2005 was
  greater than anticipated. Therefore, Printing,
  Inc. has an asset gain of 50,000. At December
  31, 2005, the value of the PBO, the ABO, the VBO,
  and the market value of plan assets were obtained
  from the actuary and trustee

3
PBO Information (from actuary)

• Beginning PBO 1,660,000
• Adjustment due to plan
• amendments -0-
• Service cost (add) 110,000
• Interest cost (add) 141,100
• Benefits paid to retirees (deduct) (125,000)
• Expected ending PBO 1,786,100

4
PBO Information (from actuary)

• Actual ending PBO 1,786,100
• Ending ABO 1,600,000
• Ending VBO 1,071,660

5
PBO Information (from actuary)

• Beginning PBO 1,660,000
• Adjustment due to plan
• amendments -0-
• Service cost (add) 110,000
• Interest cost (add) 141,100
• Benefits paid to retirees (deduct) (125,000)
• Expected ending PBO 1,786,100

6
PBO Information (from actuary)

• Interest Cost
• Beginning PBO 1,660,000
• Interest Rate 8.5
• Interest Cost 141,100

7
PBO Information (from actuary)

• Interest Cost
• Beginning PBO 1,660,000
• Interest Rate 8.5
• Interest Cost 141,100

Remember Me?
8
PBO Information (from actuary)

• Difference in expected and actual ending PBO
• Actual PBO 1,786,100
• Expected PBO 1,786,100
• Difference -0-

9
Market Value of Plan Assets (from trustee)

• Beginning market value 1,000,000
• Actual return 156,700
• Contribution to plan 150,000
• Benefits paid (125,000)
• Ending market value 1,181,700

10
Market Value of Plan Assets ending

• At the end of 2004, market and market-related
  asset values were not equal.
• Because the firm experienced an asset gain or
  loss in 2005, the two values will not be equal.

11
Market-Related Asset Value for 2005

• Beginning market-related
• value 1,067,000

12
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return

13
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return
• 1,067,000 10 106,700

14
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return 106,700

15
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return 106,700
• Contribution to plan 150,000

16
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return 106,700
• Contribution to plan 150,000
• Benefits paid (125,000)

17
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return 106,700
• Contribution to plan 150,000
• Benefits paid (125,000)
• Asset gain (loss)

18
Asset Gain (Loss) Amortization
19
Asset Gain (Loss)

• From 2004
• Loss 83,750 .20 (16,750)
• From 2005
• Gain 50,000 .20 10,000
• Net asset gain (loss) ( 6,750)

20
Market-Related Asset Value for 2005

• Beginning market-related value1,067,000
• Expected return 106,700
• Contribution to plan 150,000
• Benefits paid (125,000)
• Asset gain (loss) (6,750)

21
Market-Related Asset Value for 2005

• Beginning market-related value 1,067,000
• Expected return 106,700
• Contribution to plan 150,000
• Benefits paid (125,000)
• Asset gain (loss) (6,750)
• Ending market-related value 1,191,950

22
Computation of Pension Expense

• Using the information provided, the components of
  pension expense are

23
Computation of Pension Expense

• Service cost (from actuary) 110,000

24
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100

25
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets

26
Computation of Pension Expense

• Expected return on plan assets
• Beginning market value 1,067,000
• Expected return x .10
• Expected return on plan assets 106,700

27
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)

28
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization

29
Computation of Pension Expense

• Prior service cost is amortized over the total
  expected future years of service of the existing
  workforce benefiting from the amendment.
• Prior service cost 325,000
• Expected service years 32,500
• Allocation per expected service year 10
• Employee service years for 2004 2,400
• Amortization 24,000

30
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization 24,000

31
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization 24,000
• Gain/Loss amortization

32
(Gain) Loss Amortization

• The corridor is ten percent of the larger of the
  PBO 1,660,000 or the market-related asset value
  of 1,067,000.
• Corridor 1,660,000 10 166,000
• Gain and loss amortization is based on the
  beginning balances.
• Formula Liability gain (loss) Asset gain
  (loss) included in market-related asset value
  Gain (loss) subject to amortization

33
(Gain) Loss Amortization

• At the beginning of 2005, we had
• Liability loss (168,750)
• Asset loss included in
• 2004 market value ( 16,750)
• Loss subject to
• amortization (185,500)

34
(Gain) Loss Amortization

• Gain (loss) amortization
• Formula
• Gain (loss) subject to amortization
  Corridor/Average remaining life Gain (loss)
  amortization
• (185,000 166,000)/13 years 1,500

35
(Gain) Loss Amortization

• Gain (loss) amortization
• Formula
• Gain (loss) subject to amortization
  Corridor/Average remaining life Gain (loss)
  amortization
• (185,000 166,000)/13 years 1,500

32,500/2,500
36
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization 24,000
• Gain/Loss amortization 1,500

37
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization 24,000
• Gain/Loss amortization 1,500
• Transition amount amortization 10,000

38
Computation of Pension Expense

• Service cost (from actuary) 110,000
• Interest on BPO (from actuary) 141,100
• Expected return on plan assets (106,700)
• Prior service cost amortization 24,000
• Gain/Loss amortization 1,500
• Transition amount amortization 10,000
• Pension expense 179,900

39
Journal Entry

• Pension Expense 179,900
• Ppd/accrued pension cost 29,900
• Cash 150,000

40
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.

41
Computation of Minimum Liability

• ABO 1,600,000
• Market value of plan assets 1,181,700
• Minimum pension liability 418,300

42
Maximum Value of Intangible Asset Deferred
Pension Cost

• Prior service cost 325,000
• Less amortization (49,000)
• Transition amount 130,000
• Less amortization (30,000)
• Maximum intangible asset 376,000

43
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

44
Liability before Minimum Adjustment
29,900
37,000
2,500
200,000
229,900
27,400
Asset
Liability
(34,500)
(202,500)
(29,900)
0
45
Minimum Liability to be Journalized

• Existing balance sheet asset accounts
• Intangible asset-deferred
• Pension cost 202,500
• Excess of additional pension
• liability over unrecognized
• prior service cost -0-
• Prepaid (accrued) pension cost (229,900)

46
Minimum Liability to be Journalized

• Existing balance sheet asset accounts
• Intangible asset-deferred
• Pension cost 202,500
• Excess of additional pension
• liability over unrecognized
• prior service cost -0-
• Pension liability (229,900)

Remember that Pension Liability and Prepaid
(Accrued) Pension Cost are netted on the Balance
Sheet!
47
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

48
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

Lets look more closely at the makeup of this
journal entry.
49
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

Minimum Liability Required 418,300 Balance in
Pension Liability 229,900 Adjustment
Required 188,400
50
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

SFAS 87 tells us that the maximum value of the
intangible asset-deferred pension cost account
will be the sum of unrealized prior service cost
and unrealized transition cost.
51
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

Maximum value of ia/dp cost 376,000 Current
balance in ia/dp cost 202,500 Balance
available for minimum liability
entry 173,500
52
Journal Entry

• Intangible asset-deferred
• pension cost 173,500
• Excess of additional
• pension liability over
• unrecognized prior
• service cost 14,900
• Additional pension
• liability 188,400

188,400 - 173,500
53
Footnote Disclosure

• Two schedules are included in the footnotes to
  the financial statements
• The computation of pension expense for 2005
• The reconciliation of the funded status of the
  plan and the amounts recorded on the balance
  sheet.

54
Pension Cost Disclosure

• Pension expense for 2005 includes the following
  components
• Service cost-benefits earned
• during the period 110,000

55
Pension Cost Disclosure

• Pension expense for 200 includes the following
  components
• Service cost-benefits earned
• during the period 110,000
• Interest on PBO 141,100

56
Pension Cost Disclosure

• Pension expense for 200 includes the following
  components
• Service cost-benefits earned
• during the period 110,000
• Interest on PBO 141,100
• Actual return on plan assets (156,700)

57
Pension Cost Disclosure

• Pension expense for 200 includes the following
  components
• Service cost-benefits earned
• during the period 110,000
• Interest on PBO 141,100
• Actual return on plan assets (156,700)
• Net amortization and deferral

58
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000

59
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000
• (Gain) Loss amortization 1,500

60
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000
• (Gain) Loss amortization 1,500
• Transition amount amortization 10,000

61
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000
• (Gain) Loss amortization 1,500
• Transition amount amortization 10,000
• Difference between actual and
• expected return on plan assets
• (156,700-106,700) 50,000

62
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000
• (Gain) Loss amortization 1,500
• Transition amount amortization 10,000
• Difference between actual and
• expected return on plan assets 50,000
• Net amortization and deferral 85,500

63
Computation of Net Amortization and Deferral

• Prior service cost amortization 24,000
• (Gain) Loss amortization 1,500
• Transition amount amortization 10,000
• Difference between actual and
• expected return on plan assets
• (97,700-13,950) 50,000
• Net amortization and deferral 85,500

64
Pension Cost Disclosure

• Pension expense for 200 includes the following
  components
• Service cost-benefits earned
• during the period 110,000
• Interest on PBO 141,100
• Actual return on plan assets (156,700)
• Net amortization and deferral 85,500

65
Pension Cost Disclosure

• Pension expense for 200 includes the following
  components
• Service cost-benefits earned
• during the period 110,000
• Interest on PBO 141,100
• Actual return on plan assets (156,700)
• Net amortization and deferral 85,500
• Pension expense 179,900

66
Reconciliation Disclosure

• Actuarial present value of benefit obligations

67
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)

68
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)

69
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)

70
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700

71
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)

72
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss

73
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss
• Liability loss 2004 168,750

74
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss
• Liability loss 2004 168,750
• Asset loss 2004 83,750

75
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss
• Liability loss 2004 168,750
• Asset loss 2004 83,750
• Loss amortization 2005 (1,500)

76
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss
• Liability loss 2004 168,750
• Asset loss 2004 83,750
• Loss amortization 2005 (1,500)
• Asset gain 2005 (50,000)

77
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss
• Liability loss 2004 168,750
• Asset loss 2004 83,750
• Loss amortization 2005 (1,500)
• Asset gain 2005 (50,000)
• Unrecognized net (gain) loss 201,000

78
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000

79
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost

80
Unrecognized Prior Service Cost

• Prior service cost at amendment
• date 325,000
• Cumulative amortization 49,000
• Unrecognized prior service cost 276,000

81
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in
• net periodic pension cost 276,000

82
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004

83
Unrecognized Net Obligation

• Net obligation at adoption 130,000
• Cumulative amortization 30,000
• Unrecognized net obligation 100,000

84
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004 100,000

85
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004 100,000
• Adjustment required to recognize minimum
  liability

86
Minimum Liability Adjustment

• Pension liability (418,300)
• Net liability ( 27,400)
• Total adjustment (390,900)

87
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004 100,000
• Adjustment required to recognize minimum
  liability (390,900)

88
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004 100,000
• Adjustment required to recognize minimum
  liability (390,900)

This is a cumulative amount!
89
Reconciliation Disclosure

• Actuarial present value of benefit obligations
• VBO (from actuary) (1,071,600)
• ABO (from actuary) (1,600,000)
• PBO (from actuary) (1,786,100)
• Plan assets at fair market value 1,181,700
• PBO (in excess of) or less than plan assets (
  604,400)
• Unrecognized net (gain) or loss 201,000
• Prior service cost not yet recognized in net
  periodic pension cost 276,000
• Unrecognized net obligation (asset) at December
  31, 2004 100,000
• Adjustment required to recognize minimum
  liability (390,900)
• Prepaid pension cost (pension liability)
  recognized on the balance sheet ( 418,300)