Chapter 17 Pensions and Other Postretirement Benefits

Transcription

1 Chapter 17 Pensions and Other Postretirement Benefits AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise and problem in Intermediate Accounting, 7e, with the following AACSB learning skills: Questions AACSB Tags Brief Exercises AACSB Tags (cont.) 17 1 Reflective thinking Analytic 17 2 Reflective thinking Analytic 17 3 Reflective thinking Analytic 17 4 Reflective thinking Exercises 17 5 Reflective thinking 17 1 Reflective thinking 17 6 Reflective thinking 17 2 Analytic 17 7 Reflective thinking 17 3 Reflective thinking 17 8 Reflective thinking 17 4 Analytic 17 9 Reflective thinking 17 5 Analytic Reflective thinking 17 6 Analytic Reflective thinking 17 7 Analytic Reflective thinking 17 8 Analytic Reflective thinking 17 9 Diversity, Analytic Reflective thinking Analytic Reflective thinking Analytic Reflective thinking Analytic Reflective thinking Analytic Reflective thinking Analytic, Communications Reflective thinking Analytic Reflective thinking Analytic Reflective thinking Reflective thinking Reflective thinking Diversity, Analytic Reflective thinking Analytic Analytic Analytic Diversity, Reflective thinking Analytic Diversity, Reflective thinking Diversity, Analytic Brief Exercises Reflective thinking 17 1 Analytic Analytic 17 2 Analytic Analytic 17 3 Analytic Analytic 17 4 Analytic Analytic 17 5 Analytic Analytic 17 6 Analytic Analytic 17 7 Analytic Analytic 17 8 Analytic Analytic 17 9 Analytic Reflective thinking, Communications Analytic Reflective thinking, Communications Analytic Analytic 17 1 Intermediate Accounting 7e

2 CPA/CMA AACSB Tags Problems 1 Analytic 17 1 AACSB Tags Analytic 2 Reflective thinking 17 2 Analytic 3 Reflective thinking 17 3 Analytic 4 Reflective thinking 17 4 Analytic 5 Reflective thinking 17 5 Analytic 6 Diversity, Reflective thinking 17 6 Analytic 7 Diversity, Reflective thinking 17 7 Analytic 8 Diversity, Reflective thinking 17 8 Analytic 1 Reflective thinking 17 9 Analytic 2 Analytic Diversity, Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Analytic Solutions Manual, Vol.2, Chapter

3 QUESTIONS FOR REVIEW OF KEY TOPICS Question 17 1 Pension plans are arrangements designed to provide income to individuals during their retirement years. Funds are set aside during an employee s working years so that the accumulated funds plus earnings from investing those funds are available to replace wages at retirement. An individual has a pension fund when she or he periodically invests in stocks, bonds, CDs, or other securities for the purpose of saving for retirement. When an employer establishes a pension plan, the employer provides some or all of the periodic contributions to the retirement fund. The motivation for corporations to establish pension plans comes from several sources. Pension plans provide employees with a degree of retirement security. They may fulfill a moral obligation many employers feel toward employees. Pension plans often enhance productivity, reduce turnover, satisfy union demands, and allow employers to compete in the labor market. Question 17 2 A qualified pension plan gains important tax advantages. The employer is permitted an immediate tax deduction for amounts paid into the pension fund. Conversely, the benefits to employees are not taxed until retirement benefits are received. Also, earnings on the funds set aside by the employer accumulate tax-free. For a pension plan to be qualified for special tax treatment, these general requirements must be met: 1. It must cover at least 70% of employees. 2. It cannot discriminate in favor of highly compensated employees. 3. It must be funded in advance of retirement through contributions to an irrevocable trust fund. 4. Benefits must vest after a specified period of service, commonly five years. 5. It complies with specific restrictions on the timing and amount of contributions and benefits. Question 17 3 This is a noncontributory plan because the corporation makes all contributions. When employees make contributions to the plan in addition to employer contributions, it s called a contributory plan. This is a defined contribution plan because it promises fixed annual contributions to a pension fund, without further commitment regarding benefit amounts at retirement. Question 17 4 The vested benefit obligation is the pension benefit obligation that is not contingent upon an employee's continuing service. Question 17 5 The accumulated benefit obligation is the discounted present value of retirement benefits calculated by applying the pension formula with no attempt to forecast what salaries will be when the formula actually is applied. The projected benefit obligation is the present value of those benefits when the actuary includes projected salaries in the pension formula Intermediate Accounting 7e

4 Answers to Questions (continued) Question 17 6 The projected benefit obligation can change due to periodic service cost, accrued interest, revised estimates, plan amendments, and the payment of benefits. Question 17 7 The balance of the plan assets can change due to investment returns, employer contributions, and the payment of benefits. Question 17 8 The pension expense reported on the income statement is a composite of periodic changes that occur in both the pension obligation and the plan assets. These include service cost, interest cost, return on the plan assets, and the amortization of prior service cost and of net gains or losses. Question 17 9 The service cost in connection with a pension plan is the present value of benefits attributed by the pension formula to employee service during the period, projecting future salary levels (i.e., the projected benefits approach). Question The interest cost is the projected benefit obligation outstanding at the beginning of the period multiplied by the actuary's interest (discount) rate. This is the interest expense that accrues on the PBO and is included as a component of pension expense rather than being separately reported. Question GAAP specifies that the actual return be included in the determination of pension expense. However, the actual return is adjusted for any difference between actual and expected return, meaning that the expected return is really the amount reflected in the calculation of pension expense. This investment revenue is deducted as a component of pension expense rather than being separately reported. The difference between actual and expected return on plan assets is combined with gains and losses from other sources for possible future amortization to pension expense. Question Prior service cost is the obligation (present value of benefits) due to giving credit to employees for years of service provided before either the date of an amendment to (or initiation of) a pension plan. Prior service cost is recognized as other comprehensive income as incurred and then as a component of accumulated other comprehensive income in the company s balance sheet. The account is allocated (amortized) to pension expense over the service period of affected employees. The straight-line method allocates an equal amount of the prior service cost to each year. The service method recognizes the cost each year in proportion to the fraction of the total remaining service years worked in each of these years. Solutions Manual, Vol.2, Chapter

5 Answers to Questions (continued) Question Gains or losses related to pension plan assets represent the difference between the return on investments and what the return had been expected to be. They are recognized as other comprehensive income as incurred and then as a component of accumulated other comprehensive income in the company s balance sheet: either a net loss AOCI or a net asset AOCI depending on whether cumulative losses have exceeded gains, or vice versa. The account is amortized to pension expense only if the net loss AOCI or net asset AOCI exceeds a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Gains or losses related to the pension obligation are treated the same way. In fact, gains and losses from both sources are combined to determine the net gains or net losses referred to above. Question A company s PBO is not reported among liabilities in the balance sheet. Similarly, the plan assets a company sets aside to pay those benefits are not reported among assets in the balance sheet. However, firms report the net difference between those two amounts, referred to as the funded status of the plan, as either a net pension liability (if underfunded) or a net pension asset (if overfunded). Question The two components of pension expense that may reduce pension expense are the return on plan assets (always) and the amortization of a net gain AOCI (amortizing a net loss AOCI increases the expense). Question The components of pension expense that involve delayed recognition are the prior service cost and gains and losses. Question The excess of the actual return on plan assets over the expected return is considered a gain. It does, in fact, decrease the employer s pension cost, but not immediately the pension expense. It is reported as other comprehensive income as it occurs, grouped with other gains and losses to create a net gain AOCI or net loss AOCI account, and then amortized as a component of pension expense only if the net gain AOCI or net loss AOCI exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. Question The cash contribution is debited to the pension asset. It adds to plan assets, thereby reducing an underfunded status (PBO > assets) or increasing an overfunded status (assets > PBO). So, if the plan is underfunded so that a net pension liability exists, the liability is reduced. Otherwise, if the plan is overfunded so that a net pension asset exists, the asset is increased Intermediate Accounting 7e

6 Answers to Questions (continued) Question TFC Inc. revises its estimate of future salary levels causing its PBO estimate to increase by the $3 million. The $3 million is considered a loss and is reported in the statement of comprehensive income rather than being reported as part of traditional net income as would occur if included as part of pension expense. It then becomes part of accumulated other comprehensive income in the balance sheet as part of the net loss AOCI or net gain AOCI. A portion of that balance might possibly be amortized to pension expense if the net loss AOCI or net gain AOCI exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. Question The difference between the employer s obligation (PBO) and the resources available to satisfy that obligation (plan assets) is the funded status of the pension plan. Firms must report the net difference between those two amounts, referred to as the funded status of the plan, in the balance sheet. It s reported as a net pension asset if the plan assets exceed the PBO or as a net pension liability if the PBO exceeds the plan assets. Question The expected postretirement benefit obligation (EPBO) is the actuary's estimate of the total postretirement benefits (at their discounted present value) expected to be received by plan participants. When a plan is pay-related, future compensation levels are implicitly assumed. The accumulated postretirement benefit obligation (APBO) measures the obligation existing at a particular date, rather than the total amount expected to be earned by plan participants. The APBO is conceptually similar to a pension plan s projected benefit obligation. The EPBO has no counterpart in pension accounting. Question The cost of benefits is attributed to the years during which those benefits are assumed to be earned by employees. The attribution period spans each year of service from the employee s date of hire to the employee s full eligibility date, which is the date the employee has performed all the service necessary to have earned all the retiree benefits estimated to be received by that employee. The approach assigns an equal fraction of the EPBO to each of those years. The attribution period does not include any years of service beyond the full eligibility date, even if the employee is expected to work after that date. Question The service cost for pensions reflects additional benefits employees earn from an additional year s service, whereas the service cost for retiree health care plans is simply an allocation to the current year of a portion of a fixed total cost. Question The attribution period spans each year of service from the employee s date of hire to the employee s full eligibility date, 30 years in this case. The APBO is $10,000, which represents the portion of the EPBO earned after 15 years of the 30-year attribution period: $20,000 x 15 /30 = $10,000. Solutions Manual, Vol.2, Chapter

7 Answers to Questions (concluded) Question Mid-South Logistics prepares its financial statements according to U.S. GAAP. Under U.S. GAAP, prior service cost is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period. On the other hand, under IAS No. 19, prior service cost (called past service cost under IFRS) is combined with service cost and reported within the income statement, in the period in which it arises, rather than as a component of other comprehensive income as it is under U.S. GAAP, so it never is amortized to expense. Since Mid-South Logistics is amortizing a portion of the amount, U.S. GAAP is indicated. Question Under both U.S. GAAP and IFRS we report gains and losses among OCI items in the statement of comprehensive income; thus, they subsequently become part of AOCI. But, under IFRS the gains and losses are not subsequently amortized to expense and recycled or reclassified from other comprehensive income as is required under U.S. GAAP (when the accumulated net gain or net loss exceeds the 10% threshold). A second difference pertains to the make-up of the gain or loss on plan assets. This amount under U.S. GAAP is the difference in the actual and expected returns, where the expected return is different from company to company and usually different from the interest rate used to determine the interest cost. Under IFRS, though, we use the same rate (the rate for highgrade corporate bonds) for both the interest cost on the defined benefit obligation and the interest income on the plan assets. In fact, under IFRS, we multiply that rate times the net difference between the defined benefit obligation and plan assets and report the net interest cost/income Intermediate Accounting 7e

8 BRIEF EXERCISES Brief Exercise 17 1 Beginning of the year PBO $80 Service cost 10 Interest cost 4 (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (6) End of the year PBO $88 Brief Exercise 17 2 Beginning of the year PBO $80 Service cost? Interest cost 4 (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (6) End of the year PBO $85 Service cost = $ = $7 million Brief Exercise 17 3 Beginning of the year PBO $80 Service cost 10 Interest cost 4 (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (?) End of the year PBO $85 Retiree benefits = $ = $9 million Solutions Manual, Vol.2, Chapter

9 Brief Exercise 17 4 Beginning of the year PBO $80 Service cost 10 Interest cost 4 (5% x $80) Loss (gain) on PBO? Less: Retiree benefits (6) End of the year PBO $85 Gain = $ = $3 million Brief Exercise 17 5 Plan assets Beginning of the year $80 Actual return 4 (5% x $80) Cash contributions 7 Less: Retiree benefits (6) End of the year $85 Brief Exercise 17 6 Plan assets Beginning of the year $80 Actual return 4 (5% x $80) Cash contributions 7 Less: Retiree benefits (?) End of the year $83 Retiree benefits = $ = $8 million 17 9 Intermediate Accounting 7e

10 Brief Exercise 17 7 Plan assets Beginning of the year $100 Actual return? (? % x $100) Cash contributions 7 Less: Retiree benefits (6) End of the year $104 Return on assets = $ = $3 million Rate of return on assets = $3 million $100 million = 3% Solutions Manual, Vol.2, Chapter

11 Brief Exercise 17 8 The difference between an employer s obligation (PBO) and the resources available to satisfy that obligation (plan assets) is the funded status of the pension plan. The employer must report the net difference between those two amounts, referred to as the funded status of the plan in the balance sheet. It s reported as a net pension liability if the PBO exceeds the plan assets or a net pension asset if the plan assets exceed the PBO. In the situation described, JDS would report a net pension liability of $15 million: PBO $40 Plan assets 25 Net pension liability $15 If the plan assets are $45 million, JDS would report a net pension asset of $5 million: Plan assets $45 PBO 40 Net pension asset $ Intermediate Accounting 7e

12 Brief Exercise 17 9 Service cost $10 Interest cost (5% x $80) 4 Expected return on the plan assets ($5 actual, less $1 gain) (4) Amortization of prior service cost 0 Amortization of net loss (gain) 0 Pension expense $10 Solutions Manual, Vol.2, Chapter

13 Brief Exercise Service cost $10 Interest cost 4 Expected return on the plan assets ($4 actual, plus $2 loss) (6) Amortization of prior service cost 2* Amortization of net loss (gain) 0 Pension expense $10 * $20 10 years = $ Intermediate Accounting 7e

14 Brief Exercise Gains or losses should not be part of pension expense unless and until total net gains or losses exceed a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is larger. The amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Amortization of net gains is deducted from pension expense; amortization of a net loss is added to pension expense. Pension expense in this instance is decreased by a $2 million amortization of the net gain: Net gain $30 Less: 10% corridor (threshold)* (10) Excess $20 Service period 10 Amortization $ 2 * 10% times either the PBO ($80) or plan assets ($100), whichever is larger. Solutions Manual, Vol.2, Chapter

15 Brief Exercise The net pension liability, which is the difference between the PBO and plan assets, increases by the combination of the service cost, interest cost, and the expected return ($ million) as is reflected in the following entry. To Record Pension Expense Pension expense (total) Plan assets ($55 expected return on assets) 55 PBO ($ ) Prior service cost AOCI... 2 The net pension liability (PBO minus plan assets) is affected only by the three components of pension expense that change either the PBO or plan assets. The pension expense also includes the $2 million of prior service cost amortization but, unlike the other three components, this amortization amount affects neither the PBO nor the plan assets and therefore doesn t change the net pension liability. However, the prior service cost (an accumulated other comprehensive income account) is reduced by $2 million. This reduction is reported as other comprehensive income in the statement of comprehensive income Intermediate Accounting 7e

16 Brief Exercise Pension gains and losses (either from changing assumptions regarding the PBO or the return on assets being higher or lower than expected) are deferred and not immediately included in pension expense and net income. They are, however, reported as other comprehensive income in the period they occur. Accordingly, these gains and losses are reported in Andrews s statement of comprehensive income as a gain of $4 million and a loss of $1 million. Here are the entries: Loss OCI (loss from actual return falling short of expected) 1 Plan assets... 1 PBO... 4 Gain OCI (gain from change in assumption)... 4 The net pension liability in the balance sheet declines by the $3 million net effect of the loss and the gain: PBO Less: Plan assets Net pension liability $4 1 $ 3 The Net loss AOCI in the balance sheet increases by the current $1 million Loss OCI and deceases by the current $4 million Gain OCI, a net reduction of $3 million. Plus: Loss OCI $ 1 Less: Gain OCI (4) Decrease in Net loss AOCI $(3) Solutions Manual, Vol.2, Chapter

17 Brief Exercise APBO Service Cost 2013 $50,000 x 6/ 30 = $10,000 $50,000 x 1 / 30 = $1, $54,000 x 7 / 30 = $12,600 $54,000 x 1 / 30 = $1, year attribution period (age 26 55). Brief Exercise Beginning of 2013 APBO $25 Service cost 7 Interest cost 2 (8% x $25) Gain on APBO (1) Less: Retiree benefits (3) End of 2013 APBO $ Intermediate Accounting 7e

18 EXERCISES Exercise 17 1 I N D I I D N D I N N Exercise 17 2 Events 1. Interest cost. 2. Amortization of prior service cost. 3. A decrease in the average life expectancy of employees. 4. An increase in the average life expectancy of employees. 5. A plan amendment that increases benefits is made retroactive to prior years. 6. An increase in the actuary s assumed discount rate. 7. Cash contributions to the pension fund by the employer. 8. Benefits are paid to retired employees. 9. Service cost. 10. Return on plan assets during the year lower than expected. 11. Return on plan assets during the year higher than expected. Beginning of 2013 $30 Service cost 12 Interest cost 3 (10% x $30) Loss (gain) on PBO 0 Less: Retiree benefits (4) End of 2013 $41 Solutions Manual, Vol.2, Chapter

19 Exercise 17 3 I I N D N N N N I N I D Events 1. Interest cost. 2. Amortization of prior service cost AOCI. 3. Excess of the expected return on plan assets over the actual return. 4. Expected return on plan assets. 5. A plan amendment that increases benefits is made retroactive to prior years. 6. Actuary s estimate of the PBO is increased. 7. Cash contributions to the pension fund by the employer. 8. Benefits are paid to retired employees. 9. Service cost. 10. Excess of the actual return on plan assets over the expected return. 11. Amortization of net loss AOCI. 12. Amortization of net gain AOCI Intermediate Accounting 7e

20 Exercise 17 4 Requirement 1 Pension expense (total) Plan assets (expected return on assets)... 4 PBO ($10 service cost + $6 interest cost) Net loss AOCI (current amortization) 2 Requirement 2 Pension expense (total) Plan assets (expected return on assets)... 4 Net gain AOCI (current amortization) 2 PBO ($10 service cost + $6 interest cost) Requirement 3 Pension expense (total) Plan assets (expected return on assets)... 4 PBO ($10 service cost + $6 interest cost) Net loss AOCI (current amortization) 2 Prior service cost (current amortization) 3 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Solutions Manual, Vol.2, Chapter

21 Exercise 17 5 Plan assets Beginning of the year $600 Actual return 48 Cash contributions 100 Less: Retiree benefits (11) End of the year $737 Exercise 17 6 PBO: Beginning of the year $360 Service cost? Interest cost 36 (10% x $360) Loss (gain) on PBO 0 Less: Retiree benefits (54) End of the year $465 Service cost = $ = $123 million Exercise 17 7 Plan assets Beginning of the year $700 Actual return 77 (11% x $700) Cash contributions? Less: Retiree benefits (66) End of the year $750 Cash contributions = $ = $39 million Intermediate Accounting 7e

22 Exercise 17 8 ($ in 000s) Service cost $112 Interest cost (6% x $850) 51 Expected return on the plan assets ($99 actual, less $9 gain*) (90) Amortization of prior service cost 8 Amortization of net loss 1 Pension expense $82 * (11% x $900) (10% x $900) Exercise 17 9 Under IFRS the various components of pension expense are not reported as a single net amount. Instead, Sterling Properties would separately report service cost (including past service cost), net interest cost/income, and remeasurement gains and losses: ($ in 000s) Income statement: Service cost 2013 $112 Past service cost 80 Service cost (reported in income statement) $192 Net interest income* (6%** x [$ ]) $ 3 Statement of comprehensive income: Remeasurement gain OCI ([11% 6%] x $900]) $ (45) Net pension cost (not separately reported) $150 * Because plan assets exceed the DBO, we have net interest income rather than net interest cost ** This solution assumes that the 6% interest rate is also the interest rate for high-quality corporate bonds, which is the rate prescribed for determining the net interest cost/income. Note: Using IFRS, there would be no prior service cost in AOCI and no amortization of the net loss. Solutions Manual, Vol.2, Chapter

23 Exercise Requirement 1 Service cost $20 Interest cost 12 Expected return on the plan assets ($9 actual, less $1 gain) (8) Pension expense $24 Requirement 2 Pension expense (calculated above) 24 Plan assets (expected return on plan assets) 8 PBO ($20 service cost + $12 interest cost) 32 Plan assets 20 Cash (contribution) 20 PBO 9 Plan assets (given) 9 The following entry also would be required although it does not affect the pension expense or the plan asset funding: Plan assets 1 Gain OCI Intermediate Accounting 7e

24 Exercise Requirement 1 ($ in 000s) Service cost $310 Interest cost (7% x $2,300) 161 Expected return on the plan assets ($216 actual, plus $24 loss*) (240) Amortization of prior service cost 25 Amortization of net gain (6) Pension expense $250 * (10% x $2,400) (9% x $2,400) Requirement 2 Pension expense (calculated above) 250 Plan assets (expected return on assets) 240 Net gain AOCI (current amortization) 6 Prior service cost AOCI (current amortization) 25 PBO ($310 service cost + $161 interest cost) 471 Loss OCI ($216 actual return on assets $240 expected return) 24 Plan assets 24 Plan assets 245 Cash (contribution) 245 PBO 270 Plan assets (retiree payments) 270 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Solutions Manual, Vol.2, Chapter

25 Exercise Requirement 1 1.2% x service years x final year s salary = 1.2% x 20 x $270,000 = $64,800 Requirement 2 Requirement 3 The present value of the retirement annuity at the end of 2038 is $64,800 x * = $590,193 * Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4) The PBO is the present value of the retirement benefits at the end of 2013: $590,193 x.18425* = $108,743 * Present value of $1: n = 25, i = 7 % (from Table 2) Requirement 4 1.2% x 20 x $80,000 = $19,200 $19,200 x * = $174,872 $174,872 x.18425** = $32,220 * Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4) ** Present value of $1: n = 25, i = 7% (from Table 2) Requirement 5 1.2% x 21 x $270,000 = $68,040 $68,040 x * = $619,702 $619,702 x.19715** = $122,174 * Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4) ** Present value of $1: n = 24, i = 7% (from Table 2) Intermediate Accounting 7e

26 Exercise (concluded) Requirement 6 PBO at the end of 2014 $122,174 PBO at the end of 2013 (108,743) Change in PBO $ 13,431 Less: Interest cost ($108,743 x 7%) (7,612) Service cost $ 5,819 The change due to service cost can be verified as follows ($1 difference due to rounding): (1.2% x 1 yr. x $270,000) x x = $5,818 annual retirement benefits to discount to discount from 2014 service to 2036 * to 2014 ** * Present value of an ordinary annuity of $1: n = 15, i = 7% (from Table 4) ** Present value of $1: n = 24, i = 7% (from Table 2) Solutions Manual, Vol.2, Chapter

27 Exercise Requirement 1 ($ in 000s) Case 1 Case 2 Case 3 Net loss or gain $320 $330 $260 Less: 10% corridor (threshold)* Excess none $ 60 $ 90 Service period Amortization none $ 4 $ 9 * 10% times either the PBO or plan assets (beginning of the year), whichever is larger. Case 1 3,310 or 2,800: choose 3,310 Case 2 2,670 or 2,700: choose 2,700 Case 3 1,700 or 1,550: choose 1,700 Requirement 2 ($ in 000s) Case 1 Case 2 Case 3 January 1, 2013 net loss or (gain) $320 ($330) $ loss (gain) on plan assets (11) (8) amortization 0 4 (9) 2013 loss (gain) on PBO (23) 16 (265) January 1, 2014 $286 ($318) ($ 12) Note: The balance in this account is recognized as part of accumulated other comprehensive income in the balance sheet Intermediate Accounting 7e

28 Exercise In the balance sheet, Liabilities increase by $274 million: The PBO increases by $374 (service cost and interest cost); plan assets increase by $100 (expected return on assets plus the gain due to the actual return exceeding expectations). When those two accounts are reported in the balance sheet by netting the two together (PBO less plan assets), the net pension liability (underfunded plan) will increase by $274 million. Shareholders equity decreases by $274 million: Retained earnings: Retained earnings decreases by the reduction of earnings by the $294 million expense. Accumulated other comprehensive income: The prior service cost AOCI (a negative shareholders equity account) decreases by the $8 million amortization. The net loss AOCI (a negative shareholders equity account) decreases by the $2 million amortization and by the $10 million gain OCI. Retained earnings ($294) Prior service cost AOCI 8 Net loss AOCI 12 Shareholders equity $274 Journal entries (not required): To record expense ($ in 000s) Pension expense (given) 294 Plan assets (expected return on assets) 90 Prior service cost AOCI (current amortization) 8 Net loss AOCI (current amortization) 2 PBO ($224 service cost + $150 interest cost) 374 To record gain on assets... Plan assets Gain OCI (actual return exceeded expected return) 10 Solutions Manual, Vol.2, Chapter

29 Exercise ( )s indicate credits; debits otherwise Plan Assets Prior Service Cost AOCI Net Loss AOCI Pension Expense Net Pension (Liability ) / Asset ($ in 000s) PBO Cash Balance, Jan. 1, 2013 (800) (200) Service cost (84) 84 (84) Interest cost, 5% (40) 40 (40) Expected return on assets 48 (48) 48 Adjust for: Loss on assets (6) 6 (6) Amortization: Prior service cost (6) 6 Amortization: Net loss 0 (0) Gain on PBO 12 (12) 12 Prior service cost Cash funding 68 (68) 68 Retiree benefits 50 (50) Bal., Dec. 31, 2013 (862) (202) Intermediate Accounting 7e

30 Exercise Requirement 1 Pension expense (calculated below) 88* Plan assets (expected return on assets) 40 Net loss AOCI (current amortization) 2 Prior service cost AOCI (current amortization) 4 PBO ($80 service cost + $42 interest cost) 122 * Service cost $ 80 Interest cost 42 Expected return on the plan assets ($32 actual, plus $8 loss) (40) Amortization of prior service cost 4 Amortization of net loss 2 Pension expense $ 88 Computation of net loss amortization: Net loss AOCI (previous losses exceeded previous gains) $ 80 10% of $600 PBO (greater than $400 plan assets) (60) Amount to be amortized $ years Amortization $ 2 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Requirement 2 Loss OCI ($32 actual return on assets $40 expected return) 8 Plan assets 8 PBO 14 Gain OCI (from change in assumption regarding the PBO) 14 Solutions Manual, Vol.2, Chapter

31 Exercise (concluded) Requirement 3 Plan assets 90 Cash (contribution) 90 Requirement 4 PBO 38 Plan assets (retiree benefit payments) Intermediate Accounting 7e

32 Exercise List A List B d_ 1. Future compensation levels estimated. a. Actual return exceeds expected f_ 2. All funding provided by the employer. b. Net gain AOCI a_ 3. Credit to OCI and debit to c. Vested benefit obligation plan assets. d. Projected benefit obligation l_ 4. Retirement benefits specified e. Choice between PBO and ABO by formula. f. Noncontributory pension plan e_ 5. Trade-off between relevance g. Accumulated benefit obligation and reliability. h. Plan assets b_ 6. Cumulative gains in excess of losses. i. Interest cost g_ 7. Current pay levels implicitly assumed. j. Delayed recognition in earnings i_ 8. Created by the passage of time. k. Defined contribution plan c_ 9. Not contingent on future employment. l. Defined benefit plan k_ 10. Risk borne by employee. m. Prior service cost h_ 11. Increased by employer contributions. n. Amortize net loss AOCI m_ 12. Caused by plan amendment. j_ 13. Loss on plan assets. n_ 14. Excess over 10% of plan assets or PBO. Solutions Manual, Vol.2, Chapter

33 Exercise Requirement 1 A decrease in the discount rate from 7% to 6% increases the projected benefit obligation. The lower the discount rate in a present value calculation, the higher the present value. When the obligation increases, it is reported as a loss. Requirement 2 Loss OCI (from change in discount rate) 13 PBO 13 U.S. GAAP requires that actuarial gains and losses be included among OCI items in the statement of comprehensive income, thus subsequently become part of AOCI. Requirement 3 Reporting actuarial gains and losses among OCI items in the statement of comprehensive income also is required under IAS No. 19, referred to as remeasurement gains and losses. Under IAS No. 19 they are not subsequently amortized to expense and recycled or reclassified from other comprehensive income as is required under U.S. GAAP (if the net gain or net loss exceeds the 10% corridor threshold). So, the entry might be identical to the one in Requirement 2 except we call it a remeasurement loss and the projected benefit obligation is called the defined benefit obligation (DBO): Remeasurement loss OCI (from change in discount rate) 13 DBO Intermediate Accounting 7e

34 Exercise Requirement 1 Pension expense (calculated below) 67* Plan assets (expected return on assets) 45 Net gain AOCI (current amortization) 2 Prior service cost AOCI (current amortization) 8 PBO ($82 service cost + $24 interest cost) 106 * Service cost $ 82 Interest cost 24 Expected return on the plan assets ($40 actual, plus $5 loss) (45) Amortization of prior service cost 8 Amortization of net gain (2) Pension expense $ 67 Computation of net gain amortization: Net gain AOCI (previous gains exceeded previous losses) $ 80 10% of $500 plan assets (greater than $480 PBO) (50) Amount to be amortized $ years Amortization $ 2 Requirement 2 Journal entries to record gains and losses PBO (given) Gain OCI (from change in assumption regarding the PBO) 10 Loss OCI ($40 actual return on assets $45 expected return) 5 Plan assets... 5 Requirement 3 Plan assets 70 Cash (contribution) 70 PBO 40 Plan assets (benefit payments) 40 Solutions Manual, Vol.2, Chapter

35 Exercise (continued) Requirement 4 PBO 480 Jan. 1 balance 82 Service cost 24 Interest cost New gain 10 Benefits paid Dec. 31 balance Plan Assets Jan. 1 balance 500 Expected return 45 5 New loss Cash funding Benefits paid Dec. 31 balance Intermediate Accounting 7e

36 Exercise (concluded) SHAREHOLDERS EQUITY: ACCUMULATED OTHER COMPREHENSIVE INCOME Net Gain AOCI 80 Jan. 1 balance 10 New gain New loss 5 Amortized in Dec. 31 balance Prior Service Cost AOCI Jan. 1 balance 48 8 Amortized in 2013 Dec. 31 balance 40 Requirement 5 The pension plan is overfunded. Beale will report a net pension asset of $34 million in its 2013 balance sheet: Plan assets PBO = Net pension asset 2012 $ = $ $ = $34 Solutions Manual, Vol.2, Chapter

37 Exercise ( )s indicate credits; debits otherwise Plan Assets Prior Service Cost AOCI Net Gain AOCI Pension Expense Net Pension (Liability) / Asset PBO Cash Balance, Jan. 1, 2013 (480) (80) 20 Service cost (82) 82 (82) Interest cost, 5% (24) 24 (24) Expected return on assets 45 (45) 45 Adjust for: Loss on assets (5) 5 (5) Amortization of: Prior service cost (8) 8 Net gain 2 (2) Gain on PBO 10 (10) 10 Cash funding 70 (70) 70 Retiree benefits 40 (40) Balance, Dec. 31, 2013 (536) (83) Intermediate Accounting 7e

38 Exercise Requirement 1 Service cost $ 60 Interest cost 27 Expected return on the plan assets ($27 actual, less $3 gain) (24) Amortization of prior service cost 0* Amortization of net gain or net loss AOCI 0 Pension expense $ 63 * Since the amendment was at the end of the year, there is no amortization of prior service cost in Requirement 2 Pension expense (calculated above) 63 Plan assets (expected return on assets) 24 PBO ($60 service cost + $27 interest cost) 87 Plan assets 3 Gain OCI ($27 actual return on assets $24 expected return) 3 Prior service cost OCI (from 2013 amendment) 12 PBO 12 Plan assets 60 Cash (funding contribution) 60 PB O 37 Plan assets (retiree benefits) 37 Solutions Manual, Vol.2, Chapter

39 Exercise Under U.S. GAAP, prior service cost is included among other comprehensive income items in the statement of comprehensive income and thus subsequently becomes part of accumulated other comprehensive income where it is amortized over the average remaining service period. Under IAS No. 19, past service cost (called prior service cost under U.S. GAAP) is expensed immediately as part of the service cost for the year. Requirement 1 Income statement: Service cost 2013 $ 60 Past service cost 12 Service cost $ 72 Net interest cost (7.5% x [$ ]) $ 9 Other comprehensive income: Remeasurement gain OCI ($27 [7.5% x $240]) ($ 9) Net pension cost (not separately reported) $ Intermediate Accounting 7e

40 Exercise (concluded) Requirement 2 Service cost 72 DBO (2013 service cost) 60 DBO (past service cost) 12 Net interest cost (7.5% x [$ ]) 9 Plan assets (7.5% x $240: interest income) 18 DBO (7.5% x $360: interest cost) 27 Plan assets (actual return in excess of 7.5%) 9 Remeasurement gain OCI ($27 [7.5% x $240]) 9 When Lacy adds its annual cash investment to its plan assets, the value of those plan assets increases by $60 million: To Record Funding Plan assets 60 Cash (contribution to plan assets) 60 Lacy s retired employees were paid benefits of $37 million in Paying those benefits, of course, reduces the obligation to pay benefits (the DBO), and since the payments are made from the plan assets, that balance is reduced as well: To Record Payment of Benefits DBO 37 Plan assets 37 Solutions Manual, Vol.2, Chapter

41 Exercise B 1. Change in actuarial assumptions for a defined benefit pension plan. C 2. Determination that the accumulated benefits obligation under a pension plan exceeded the fair value of plan assets at the end of the previous year by $17,000. The only pension-related amount on the balance sheet was net pension liability of $30,000. D 3. Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated. D 4. Instituting a pension plan for the first time and adopting GAAP for employers accounting for defined benefit pension and other postretirement plans Intermediate Accounting 7e

42 Exercise Requirement 1 $72,000 EPBO 2013 Requirement 2 $72,000 x 2/ [2+28] = $4,800 EPBO fraction APBO 2013 earned 2013 Requirement 3 $72,000 x 1.06 = $76,320 EPBO to accrue EPBO 2013 interest 2014 Requirement 4 $76,320 x 3/ 30 = $7,632 EPBO fraction APBO 2014 earned 2014 Solutions Manual, Vol.2, Chapter

43 Exercise Requirement 1 $50,000 x 3/ 25 = $6,000 EPBO fraction APBO earned Requirement 2 Requirement 3 $6,000 (beginning APBO) x 6% = $360 $53,000 x 1/ 25 = $2,120 EPBO attributed service 2013 to 2013 cost Requirement 4 Postretirement benefit expense ($ ,120)... 2,480 Postretirement benefit liability... 2, Intermediate Accounting 7e

44 Exercise Requirement 1 22 years Requirement 2 $44,000 Requirement 3 $44,000 x? / 22 = $20,000 EPBO fraction APBO earned $44,000 x 10/ 22 = $20,000 EPBO fraction APBO earned Requirement 4 10 years before 2012: beginning of 2003 (or end of 2002) $? x 1.10 = $44,000 EPBO interest EPBO beg. multiple end $40,000 x 1.10 = $44,000 EPBO interest EPBO beg. multiple end or, alternatively: $? x 9/ 22 = $16,364 EPBO fraction APBO earned $40,000 x 9/ 22 = $16,364 EPBO fraction APBO earned Solutions Manual, Vol.2, Chapter

45 Exercise Requirement 1 ($ in 000s) Service cost $124 Interest cost (7% x $700) 49 Return on the plan assets (10% x $50) (5) Amortization of prior service cost 0 Amortization of net gain (1) Postretirement benefit expense $167 Requirement 2 ($ in 000s) Postretirement benefit expense (calculated above) Plan assets (expected return on assets)... 5 Net gain AOCI (current amortization)... 1 APBO ($124 service cost + $49 interest cost) Plan assets Cash (contributions to fund) PBO Plan assets (retiree benefits) The amortization amount is reported as other comprehensive income on the statement of comprehensive income Intermediate Accounting 7e

46 Exercise Requirement 1 ($ in 000s) Net loss (previous losses exceeded previous gains) $336 10% of $2,800 ($2,800 is greater than $500) 280 Excess at the beginning of the year $ 56 Average remaining service years 14 Amount amortized to 2013 expense $ 4 Requirement 2 ($ in 000s) Postretirement benefit expense exclusive of net loss amortization $212 Amortization of net loss 4 Postretirement benefit expense $216 Requirement 3 ($ in 000s) Net loss, beginning of 2013 $ gain on plan assets ([10% 9%] x $500) (5) 2013 amortization (4) 2013 loss on PBO 39 Net loss, end of 2013 $366 Solutions Manual, Vol.2, Chapter

47 Exercise Requirement 1 Service cost $34 Interest cost 12 (8% x [$ ]) Return on plan assets (0) Amortization of prior service cost 1 ($20 20 yrs) Postretirement benefit expense $47 Requirement 2 Postretirement benefit expense (calculated above) Prior service cost AOCI (amortization)... 1 APBO ($34 service cost + $12 interest cost) The amortization amount is reported as other comprehensive income in the statement of comprehensive income Intermediate Accounting 7e

48 Exercise Requirement 1 The negative prior service cost is first offset against any existing prior service cost before it is amortized. ($ in 000s) Prior service cost $ 50 Reduction for amendment (80) Negative prior service cost $(30) Service period to full eligibility 15 years Amortization $ 2 Requirement 2 Service cost $114 Interest cost 36 (8% x [$530 80]) Return on plan assets (0) Amortization of prior service cost (2) ([$50 80] 15 yrs) Postretirement benefit expense $148 Solutions Manual, Vol.2, Chapter

49 Exercise Requirement 1 ($ in 000s) Number of Fraction of Prior Year Employees Total Service Service Amount Still Employed Years Cost Amortized / 550 x $110 = $ / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = / 550 x 110 = 2 Totals 550* 550/ 550 $110 Total Number of Service Years Total Amount Amortized Requirement 2 $110, years* = $20,000/year * The average service life is the total estimated service years divided by the total number of employees in the group: 550 years 100 = 5.5 years total number total number average of service years of employees service years Intermediate Accounting 7e

50 Exercise Requirement 1 The specific citation that describes the guidelines is found in FASB ASC : Compensation-Retirement Benefits Defined Benefit Plans Other Postretirement Subsequent Measurement. a. What is the objective for attributing expected postretirement benefit obligations to years of service: b. When does the attribution period for expected postretirement benefits begin for an employee: c. When does the attribution period for expected postretirement benefits end for an employee: Requirement 2 Specifically, the guidelines are: Attribution In the context of this Subtopic, attribution is the process of assigning the expected cost of benefits to periods of employee service. The general objective is to assign to each year of service the cost of benefits earned or assumed to have been earned in that year The beginning of the attribution period generally is the date of hire. However, if the plan's benefit formula grants credit only for service from a later date and that credited service period is not nominal in relation to employees' total years of service before their full eligibility dates, the expected postretirement benefit obligation is attributed from the beginning of that credited service period In all cases, the end of the attribution period shall be the full eligibility date. For postretirement benefit plans that are pay-related or that otherwise index benefits during employees' service periods to their retirement date, the full eligibility date and retirement date may be the same. The attribution period for those benefits will differ from the attribution period for a similarly defined pension benefit with a capped credited service period. Solutions Manual, Vol.2, Chapter

51 Exercise The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is: 1. The disclosure required in the notes to the financial statements for plan assets: FASB ASC b: Compensation-Retirement Benefits Defined Benefit Plans-General Disclosure Disclosures by Public Entities. 2. Recognition of the net pension asset or net pension liability: FASB ASC : Compensation-Retirement Benefits Defined Benefit Plans-Pension Recognition Recognition of Liabilities and Assets. 3. Disclosures required in the notes to the financial statements for pension cost for a defined contribution plan: FASB ASC : Compensation-Retirement Benefits Defined Contribution Plans-Disclosure General Intermediate Accounting 7e

52 CPA / CMA REVIEW QUESTIONS CPA Exam Questions 1. d. A company doesn t report its PBO among liabilities in the balance sheet. Neither does it report the plan assets it sets aside to pay those benefits among assets in the balance sheet. However, a company must report the net difference between those two amounts, referred to as the funded status of the plan. The funded status for Wolf at Dec. 31, 2013, is $385, ,000 = $130, b. Gains and losses (either from changing assumptions regarding a pension obligation or the return on assets being higher or lower than expected) are deferred and not immediately included in pension expense and net income. They are, instead, reported in the statement of comprehensive income. The statement includes not only items of other comprehensive income, but net income as well. 3. d. The statement of comprehensive income will report a $2 million loss and an $8 million gain. This will cause the net pension liability to decrease by $6 million. Accumulated other comprehensive income will increase by $6 million, the $8 million gain less the $2 million loss. 4. d. Amortizing a net gain for pensions and other postretirement benefit plans will increase retained earnings and decrease accumulated other comprehensive income. Amortization of a net gain reduces the expense and thus increases net income and therefore retained earnings. Here s the entry to record the expense: Postretirement expense... xxx Plan assets (expected return on assets)... xxx Net gain AOCI... xxx APBO (service cost and interest cost)... Net loss AOCI... Prior service cost AOCI... xxx xxx xxx Solutions Manual, Vol.2, Chapter

53 CPA Exam Questions (concluded) 5. a. Gains and losses are deferred and not immediately included in postretirement benefit expense and net income. They are, instead, reported in the statement of comprehensive income. J&J, then, records a loss other comprehensive income when it revises its estimate of future health care costs, causing its postretirement benefit obligation estimate to increase. 6. c. Gains and losses are reported in the statement of comprehensive income as other comprehensive income under both sets of standards. Under IFRS, they remain in AOCI while under GAAP they may be recycled to net income if a net gain or net loss exceeds the corridor. 7. a. Under U.S. GAAP, prior service cost is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period. On the other hand, under IAS No. 19, prior service cost (called past service cost under IFRS) is combined with service cost and reported within the income statement rather than as a component of other comprehensive income as it is under GAAP, so it never is amortized to expense. 8. b. Under U.S. GAAP, prior service cost is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized over the average remaining service period. On the other hand, under IAS No. 19, prior service cost (called past service cost under IFRS) is combined with service cost and reported within the income statement rather than as a component of other comprehensive income as it is under GAAP, so it never is amortized to expense. CMA Exam Questions 1. a. The PBO is the actuarial present value of all future benefits attributable to past employee service at a moment in time. It is based on assumptions as to future compensation if the pension plan formula is based on future compensation. 2. b. Prior service cost arises from the awarding of retroactive benefits resulting from plan initiation or amendments. Prior service cost is assigned to the future service periods of active employees using either a straight-line or another acceptable method of allocation. Given that the average remaining service life of the firm s employees is 10 years, the annual charge is $19,000 ($190,000 10) Intermediate Accounting 7e

54 PROBLEMS Problem 17 1 Requirement 1 measurement date (beg.) (end) (end) (end) 15 years 20 years 18 years Service period Retirement Requirement 2 1.6% x 15 x $90,000 = $21,600 Requirement 3 The present value of the retirement annuity as of the retirement date (end of 2033) is: $21,600 x * = $217,276 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) The ABO is the present value of the retirement benefits at the end of 2013: $217,276 x.25842* = $56,148 * Present value of $1: n = 20, i = 7% (from Table 2) Requirement 4 1.6% x 18 x $100,000 = $28,800 $28,800 x * = $289,702 $289,702 x.31657** = $91,711 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 17, i = 7% (from Table 2) Solutions Manual, Vol.2, Chapter

55 Problem 17 2 Requirement 1 measurement date (beg.) (end) (end) (end) 15 years 20 years 18 years Service period Retirement Requirement 2 1.6% x 15 x $240,000 = $57,600 Requirement 3 The present value of the retirement annuity as of the retirement date (end of 2033) is: $57,600 x * = $579,404 [This is the lump-sum equivalent of the retirement annuity as of the retirement date.] * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) The PBO is the present value of the retirement benefits at the end of 2013: $579,404 x.25842* = $149,730 * Present value of $1: n = 20, i = 7% (from Table 2) Requirement 4 1.6% x 18 x $240,000 = $69,120 $69,120 x * = $695,284 $695,284 x.31657** = $220,106 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 17, i = 7% (from Table 2) Intermediate Accounting 7e

56 Problem 17 3 Requirement 1 1.6% x 14 x $240,000 = $53,760 $53,760 x * = $540,777 $540,777 x.24151** = $130,603 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 21, i = 7% (from Table 2) Requirement 2 1.6% x 1 x $240,000 = $3,840 Requirement 3 $3,840 x * = $38,627 $38,627 x.25842** = $9,982 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 20, i = 7% (from Table 2) Requirement 4 $130,603 x 7% = $9,142 Requirement 5 PBO at the beginning of 2013 (end of 2012) $130,603 Service cost: 9,982 Interest cost: $130,603 x 7% 9,142 PBO at the end of 2013 $149,727 Note: In requirement 3 of the previous problem this same amount is calculated without separately determining the service cost and interest elements (allowing for a $3 rounding adjustment). Solutions Manual, Vol.2, Chapter

57 Problem 17 4 Requirement 1 PBO Without Amendment PBO With Amendment 1.6% x 15 yrs. x $240,000 = $57, % x 15 yrs. x $240,000 = $63,000 $57,600 x * = $579,404 $63,000 x * = $633,723 $579,404 x.25842** = $149,730 $633,723 x.25842** = $163,767 $14,037 Prior service cost * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 20, i = 7% (from Table 2) Alternative calculation: = 0.15% x 15 yrs x $240,000 = $5,400 Requirement 2 $5,400 x * = $54,319 $54,319 x.25842** = $14,037 $14, years (expected remaining service) = $702 Requirement % x 1 x $240,000 = $4,200 $4,200 x * = $42,248 $42,248 x.27651** = $11,682 * Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) ** Present value of $1: n = 19, i = 7% (from Table 2) Requirement 4 $163,767 x 7% = $11,464 Requirement 5 Service cost (from req. 3) $11,682 Interest cost (from req. 4) 11,464 Return on the plan assets (10% x $150,000) (15,000) Amortization of prior service cost (from req. 2) 702 Pension expense $8, Intermediate Accounting 7e

58 Problem 17 5 PBO With Previous Rate PBO With Revised Rate 1.6% x 15 yrs x $240,000 = $57, % x 15 yrs x $240,000 = $57,600 $57,600 x = $579,404 $57,600 x = $539,821 $579,404 x = $149,730 $539,821 x = $115,819 $33,911 Gain on PBO 1 Present value of an ordinary annuity of $1: n = 18, i = 7% (from Table 4) 2 Present value of $1: n = 20, i = 7% (from Table 2) 3 Present value of an ordinary annuity of $1: n = 18, i = 8% (from Table 4) 4 Present value of $1: n = 20, i = 8% (from Table 2) Solutions Manual, Vol.2, Chapter

59 Problem Projected Benefit Obligation ($ in 000s) Balance, January 1, 2013 $ 0 Service cost 150 Interest cost (6% x $0) 0 Benefits paid (0) Balance, December 31, 2013 $150 Service cost 200 Interest cost (6% x $150) 9 Benefits paid (0) Balance, December 31, 2014 $ Plan Assets Balance, January 1, 2013 $ 0 Actual return on plan assets (10% x $0) 0 Contributions, Benefits paid (0) Balance, December 31, 2013 $160 Actual return on plan assets (10% x $160) 16 Contributions, Benefits paid (0) Balance, December 31, 2014 $ Pension expense 2013 Service cost $150 Interest cost (6% x $0) 0 Expected return on the plan assets (10% x $0) 0 Pension expense $150 Pension Expense 2014 Service cost $200 Interest cost (6% x $150) 9 Expected return on the plan assets (10% x $160) (16) Pension expense $ Net pension asset or net pension liability PBO $150 Plan assets 160 Net pension asset, Dec. 31, 2013 $ 10 PBO $359 Plan assets 346 Net pension liability, Dec. 31, 2014 $ Intermediate Accounting 7e

60 Problem 17 7 Requirement 1 ($ in 000s) Net gain (previous gains exceeded previous losses) $170 10% of $1,400 ($1,400 is greater than $1,100) 140 Excess at the beginning of the year $ 30 Average remaining service period years 15 Amount amortized to 2013 pension expense $ 2 Requirement 2 Pension expense exclusive of net gain amortization $325 Amortization of net gain (2) Pension expense $323 Requirement 3 Net gain AOCI, beginning of 2013 $(170) 2013 loss on plan assets ([10% 9%] x $1,100) amortization gain on PBO (23) Net gain AOCI, end of 2013 (beg. of 2014) $(180) Solutions Manual, Vol.2, Chapter

61 Problem 17 8 ( )s indicate credits; debits otherwise Plan Assets Prior Service Cost AOCI Net Loss AOCI Pension Expense Net Pension (Liability) / Asset PBO Cash Balance, Jan. 1, 2013 (830) (150) Service cost (74) 74 (74) Interest cost, 10% (83) 83 (83) Expected return on assets 68 (68) 68 Adjust for: Loss on assets (7) 7 (7) Amortization of: Prior service cost (5) 5 Net loss (1) 1 Loss on PBO (13) 13 (13) Prior service cost (40) 40 (40) Cash funding 84 (84) 84 Retiree benefits 50 (50) Bal., Dec. 31, 2013 (990) (215) Intermediate Accounting 7e

62 Problem 17 8 (concluded) Calculations: Interest cost = $830 x 10% = $83 Expected return on assets = $680 x 10% = $68 Amortization of net loss: Net loss AOCI $93 Corridor: 10% x $ Excess $10 Avg. service life 10 years 2013 Amortization $ 1 Requirement 2 Pension expense (total) Plan assets (expected return on plan assets) PBO ($74 service cost + $83 interest cost) Prior service cost AOCI (2013 amortization)... 5 Net loss AOCI (2013 amortization)... 1 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income Requirement 3 Record gains and losses and new prior service cost Loss OCI ($61 actual return on assets less than $68 expected return) 7 Plan assets... 7 Loss OCI (from change in assumption regarding the PBO) 13 Prior service cost OCI (from new amendment to the PBO) PBO Requirement 4 Plan assets 84 Cash (contribution to plan assets) 84 PBO 50 Plan assets (retiree benefits) 50 Solutions Manual, Vol.2, Chapter

63 Problem Pension expense ($ in 000s) Service cost $60 Interest cost (5% x $320) 16 Return on the plan assets (9% x $400) (36) Amortization of prior service cost 0 Amortization of net loss or gain 0 Pension expense $40 2. Projected Benefit Obligation Balance, January 1 $320 Service cost 60 Interest cost 16 Benefits paid (44) Balance, December 31 $ Plan Assets Balance, January 1 $400 Actual return on plan assets 36 Contributions Benefits paid (44) Balance, December 31 $ Net Pension Asset or Net Pension Liability PBO $352 Plan assets 512 Net pension asset, Dec. 31, 2013 $ Intermediate Accounting 7e

64 Problem 17 9 (concluded) 5. Journal Entries ($ in 000s) Pension expense (total) Plan assets (expected return on plan assets) PBO ($60 service cost + $16 interest cost) Prior service cost AOCI (2013 amortization)... 0 Net loss AOCI (2013 amortization)... 0 Plan assets 120 Cash (contribution to plan assets) 120 PBO 44 Plan assets (retiree benefits) 44 The amortization amounts are reported as other comprehensive income in the statement of comprehensive income. Jan. 1, 2013 PBO $320 Plan Assets 400 Net pension asset $ 80 Dec. 31, 2013 PBO $352 Plan Assets 512 Net pension asset $160 Solutions Manual, Vol.2, Chapter

65 Problem Requirement 1 Service cost $ 75 Interest cost 45 Expected return on the plan assets ($20 actual, plus $4 loss) (24) Amortization of prior service cost 0* Amortization of net gain or net loss AOCI 0 Pension expense $ 96 * Since the amendment was at the end of the year, there is no amortization of prior service cost in Requirement 2 Pension expense (calculated above) 96 Plan assets (expected return on assets: 8% x $300) 24 PBO ($75 service cost + $45 interest cost) 120 Prior service cost OCI (from 2013 amendment) 12 PBO 12 PBO 22 Gain OCI* (change in assumption) 22 Loss OCI ($20 actual return $24 expected return) 4 Plan assets 4 Plan assets 60 Cash (funding contribution) 60 PBO 36 Plan assets (retiree benefits) Intermediate Accounting 7e

66 Problem (concluded) Requirement 3 PBO balance, January 1 $480 Service cost 75 Interest cost 45 Gain from change in actuarial assumption (22) Prior service cost (new) 12 Benefits paid (36) PBO balance, December 31 $554 Plan assets balance, January 1 $300 Actual return on plan assets 20 Contributions Benefits paid (36) Plan assets balance, December 31 $344 Because the plan is underfunded, Electronic Distribution will report a net pension liability: PBO balance, December 31 $554 Plan assets balance, December 31 (344) Net pension liability $210 Solutions Manual, Vol.2, Chapter

67 Problem Requirement 1 Reported in income statement: Service cost 2013 $ 75 Past service cost 12 Service cost $ 87 Net interest cost (10% x [$ ]) $ 18 Reported as OCI: Remeasurement gain from assumption change OCI $(22) Remeasurement loss on plan assets OCI ($20 [10% x $300]) 10 $(12) Net pension cost (not separately reported) $ Intermediate Accounting 7e

68 Problem (continued) Requirement 2 Service cost 87 DBO (Service cost 2013) 75 DBO (past service cost) 12 Net interest cost (10% x [$ ]) 18 Plan assets (10% x $300: interest income) 30 DBO (10% x $480: interest cost) 48 Remeasurement loss OCI ($20 [10% x $300]) 10 Plan assets (actual return below 10%) 10 DBO 22 Remeasurement gain OCI (given) 22 When Electronic adds its annual cash investment to its plan assets, the value of those plan assets increases by $60 million: To Record Funding Plan assets 60 Cash (contribution to plan assets) 60 Retired employees were paid benefits of $36 million in Paying those benefits, of course, reduces the obligation to pay benefits (the DBO), and since the payments are made from the plan assets, that balance is reduced as well: To Record Payment of Benefits DBO 36 Plan assets 36 Solutions Manual, Vol.2, Chapter

69 Problem (concluded) Requirement 3 DBO balance, January 1 $480 Service cost 75 Interest cost (10% x $480) 48 Gain from change in actuarial assumption (22) Past service cost 12 Benefits paid (36) DBO balance, December 31 $557 Plan assets balance, January 1 $300 Actual return on plan assets 20 Contributions Benefits paid (36) Plan assets balance, December 31 $344 Because the plan is underfunded, Electronic Distribution will report a net pension liability: DBO balance, December 31 $557 Plan assets balance, December 31 (344) Net pension liability $ Intermediate Accounting 7e

70 Problem Requirement Service cost (given) $520 $570 Interest on PBO (2013: 10% x $2,200 * ; 2014: 10% x $2,560 * ) Expected return (2013: 12% x $1,600; 2014: 12% x $1,940 ** ) (192) (232.8) Amortization of prior service cost ($ years) Amortization of net gain *** (5) none Pension expense $583 $633.2 *PBO **Plan Assets Balance, $1,800 Balance, $1,600 Prior service cost 400 Balance, $2,200 Interest 10% contribution 540 Service cost actual return 180 Payments (380) Payments (380) Balance, $2,560 Balance, $1,940 Interest 10% contribution 590 Service cost actual return 210 Payments (450) Payments (450) Balance, $2,936 Balance, $2,290 *** Net Gain AOCI 2013 Net gain AOCI at $230 10% of $1,800 ($1,800 is greater than $1,600): (180) Excess at the beginning of the year $ 50 Average remaining service period 10 years Amount amortized to 2013 pension expense $ Net gain AOCI at $230 Loss in 2013 (actual return: $180 - expected return: $192) (12) Amortization in 2013 (calculated above) (5) Net gain AOCI at $213 10% of $2,560 ($2,560 is greater than $1,940): (256) No excess at the beginning of the year none No amortization for 2014 Solutions Manual, Vol.2, Chapter

71 Problem (continued) Requirement Pension expense (total) Plan assets (expected return on plan assets) Net gain AOCI (2013 amortization)... 5 PBO ($520 service cost + $220 interest cost) Prior service cost AOCI (2013 amortization) Pension expense (total) Plan assets (expected return on plan assets) PBO ($570 service cost + $256 interest cost) Prior service cost AOCI (2014 amortization) The amortization amounts are reported as other comprehensive income in the statement of comprehensive income Requirement Loss OCI ($180 actual return on assets less than $192 expected return) 12 Plan assets Prior service cost OCI (from new amendment to the PBO) PBO Loss OCI ($210 actual return on assets less than $232.8 expected return) 22.8 Plan assets Intermediate Accounting 7e

72 Problem (concluded) Requirement Plan assets 540 Cash (contribution to plan assets) Plan assets 590 Cash (contribution to plan assets) PBO 380 Plan assets (benefit payments) PBO 450 Plan assets (benefit payments) 450 Solutions Manual, Vol.2, Chapter

73 Problem Projected Benefit Pension Obligation Plan Assets Expense Balance at Jan. 1 $ 0 $ 0 Prior service cost 2,000,000 2,000,000 Amortization of prior service cost ($2,000, years) $200,000 Service cost 250, ,000 Interest cost ($2,000,000* x 9%) 180, ,000 Return on plan assets Actual ($2,000,000** x 11%) 220,000 Expected ($2,000,000** x 9%) (180,000) Retirement payments (16,000) (16,000) Cash contribution 250,000 Balance at Dec. 31 $2,414,000 $2,454,000 $450,000 Note: The $40,000 gain ($220, ,000), while not included in pension expense, is reported as a gain OCI in the statement of comprehensive income; it is carried forward as part of accumulated other comprehensive income in the balance sheet to be combined with future gains and losses, which will be included in pension expense only if the net gain or net loss exceeds 10% of the higher of the PBO or plan assets. * Since the plan was adopted at the beginning of the year, the prior service cost increased the PBO at that time. ** Since the prior service cost was funded at the beginning of the year, the plan assets were increased at that time Intermediate Accounting 7e

74 Problem Actual return on plan assets ($ in 000s) Plan assets Beginning of 2013 $2,400 Actual return? Cash contributions 245 Less: Retiree benefits (270) End of 2013 $2,591 Actual return = $2,591 2, = $ Loss or gain on plan assets Expected return $240 (10% x $2,400) Actual return (216) Loss on plan assets $24 3. Service cost PBO: Beginning of 2013 $2,300 Service cost? Interest cost 161 (7% x $2,300) Loss (gain) on PBO 0 Less: Retiree benefits (270) End of 2013 $2,501 Service cost = $2,501 2, = $310 Solutions Manual, Vol.2, Chapter

75 Problem (concluded) 4. Pension expense ($ in 000s) Service cost $310 Interest cost 161 (7% x $2,300) Expected return ($216 actual, plus $24 loss) (240) Amortization of: Prior service cost AOCI 25 ($ ) Net gain AOCI (6) ($ *) Pension expense $250 * 2013 loss on plan assets 5. Average remaining service life of active employees Net gain, Jan. 1 $330 10% of $2, Excess $ 90 Amount amortized 6 Average service period 15 years Intermediate Accounting 7e

76 Problem ( )s indicate credits; debits otherwise Plan Assets Prior Service Cost AOCI Net Loss AOCI Pension Expense Net Pension (Liability) / Asset ($ in 000s) PBO Cash Balance, Jan. 1, 2013 (4100) Service cost 2 (332) 332 (332) Interest cost, 7% 1 (287) 287 (287) Expected return on assets (453) 453 Adjust for: Loss on assets 4 (53) 53 (53) Amortization of: Prior service cost 5 (70) 70 Net loss 6 (2) 2 Gain on PBO 44 (44) 44 Cash funding 340 (340) 340 Retiree benefits 295 (295) Bal., Dec. 31, 2013 (4380) % x $4,100 = $287 2 $4,380 4, = $ % x $4,530 = $453 (expected) 4 10% x $4,530 = $453 (expected) 400 = $53 5 $ = $70 6 ($ ) 12 = $2 Solutions Manual, Vol.2, Chapter

77 Problem Requirement 1 Calculation of pension expense: Service cost (given) $48 Interest cost (given) 24 Expected return on the plan assets ($15 actual, plus $5 loss) (20) Amortization of prior service cost (given) 4 Amortization of the net loss * 1 Pension expense $57 * Amortization of the net loss: Net loss AOCI (previous losses exceeded previous gains) $40 10% of $300 ($300 is greater than $200): the corridor (30) Excess at the beginning of the year $10 Average remaining service period 10 years Amount amortized to 2013 pension expense $ 1 To record expense Pension expense (total) Plan assets (expected return on plan assets) PBO ($48 service cost + $24 interest cost) Prior service cost AOCI (2013 amortization)... 4 Net loss AOCI (2013 amortization)... 1 To record funding and benefit payment Plan assets 45 Cash (contribution to plan assets) 45 PBO 20 Plan assets (benefit payments) Intermediate Accounting 7e

78 Problem (continued) Requirement 2 To record gains and losses Loss OCI ($20 15 loss due to return on assets being less than expected) 5 Plan assets... 5 PBO... 2 Gain OCI ($2 gain on change of PBO assumption) 2 Requirement 3 Prior Net ( )s indicate credits; debits Service Net Pension otherwise Plan Cost Loss Pension (Liability) PBO Assets AOCI AOCI Expense Cash / Asset Bal., Jan. 1, 2013 (300) (100) Service cost (48) 48 (48) Interest cost, 8% (24) 24 (24) Expected return on assets 20 (20) 20 Loss on assets (5) 5 (5) Amortization of: Prior service cost AOCI (4) 4 Net loss AOCI (1) 1 Gain on PBO 2 (2) 2 Cash contributions 45 (45) 45 Retiree benefits 20 (20) Bal., Dec. 31, 2013 (350) (110) Solutions Manual, Vol.2, Chapter

79 Problem (continued) Requirement 4 Calculation of pension expense: Service cost (given) $38 Interest cost (given) 28 Expected return on the plan assets ($36 actual, less $12 gain) (24) Amortization of prior service cost (given) 4 Amortization of the net loss * 0.7 Pension expense $46.7 * Amortization of the net loss: Net loss AOCI (previous losses exceeded previous gains) $42 10% of $350 ($350 is greater than $240): the corridor (35) Excess at the beginning of the year $ 7 Average remaining service period 10 years Amount amortized to 2014 pension expense $ 0.7 To record expense Pension expense (total) Plan assets (expected return on plan assets) PBO ($38 service cost + $28 interest cost) Net loss AOCI (2014 amortization)....7 Prior service cost AOCI (2014 amortization) To record funding and benefit payments Plan assets Cash (contribution to plan assets) PBO Plan assets (benefit payments) Intermediate Accounting 7e

80 Problem (continued) Requirement 5 To record gains and losses Loss OCI ($5 loss on change of PBO assumption) 5 PBO... 5 Plan assets Gain OCI ($36 actual return on assets exceeds $24 gain expected) 12 Requirement 6 SHAREHOLDERS EQUITY: ACCUMULATED OTHER COMPREHENSIVE INCOME Net Loss AOCI Balance, Jan New loss New gain 0.7 Amortized in 2014 Balance, Dec Prior Service Cost AOCI Balance, Jan Amortized in 2014 Balance, Dec Solutions Manual, Vol.2, Chapter

81 Problem (concluded) Requirement 7 Prior Net ( )s indicate credits; debits Service Net Pension otherwise Plan Cost Loss Pension (Liability) PBO Assets AOCI AOCI Expense Cash / Asset Bal., Jan. 1, 2014 (350) (110) Service cost (38) 38 (38) Interest cost, 8% (28) 28 (28) Expected return on assets 24 (24) 24 Gain on assets 12 (12) 12 Amortization of: Prior service cost AOCI (4) 4 Net loss AOCI (0.7) 0.7 Loss on PBO (5) 5 (5) Cash contributions 30 (30) 30 Retiree benefits 16 (16) Bal., Dec. 31, 2014 (405) (115) Intermediate Accounting 7e

82 Problem Requirement 1 To Record Pension Expense Deferred tax asset (40% x [$ ]) Pension expense ($ ) Plan assets (expected return on plan assets) PBO ($41 service cost + $24 interest cost) Prior service cost AOCI (current amortization net of $1.6 tax benefit) 2.4 Net loss AOCI (current amortization net of $.4 tax benefit)....6 Income tax expense (40% x $43) Although for financial reporting purposes the income is reduced now, only the actual contributions to the plan assets can be deducted for tax purposes. This creates a temporary difference as described in Chapter 16. Remember, we already recorded the deferred tax asset for the net loss and the prior service cost, and amortizing a portion of those amounts now merely moves amounts to the income statement, not the tax return where a tax benefit would be realized. We do, however, need to record a deferred tax asset for the future deductible amounts created by the new amounts service cost, interest cost, and return on assets. Also, because the annual tax expense should reflect both the current and deferred tax effects of what occurs each year, the 2013 tax expense is reduced by the $17.2 million eventual tax savings from the 2013 pension expense. Here now is how the new gain and new loss would be recorded if we now include the tax implications: Solutions Manual, Vol.2, Chapter

83 Problem (continued) To Record New Gains and Losses Deferred tax asset (40% x $23) Loss OCI ($23 loss, net of $9.2 tax benefit) 13.8 PBO Plan assets Gain OCI ($3 gain, net of $1.2 tax expense) 1.8 Deferred tax liability (40% x $3) Global reported a $23 million loss in 2013 from revising an assumption used to calculate its PBO. That additional cost is recognized now on the statement of comprehensive income but won t be deducted until the pension benefits are paid in the future. This creates a future deductible amount and thus a deferred tax asset for 40% of the loss. In like manner, the $3 million gain creates a future taxable amount and thus a deferred tax liability for 40% of the gain. There are no tax effects of the funding and payment of benefits entries Intermediate Accounting 7e

84 Problem (continued) To Record Funding and Payment of Benefits Plan assets Cash (contribution to plan assets) Earlier, when we recorded the pension expense, the book basis (financial statement carrying value) of the net pension liability increased relative to its tax basis (original value for tax purposes less amounts included to date on the tax return). That created a temporary difference and thus a deferred tax asset. This occurred also in previous years. Now, when $48 million cash is paid, that payment is deducted for tax purposes. This reduces our temporary difference and thus our deferred tax asset. As a portion of this asset is realized, income taxes payable is reduced as well: Income tax payable Deferred tax asset ($48 x 40%) The payment for retiree benefits reduces both the obligation to make payments and the plan assets used to make the payment. There is no net tax effect of that transaction: PBO Plan assets (retiree benefits) Solutions Manual, Vol.2, Chapter

85 Problem (concluded) Requirement 2 GLOBAL COMMUNICATIONS Statement of Comprehensive Income Year ended December 31, 2013 Net income $300.0 Other comprehensive income: Net unrealized holding gain on investments ($30, net of $12 tax) $ 18.0 Loss on pensions PBO estimate ($23, net of $9.2 tax benefit) (13.8) Gain on pensions return on plan assets ($3, net of $1.2 tax) Comprehensive income $ Intermediate Accounting 7e

86 Problem Requirement 1 Retirement Attribution Period Period 26 years 5 years age age age age (end) (end) (end) (end) retirement date hired full-eligibility date Requirement 2 Year Expected PV of $1 Present Value End Net Cost n = 1 5, i = 6% at Dec. 31, $4,000 x $ 3, ,400 x , ,300 x , ,500 x , ,800 x ,092 $13,693 Requirement 3 $13,693 x.74726* = $10,232 * Present value of $1: n = 5, i = 6% (from Table 2) Solutions Manual, Vol.2, Chapter

87 Problem (concluded) Requirement 4 $10,232 x 23 yrs* / 26 yrs** = $9,051 * ** Attribution period ( ) Requirement 5 $13,693 x.79209* = $10,846 (EPBO) * Present value of $1: n = 4, i = 6% (from Table 2) $10,846 x 24 yrs* / 26 yrs** = $10,012 * ** attribution period ( ) Requirement 6 $13,693 x.79209* = $10,846 (EPBO) * Present value of $1: n = 4, i = 6% (from Table 2) $10,846 x 1 yr / 26 yrs = $417 Requirement 7 $9,051 (beginning APBO) x 6% = $543 Requirement 8 APBO at the beginning of 2014 (from req. 4) $9,051 Service cost: (from req. 5) 417 Interest cost: (from req. 6) 543 APBO at the end of 2014 (agrees with req. 5*) $10,011 * $1 difference due to rounding Intermediate Accounting 7e

88 Problem EPBO Fraction APBO Service Interest Earned Cost Cost Expense 10% 2013 $18,000 1 / 8 $ 2,250 $ 2,250 $ 0 $ 2, , / 8 4, , , ,780 3 / 8 8,168 2, , ,958 4 / 8 11,979 2, , ,354 5 / 8 16,471 3,294 1,198 4, ,989 6 / 8 21,742 3,624 1,647 5, ,888 7 / 8 27,902 3,986 2,174 6, ,077 8 / 8 35,077 4,385 2,790 7,175 Totals $25,732 $9,346 $35,078 1 $18,000 x 1.10 = $19,800 2 $19,800 x 2 / 8 = $4,950 3 $19,800 x 1 / 8 = $2,475 4 $2,250 (APBO) x 10% = $225 5 $2, = $2,700 Solutions Manual, Vol.2, Chapter

89 Problem Requirement 1 ($ in 000s) APBO: Beginning of 2013 $460 Service cost? Interest cost 23 (5% x $460) Loss (gain) on APBO 0 Less: Retiree benefits (52) End of 2013 $485 Service cost = $ = $54 Requirement 2 ($ in 000s) Service cost $54 Interest cost 23 (5% x $460) Return on plan assets (0) Amortization of: prior service cost 10 ($ ) net gain (1) ($50 49) Postretirement benefit expense $86 Requirement 3 ($ in 000s) Accumulated postretirement benefit obligation $485 Plan assets 75 Net postretirement benefit liability $ Intermediate Accounting 7e

90 Problem Requirement 1 The difference between an employer s obligation (PBO) and the resources available to satisfy that obligation (plan assets) is the funded status of the pension plan. The employer must report the net difference between those two amounts, referred to as the funded status of the plan in the balance sheet. It s reported as a pension liability if the PBO exceeds the plan assets or a pension asset if the plan assets exceed the PBO. Toys R Us would report a pension liability of $19 million: PBO $111 Plan assets 92 Pension liability $ 19 Solutions Manual, Vol.2, Chapter

91 Problem (continued) Requirement 2 Gains or losses should not be part of pension expense unless and until total net gains or losses exceed a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Amortization of a net loss is added to pension expense. Pension expense in this instance is increased by a $1 million amortization of the net loss: Unrecognized net actuarial loss $11.0 Less: 10% corridor (threshold)* (10.8) Excess $ 0.2 Service period 10 Amortization $.002** **Toys R Us rounded this amount up to $1 million for the financial statements. * 10% times either the PBO ($108) or plan assets ($75), whichever is larger. Requirement 3 Service cost $ 6 Interest cost 5 Expected return on plan assets (4) Amortization of prior service cost 0 Amortization of net loss 1 Pension expense $ Intermediate Accounting 7e

92 Problem (concluded) Requirement 4 The pension liability, which is the difference between the PBO and plan assets, increases by the combination of the service cost, interest cost, and the expected return as is reflected in the following entry. To Record Pension Expense... Pension expense (calculated in Req. 3)... 8 Plan assets (expected return on assets)... 4 PBO (service cost $6 + interest cost $5) Net loss AOCI (current amortization)... 1 The net pension liability (PBO minus plan assets) is affected only by the three components of pension expense that change either the PBO or plan assets. The pension expense also includes the $1 million amortization of net loss but, unlike the other three components, this amortization amount affects neither the PBO nor the plan assets and therefore doesn t change the net pension liability. The net loss AOCI is reduced by the $1 million amortization. It s reported as other comprehensive income in the statement of comprehensive income. Pension gains and losses (either from changing assumptions regarding the PBO or the return on assets being higher or lower than expected) are deferred and not immediately included in pension expense and net income. They are, however, reported as other comprehensive income in the period they occur. Accordingly, the actuarial gain that increased the PBO and the gain from the actual return exceeding the expected return are reported in Toys R Us s statement of comprehensive income as a gain of $11 million and a gain of $14 2 = $12 million. Here are the entries: PBO Loss OCI (given) Plan assets Gain OCI ($14 2) Solutions Manual, Vol.2, Chapter

93 CASES Judgment Case 17 1 Requirement 1 Here is a graphical depiction of your estimated service and retirement periods: years 20 years Service period Retirement Salary at retirement: $100,000 x , or $100,000 x (1.03) 40 = $326, % x 40 x $326,204 = $195,722 The present value of the retirement annuity as of the retirement date (end of 2052) is: $195,722 x * = $2,244,916 [This is the lump-sum equivalent of the retirement annuity as of the retirement date.] * Present value of an ordinary annuity of $1: n = 20, i = 6% Intermediate Accounting 7e

94 Case 17 1 (continued) Requirement 2 The value of your plan assets as of the anticipated retirement date is $1,872,981: A B C D E End of Years to Future Value Year: Retirement Salary Contribution at Retirement ,000 8,000 77, ,000 8,240 75, ,090 8,487 73, ,273 8,742 71, ,551 9,004 69, ,927 9,274 67, ,405 9,552 65, ,987 9,839 63, ,677 10,134 61, ,477 10,438 59, ,392 10,751 58, ,423 11,074 56, ,576 11,406 55, ,853 11,748 53, ,259 12,101 51, ,797 12,464 50, ,471 12,838 49, ,285 13,223 47, ,243 13,619 46, ,351 14,028 44, ,611 14,449 43, ,029 14,882 42, ,610 15,329 41, ,359 15,789 40, ,279 16,262 38, ,378 16,750 37, ,659 17,253 36, ,129 17,770 35, ,793 18,303 34, ,657 18,853 33, ,726 19,418 32, ,008 20,001 31, ,508 20,601 30, ,234 21,219 30, ,191 21,855 29, ,386 22,511 28, ,828 23,186 27, ,523 23,882 26, ,478 24,598 26, ,703 25,336 25,336 Lump-sum equivalent of the retirement annuity as of the retirement date 1,872,981 Solutions Manual, Vol.2, Chapter

95 Case 17 1 (concluded) Your annual retirement pay assuming continuing investment of assets at 6% will be: $1,872, = $163,295 * Present value of an ordinary annuity of $1: n = 20, i = 6% Requirement 3 Based on the calculations alone, the state s defined benefit plan offers the larger retirement annuity and, therefore, lump-sum equivalent of the retirement annuity. Be aware though that many other factors need to be considered. Plans vary in terms of the flexibility regarding how you can choose to receive distributions of your retirement assets. Very often, defined benefit plans provide benefits only until you and/or your spouse dies with no benefits to other beneficiaries; whereas, assets accumulated under defined contribution plans can be bequeathed to other beneficiaries. Also, greater uncertainty is associated with defined contribution plans, in general. The employee bears the risk of uncertain investment returns and, potentially, might settle for far less at retirement than at first expected. On the other hand, results may exceed expectations as well. Risk is reversed in a defined benefit plan. Because specific benefits are promised at retirement, the employer is responsible for making up the difference when investment performance is less than expected. Related, uncertainty regarding mortality significantly affects the equation. Defined benefit plans pay benefits from retirement to death. Assets accumulated under defined contribution plans, however, are a fixed amount. How well that amount provides for retirement income depends on how many years you live after retirement Intermediate Accounting 7e

96 Communication Case 17 2 Suggested Grading Concepts and Grading Scheme: Content (80% ) 25 The net periodic pension expense measures this compensation and consists of the following five elements which can vary differently from changes in employment.(5 each; maximum of 25 for this part) The service cost component is the present value of the benefits earned by the employees during the current period. The interest cost component is the increase in the projected benefit obligation due to the passage of time. The return on plan assets reduces the pension expense. The actual return on plan assets component is the difference between the fair value of the plan assets at the beginning and the end of the period, adjusted for contributions and benefit payments. This amount is adjusted for any gain or loss, so it is the expected return that actually affects the calculation. Prior service cost is created when a pension plan is amended and credit is given for employee service rendered in prior years. This retroactive credit is not recognized as pension expense entirely in the year the plan is amended, but is recognized in pension expense over the time that the employees who benefited from this credit work for the company. Gains and losses arise from changes in estimates concerning the amount of the projected benefit obligation or the return on the plan assets being different from expected. These are not included in pension expense as they occur. They are instead reported as other comprehensive income. 20 Gains and losses occur when the PBO or the return on plan assets turns out to be different than expected. (10 each; maximum of 20 for this part) Gains and losses are reported as they occur in the statement of comprehensive income, not as part of pension expense. They accumulate over time as a net gain or net loss, a component of accumulated other comprehensive income. A net gain or a net loss affects pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. Solutions Manual, Vol.2, Chapter

97 Case 17 2 (concluded) When the corridor is exceeded, the excess is not charged to pension expense all at once. Instead, the amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. 20 PBO and ABO compared (10 each; maximum of 20 for this part) Both the accumulated benefit obligation and the projected benefit obligation represent the present value of the benefits attributed by the pension benefit formula to employee service rendered prior to a specific date. The accumulated benefit obligation is based on present salary levels and the projected benefit obligation is based on estimated future salary levels. 15 The projected benefit obligation in excess of plan assets: This is the funded status of the plan and is reported in the balance sheet as a pension liability (10 points) If the plan assets exceed the PBO, it would be reported as a pension asset. (5 points) 80 points Writing (20%) 5 Terminology and tone appropriate to the audience of assistant controllers. 6 Organization permits ease of understanding. Introduction that states purpose. Paragraphs separate main points. 9 English Word selection. Spelling. Grammar. 20 points Intermediate Accounting 7e

98 Judgment Case 17 3 Requirement 1 Yes, it s true that the pension expense is calculated as if the balance sheet contained certain amounts it doesn t individually report, specifically the projected benefit obligation and the pension assets. The balance sheet does actually reflect these balances on a net basis; that is, the funded status of the plan is reported as a net pension liability to the extent the PBO exceeds the pension assets or as a net pension asset if the pension assets exceed the PBO. Actually, even the pension expense falls short of reflecting all changes in the PBO and plan assets due to methods invented by the FASB to defer the effect of gains, losses, and the prior service cost. Requirement 2 A small liability, $30,000, was reported in 2012 because the plan was underfunded by that amount the PBO exceeded plan assets. This was not the case in Requirement 3 A net pension asset, $405,000, was reported in 2013 because the plan was overfunded by that amount the plan assets exceeded the PBO. This was not the case in Solutions Manual, Vol.2, Chapter

99 Case 17 3 (concluded) Requirement 4 Two of the other amounts reported in the disclosure note are reported in the balance sheet. The net gain and prior service cost are reported as components of accumulated other comprehensive income. This is a part of shareholders equity. Requirement 5 Gains and losses occur when either the PBO or the return on plan assets turns out to be different than expected. LGD s net gain indicates that cumulative previous gains of either type have exceeded cumulative previous losses of either type. The loss in 2013 indicates the PBO is higher than previously expected due to some unspecified change in an actuarial assumption. This loss, as well as any other loss or gain, is reported in the statement of comprehensive income as it occurs. A net gain or a net loss affects pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. That appears to be the case with LGD and the amortized portion of the net gain is one component of the pension expense. Requirement 6 As mentioned in the previous part, losses and gains are reported in the statement of comprehensive income as they occur. These amounts accumulate as a net gain or net loss in the balance sheet as part of accumulated other comprehensive income, one of the components of shareholders equity Intermediate Accounting 7e

100 Communication Case 17 4 First, this case has no right or wrong answer. The process of developing the proposed solutions will likely be more beneficial than the solutions themselves. Students should benefit from participating in the process, interacting first with other group members, then with the class as a whole. Solutions should take into account the facts brought out in the solution to the previous case on which this one is based. Also, it is likely that some of the suggestions will be variations of the following alternatives: 1. The FASB funded status approach as described in the text. 2. Individual recognition of the projected benefit obligation and the plan assets. 3. Recognition of the accumulated benefit obligation rather than the projected benefit obligation. 4. Alternatives 1, 2, or 3, but with no smoothing deferral of gains, losses, or prior service cost.. It is important that each student actively participate in the process. Domination by one or two individuals should be discouraged. Students should be encouraged to contribute to the group discussion by (a) offering information on relevant issues, (b) clarifying or modifying ideas already expressed, or (c) suggesting an alternative direction. Solutions Manual, Vol.2, Chapter

101 Real World Case 17 5 Requirement 1 Dell s pension plan is a defined contribution plan in the form of a 401(k) plan. It is described in disclosure note 5: Note 15. Benefit Plans (in part) 401(k) Plan Dell has a defined contribution retirement plan (the "401(k) Plan") that complies with Section 401(k) of the Internal Revenue Code. Substantially all employees in the U.S. are eligible to participate in the 401(k) Plan. Effective January 1, 2008, Dell matches 100% of each participant's voluntary contributions, subject to a maximum contribution of 5% of the participant's compensation, and participants vest immediately in all Dell contributions to the 401(k) Plan. Dell's contributions during Fiscal 2011, Fiscal 2010, and Fiscal 2009 were $132 million, $91 million, and $93 million, respectively. Requirement 2 Defined contribution plans promise defined periodic contributions to a pension fund, without further commitment regarding benefit amounts at retirement. Retirement benefits are entirely dependent upon how well investments perform. Thus, the employee bears the risk of uncertain investment returns. The employer is free of any further obligation. Requirement 3 Dell matches employee contributions dollar for dollar up to 5%. Also, both employee and employer contributions vest immediately. So, she is entitled to roll over $20,400: Employee contribution $10,000 Dell match 10,000 Total invested $20,000 Value increase (2% x $20,000) 400 Vested balance $20, Intermediate Accounting 7e

102 Case 17 5 (concluded) Requirement 4 Dell s plan is a 401(k) plan named after the Tax Code section that specifies the conditions for the favorable tax treatment of these plans. 401(k) plans allow voluntary contributions by employees, which in Dell s case is matched up to 5% of salary per year. Dell simply records pension expense equal to the cash contribution. Summarized for the year, Dell recorded the following: Pension expense Cash Solutions Manual, Vol.2, Chapter

103 Ethics Case 17 6 Mr. Maxwell s apparent motivation for the change in the way contributions are handled is to have the company benefit from the earning power of the contributed funds for up to three months, prior to the funds being deposited for the benefit of the employees. Temporarily diverting 401(k) funds this way benefits the company at the expense of the employee. There is some question as to whether the practice described is illegal. In practice, such cases are rarely prosecuted. Regardless of the legality, though, there is the ethical question of whether the employer should earn dividends, interest, and so forth on funds deducted from employees paychecks, prior to the funds being deposited to the employees accounts Intermediate Accounting 7e

104 Research Case 17 7 Results will vary depending on companies chosen. Walmart provided the following disclosures in its annual report for the year ending January 31, 2011: Note 14. Retirement-Related Benefits (in part) The Company maintains separate Profit Sharing and 401(k) Plans for associates in the United States and Puerto Rico, under which associates generally become participants following one year of employment. Through fiscal 2011, the Profit Sharing component of the plan was entirely funded by the Company, and the Company made an additional contribution to the associates' 401(k) component of the plan. In addition to the Company's contributions, associates could elect to contribute a percentage of their earnings to the 401(k) component of the plan. Beginning in fiscal 2012, the Company will offer a safe harbor 401(k) plan to all eligible United States associates. The Company will match 100% of participant contributions up to 6% of annual eligible earnings. The Company will offer the same matching contribution to all eligible Puerto Rico associates. The matching contributions will immediately vest at 100% for each associate. Participants can contribute up to 50% of their pretax earnings, but not more than the statutory limits. Participants age 50 or older may defer additional earnings in catch-up contributions up to the maximum statutory limits. Annual contributions made by the Company to the United States and Puerto Rico Profit Sharing and 401(k) Plans are made at the sole discretion of the Company. Contribution expense associated with these plans was $1.1 billion in fiscal 2011 and 2010 and $1.0 billion in fiscal Employees in international countries who are not U.S. citizens are covered by various post-employment benefit arrangements. These plans are administered based upon the legislative and tax requirements in the countries in which they are established. Solutions Manual, Vol.2, Chapter

105 Case 17 7 (continued) Annual contributions to international retirement savings and profit sharing plans are made at the discretion of the Company, and were $221 million, $218 million and $210 million in fiscal 2011, 2010 and 2009, respectively. The Company's subsidiaries in the United Kingdom and Japan have defined benefit pension plans. The plan in the United Kingdom was underfunded by $494 million and $339 million at January 31, 2011 and 2010, respectively. The plan in Japan was underfunded by $309 million and $249 million at January 31, 2011 and 2010, respectively. These underfunded amounts have been recorded in "Deferred income taxes and other" in our Consolidated Balance Sheets at January 31, 2011 and Certain other international operations have defined benefit arrangements that are not significant. In February 2011, ASDA and the trustees of ASDA's defined benefit plan agreed to remove future benefit accruals from the plan and, with the consent of a majority of the plan participants, also removed the link between past accrual and future pay increases. In return, ASDA will pay 43 million (approximately $70 million) in compensation costs to the plan participants. This curtailment charge will be recorded in expense in the first quarter of fiscal Older, more mature, companies are more likely to have defined benefit plans. Macy s, Inc., has a defined benefit plan described in Note 11. Among the many facts disclosed is the following: The following weighted average assumptions were used to determine benefit obligations for the supplementary retirement plan at January 29, 2011 and January 30, 2010: Discount rate 5.40% 5.65% Rate of compensation increases 4.50% 4.50% Intermediate Accounting 7e

106 Case 17 7 (concluded) The Codification reference for the requirement to disclose the discount rate used to estimate the PBO is: FASB ASC k: Compensation-Retirement Benefits Defined Benefit Plans-General Disclosure Disclosures by Public Entities Specifically, section k states: k. On a weighted-average basis, all of the following assumptions used in the accounting for the plans, specifying in a tabular format, the assumptions used to determine the benefit obligation and the assumptions used to determine net benefit cost: o o o 1. Assumed discount rates (refer to paragraph for a discussion of representationally faithful disclosure) 2. Rates of compensation increase (for pay-related plans) 3. Expected long-term rates of return on plan assets. Solutions Manual, Vol.2, Chapter

107 Real World Case 17 8 Answers will vary depending on the year of the financial statements used. The following answers are based on FedEx s fiscal 2011 financial statements. Requirement 1 FedEx sponsors both defined benefit and defined contribution pension plans as well as a postretirement healthcare plan. These are described in disclosure note 12: PENSION PLANS. Our largest pension plan covers certain U.S. employees age 21 and over, with at least one year of service. Pension benefits for most employees are accrued under a cash balance formula we call the Portable Pension Account. Under the Portable Pension Account, the retirement benefit is expressed as a dollar amount in a notional account that grows with annual credits based on pay, age and years of credited service, and interest on the notional account balance. The Portable Pension Account benefit is payable as a lump sum or an annuity at retirement at the election of the employee. The plan interest credit rate varies from year to year based on a U.S. Treasury index. Prior to 2009, certain employees earned benefits using a traditional pension formula (based on average earnings and years of service); however, benefits under this formula were capped on May 31, We also sponsor or participate in nonqualified benefit plans covering certain of our U.S. employee groups and other pension plans covering certain of our international employees. The international defined benefit pension plans provide benefits primarily based on final earnings and years of service and are funded in compliance with local laws and practices. POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. U.S. employees covered by the principal plan become eligible for these benefits at age 55 and older, if they have permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, Postretirement healthcare benefits are capped at 150% of the 1993 per capita projected employer cost, which has been reached and, therefore, these benefits are not subject to additional future inflation Intermediate Accounting 7e

108 Case 17 8 (continued) Requirement 2 A pension plan is underfunded when the obligation (PBO) exceeds the resources available to satisfy that obligation (plan assets) and overfunded when the opposite is the case. The PBO exceeds plan assets in both years reported. Thus, a net pension liability is reported in the balance sheet both years, as FedEx s defined benefit plans are underfunded. The amounts of each are reported in the disclosure note as reproduced below. The postretirement healthcare plan is not just underfunded; it is unfunded. The funded status reported as a liability, then, is equal to the postretirement benefit obligation each year. Postretirement Pension Plans Healthcare Plans Accumulated Benefit Obligation ("ABO") $16,806 $14,041 Changes in Projected Benefit Obligation ("PBO") and Accumulated Postretirement Benefit Obligation ("APBO") PBO/APBO at the beginning of year $14,484 $11,050 $565 $433 Service cost Interest cost Actuarial loss 1,875 2, Benefits paid (468) (391) (48) (45) Other 60 (22) PBO/APBO at the end of year $17,372 $14,484 $648 $565 Change in Plan Assets Fair value of plan assets at the beginning of year $13,295 $10,812 $ $ Actual return on plan assets 2,425 1,994 Company contributions Benefits paid (468) (391) (48) (45) Other 32 (20) Fair value of plan assets at the end of year $15,841 $13,295 $ $ Funded Status of the Plans $(1,531) $(1,189) $(648) $(565) Solutions Manual, Vol.2, Chapter

109 Case 17 8 (concluded) Requirement 3 FedEx reports three actuarial assumptions used to determine projected benefit obligations: Pension Plans Discount rate 5.76% 6.37% Rate of increase in future compensation levels 4.58% 4.63% Expected long-term rate of return on assets 8.0% 8.0% The reported decrease in the discount rate from 2010 to 2011 increased FedEx s projected benefit obligation. The lower the discount rate in a present value calculation, the higher the present value. FedEx reported a decrease in the rate of increase in future compensation levels. This decreased FedEx s PBO. Lower compensation estimates in the pension formula result in lower estimates of retirement benefits and thus in the PV of those benefits. The expected long-term rate of return on assets will not directly affect FedEx s projected benefit obligation. It affects instead the plan assets and pension expense Intermediate Accounting 7e

110 Real World Case 17 9 Requirement 1 The increase in a company s PBO attributable to making a plan amendment retroactive is referred to as the prior service cost. Prior service cost adds to the cost of having a pension plan. Amending a pension plan typically is done with the idea that future operations will benefit from having done so. Thus, the cost is not recognized as pension expense entirely in the year the plan is amended, but is recognized as pension expense over the time that the employees who benefited from the retroactive amendment will work for the company in the future. In GM s case, that may be a relatively short time. Apparently, a motive for GM s amendment was the expectation that employees would retire early and take advantage of the limited time offer. Requirement 2 The amendment increased GM s pension obligation. GM s pension expense will be higher each year for as long as the prior service cost is amortized. Presumably, in this instance, GM expects the bulk, if not all, of the cost to be expensed in the first year. Solutions Manual, Vol.2, Chapter

111 Analysis Case Requirement 1 Normally, a company s net periodic pension cost represents an expense and therefore decreases earnings. Often, though, circumstances cause this element of the income statement to actually increase reported earnings. This occurs when the expected return on assets, a negative component of pension expense, is higher than the combined total of the other components. Consider the following disclosure adapted from a pension footnote in a previous annual report of Qwest Communications that indicated that the pension plan contributed $87 million to reported earnings during the year: Service cost $ 170 Interest cost 601 Expected return on plan assets. (858) Net (credit) cost $ (87) The major contributor to this effect is the expected return on plan assets of over $858 million Intermediate Accounting 7e

112 Case (concluded) Requirement 2 Companies must report the actuarial assumptions used to make estimates concerning pension plans, namely the discount rate, the average rate of compensation increase, and the expected long-term rate of return on plan assets. The expected long-term rate of return on assets directly affects the net pension expense. The higher the rate, the higher the expected return on assets, a negative component of the net pension cost. The more aggressive a company is in estimating this return, the lower will be the expense and the higher reported profits will be. The discount rate can affect profits, too. The higher the discount rate in a present value calculation, the lower the present value. A lower present value will decrease the service cost and interest cost components of the net pension cost and increase earnings. The lower the rate of increase in future compensation levels, the lower will be the PBO, the service cost, and interest cost. So, the lower the rate of increase in future compensation levels, the higher earnings will be. Solutions Manual, Vol.2, Chapter

113 Research Case The specification of postretirement benefit coverage in the Content Specification Outline will depend on the date the website is accessed. The examination structure comprises four separately scored sections: Auditing & Attestation Business Environment & Concepts Financial Accounting & Reporting (business enterprises, not-for-profit organizations, and governmental entities) Regulation (professional responsibilities, business law, and taxation) Postretirement benefits are not specifically mentioned by name. However, the content specification outline indicates testing of standards for presentation and disclosure in the balance sheet and of comprehensive income and, more specifically, employee benefits are tested in the Financial Accounting & Reporting section. The education requirements to sit for the CPA exam vary somewhat from state to state. In Tennessee, examination candidates must have a minimum of 150 semester (225 quarter) hours, which includes: A baccalaureate or higher degree from a Board-recognized academic institution, 24 semester hours in accounting, and 24 semester hours in general business subjects. Educational requirements must be met within 120 days following the examination or grades will be voided Intermediate Accounting 7e

114 Analysis Case Requirement 1 Net loss, beginning of 2010 $1,186 Gain on plan assets (actual: $ ) (112)* 2010 amortization (61) 2010 loss on PBO 103 Net loss, end of 2010 $1,116 * rounded to reflect the $9M net gain Macy s reports in Note 11: $112 $103 = $9 Requirement 2 Gains or losses should not be part of pension expense unless and until total net gains or losses exceed a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Amortization of net gains is deducted from pension expense; amortization of a net loss is added to pension expense. Net loss $ 1,186 Less: 10% corridor (threshold)* (288) Excess $ 898 Service period? Amortization (given) $ 61 Average service years = $ 898 $61 = 14.7 years * 10% times either the beginning-of-the-period PBO ($2,879) or plan assets ($1,865), whichever is larger Solutions Manual, Vol.2, Chapter

115 Case (concluded) Requirement 3 Net gain, beginning of 2010 $38 Loss (gain) on plan assets (actual: 0 expected: 0) amortization (5) 2010 loss on APBO (8) Net gain, end of 2010 $25 Requirement 4 Note 12 states the effect on expense of a 1% decrease in the healthcare cost trend is $1M. Using that, we can determine the effect on net income : $847 reported net income + $1 million (1.35) = $ Intermediate Accounting 7e

116 Air France KLM Case Requirement 1 Under IAS No. 19, prior service cost (called past service cost under IFRS) is combined with service cost and reported within the income statement.. Under U.S. GAAP, prior service cost is not expensed immediately, but is included among OCI items in the statement of comprehensive income and thus subsequently becomes part of AOCI where it is amortized to earnings over the average remaining service period. Requirement 2 If AF used IFRS, it would report gains and losses among OCI items in the statement of comprehensive income, which subsequently become part of AOCI. The gains and losses remain in AOCI; they are not subsequently amortized to expense and recycled or reclassified from other comprehensive income as is required under U.S. GAAP (when the accumulated net gain or net loss exceeds the 10% threshold). Requirement 3 Under IFRS the various components of pension expense are not reported as a single net amount. AF would separately report service cost (including past service cost) net interest cost/income, and amortization of remeasurement gains and losses. Service cost and net interest cost/income would be reported within the income statement. Remeasurement gains and losses would be reported as other comprehensive income in the statement of comprehensive income. Under U.S. GAAP, all components of pension expense are reported as a single net amount in the operating profit (loss) section of the income statement. Solutions Manual, Vol.2, Chapter