Pensions & Other Post-

19 Employment Benefits

19-1
 Agenda
• Chapter 19 – Pensions & Other Post-employment Benefits
• Nature of Pension Plans

• Defined Benefit Obligation

• Plan Assets
• Net Defined Benefit Liability/ Asset (Surplus or Deficit)

• Using a Pension Worksheet

• Other Post-Employment Benefits

19-2 Copyright © 2020 Property of Christina Maco (UWO)

 Nature of Pension Plans

An arrangement whereby an employer provides benefits (payments) to

retired employees for services they provided in their working years.

Pension Plan
Administrator

Employer Contributions

Retired
Employees Benefit Payments Assets &
Liabilities

19-3 Copyright © 2020 Property of Christina Maco (UWO)

 Nature of Pension Plans

Pension plans can be:

u Contributory: employees voluntarily make payments to
increase their benefits.
u Noncontributory: employer bears the entire cost.

Pension fund is a separate legal and accounting entity.

19-4 Copyright © 2020 Property of Christina Maco (UWO)

 Nature of Pension Plans

Defined Contribution Plan Defined Benefit Plan

u Employer contribution u Benefit determined by plan
determined by plan (fixed) u Employer contribution
u Risk borne by employees varies (determined by
u Benefits based on plan Actuaries)
value u Risk borne by employer

Actuaries make predictions (called actuarial assumptions) of mortality

rates, employee turnover, interest and earnings rates, early retirement
frequency, future salaries, and any other factors necessary to operate a
pension plan.

19-5 Copyright © 2020 Property of Christina Maco (UWO)

 Accounting for Pensions

Two questions:
1) What is the pension obligation that a company should
report in the financial statements?

2) What is the pension expense for the period?

19-6 Copyright © 2020 Property of Christina Maco (UWO)

 Defined Benefit Obligation

Credit
Balance

19-7 Copyright © 2020 Property of Christina Maco (UWO)

 Components of Defined Benefit Obligation

Effect on
DBO

1. Current Service Costs +

Actuarial present value of benefits attributed by the pension
benefit formula to employee service during the period

19-8 Copyright © 2020 Property of Christina Maco (UWO)

 Components of Defined Benefit Obligation

Effect on
DBO

2. Interest Cost +
Interest for the period on the projected benefit obligation
outstanding during the period
The interest rate used is a current market rate.

Interest cost calculation:

(beginning DBO balance + past service costs granted at the
beginning of the year)
x discount rate

19-9 Copyright © 2020 Property of Christina Maco (UWO)

 Components of Defined Benefit Obligation

Effect on
DBO

3. Benefits Paid to Retirees -

Payment of pension benefits to the former employees made
by the pension fund.

19-10 Copyright © 2020 Property of Christina Maco (UWO)

 Components of Defined Benefit Obligation

Effect on
DBO

4. Past Service Costs +-

Plan amendments often include provisions to increase
benefits for employee service provided in prior years.

19-11 Copyright © 2020 Property of Christina Maco (UWO)

 Components of Defined Benefit Obligation

Effect on
DBO

5. Actuarial Gains or Losses +-

May result from:
1. A change in actuarial assumptions, or

2. An experience gain or loss.

19-12 Copyright © 2020 Property of Christina Maco (UWO)

 Check Your Understanding
At January 1, 2020, Wembley Company had plan assets of $250,000
and a defined benefit obligation of the same amount. During 2020, the
service cost for the year was $27,500, the discount rate was 10%,
actual and expected return on plan assets were $35,000,
contributions were $20,000, and benefits paid were $17,500. Based
on this information, what would be the defined benefit obligation for
Wembley Company at December 31, 2020?
a. $277,500. c. $27,500.
b. $285,000. d. $302,500.

19-13 Copyright © 2020 Property of Christina Maco (UWO)

 Plan Assets

Debit
Balance

Actual return on plan assets: Increase in pension funds from

interest, dividends, and realized and unrealized changes in
the fair value of the plan assets.

19-14 Copyright © 2020 Property of Christina Maco (UWO)

 Plan Surplus or Deficit

Surplus or deficit is reported on the company’s statement of

financial position as a net defined benefit asset or liability.

Net defined benefit asset or liability may also be determined:

Net defined benefit liability, opening balance
+ Pension expense (including remeasurement gain/loss)
- Contributions
= Net defined benefit liability, ending balance
19-15 Copyright © 2020 Property of Christina Maco (UWO)
 Time to Practice
Exercise 19-9 – Part 1
1. Working with your neighbour, complete the following requirements:
a) Prepare a continuity schedule for the DBO for 2020.
b) Prepare a continuity schedule for the plan assets for 2020.
c) IGNORE (c) for now.
d) IGNORE (d) for now.
e) Identify the plan’s surplus or deficit at year end.
The company applies ASPE.
2. You have 10 minutes.

19-16 Copyright © 2020 Property of Christina Maco (UWO)

 Pension Benefit Cost

Pension Expense
ASPE IFRS
Reported through net income: Reported through net income:
+ Current service cost + Current service cost
+ Past service cost + Past service cost
+ Actuarial loss (Dr) / - Actuarial gain (Cr) + Net interest cost
+ Net finance cost = Pension expense
+ Remeasurement loss on plan assets
(or – remeasurement gain) Reported through OCI:
= Pension Expense + Actuarial loss (Dr) / - Actuarial gain (Cr)
+ Remeasurement loss on plan assets
(or – remeasurement gain)
= Remeasurement gain / loss - OCI

19-17 Copyright © 2020 Property of Christina Maco (UWO)

 Pension Benefit Cost
Net Finance / Interest Cost
• The interest cost on the DBO combined with the interest income on
the plan assets together comprise net finance / interest on the net
defined liability or asset.

DBO Interest cost – Expected return on plan assets

Example: On January 1, 2019, Jonquere Inc. has a defined benefit

obligation of $100,000, plan assets of $80,000, and applies a 10%
discount rate. Calculate net finance / interest cost.
Net finance / interest cost = (100,000 – 80,000) x 10%
= 20,000 x 10%
= 2,000

19-18 Copyright © 2020 Property of Christina Maco (UWO)

 Pension Benefit Cost
Remeasurement Gain or Loss on Assets
• The remeasurement gain / loss relates to the return on plan assets.
It is the difference between the actual return on the plan assets and
the return calculated using the same discount rate used to
determine the DBO at the start of the period.

Expected return on plan assets – Actual return on plan assets

Example: On January 1, 2019, Jonquere Inc. has plan assets of

$80,000 and uses a 10% discount rate. At the end of the year, the
actual return was $9,000.
Remeasurement gain = (80,000 x 10%) – 9,000
= 8,000 – 9,000
= (1,000) à gain
19-19
Copyright © 2020 Property of Christina Maco (UWO)
 Pension Benefit Cost
Journal Entries
Example: On January 1, 2019, Jonquere Inc. has a defined benefit
obligation of $100,000, plan assets of $80,000, and applies a 10%
discount rate. The actual return on plan assets at the end of the year
was $9,000. Jonquere contributed $30,000 to the pension fund. The
current service cost was $15,000.
ASPE IFRS
Pension expense 16,000 Pension expense 17,000
Net Defined Benefit Liability 16,000 Remeasurement gain – OCI 1,000
(Pension expense = current service cost Net Defined Benefit Liability 16,000
$15,000 + net finance cost of $2,000 - (Pension expense = current service cost $15,000
remeasurement gain of $1,000) + net interest cost $2,000)

Net Defined Benefit Liability 30,000 Net Defined Benefit Liability 30,000
Cash 30,000 Cash 30,000
19-20
Copyright © 2020 Property of Christina Maco (UWO)
 Time to Practice
Exercise 19-9 – Part 2
1. Working with your neighbour, complete the following requirements:
c) Calculate pension expense for 2020 and prepare the entry to
record the expense. Round to the nearest dollar.
d) Calculate the balance of the net defined liability / asset at
December 31, 2020 using this method:
Net defined benefit liability, opening balance
+ Pension expense (including remeasurement gain/loss)
- Contributions
= Net defined benefit liability, ending balance

f) Identify what disclosures are required. (we’ll discuss)

The company applies ASPE.
2. You have 10 minutes.
19-21 Copyright © 2020 Property of Christina Maco (UWO)
 Other Post-Employment Benefits

Companies provide their employees with other post-

employment benefits as part of their compensation package.

Companies are required to account for these benefits (where

they vest or accumulate) in the same way as defined pension
plans.

19-22 Copyright © 2020 Property of Christina Maco (UWO)

 Using a Pension Work Sheet
Pension Work Sheet
GENERAL JOURNAL ENTRIES MEMO RECORD
Annual Defined Defined
Remeasurement Pension Liability / Benefit Plan
Items (Gain) / Loss Expense Cash Asset Obligation Assets

The “General Journal Entries” columns The “Memo Record”

determine the journal entries to be recorded columns maintain balances
in the formal general ledger. for the unrecognized
pension items.
19-23 Copyright © 2020 Property of Christina Maco (UWO)
 Using a Pension Work Sheet

Example: Rydell Corp provides the following information for 2020.

Defined benefit obligation, Jan 1, 2020 (before amendment) $560,000
Plan assets, Jan 1, 2020 546,200
Net defined pension liability, Jan 1, 2020 13,800
On January 1, 2020, Rydell Corp., through plan amendment,
grants prior service benefits having a present value of 120,000
Discount rate 9%
Service cost 58,000
Contributions (funding) 65,000
Actual return on plan assets 52,280
Benefits paid to retirees 40,000
Instructions: For 2020, prepare a pension work sheet for Rydell Corp. that
shows the journal entry for pension expense.

19-24 Copyright © 2020 Property of Christina Maco (UWO)

 Using a Pension Work Sheet
GENERAL JOURNAL ENTRIES MEMO RECORD
Net
Annual Defined Defined
Remeasurment Pension Liability / Benefit Plan
Items (Gain) / Loss Expense Cash Asset Obligation Assets
Dec 31, 2018 (13,800) (560,000) 546,200
Past service cost 120,000 (120,000)
Bal. Jan. 1, 2019 (680,000) 546,200
Service costs 58,000 (58,000)
(680,000 – 546,200)
Net interest cost 12,042 (61,200) 49,158
x 9%
Remeasurment (3,122) 3,122
Contributions (65,000) 65,000
Benefits paid 40,000 (40,000)
Journal entry (3,122) 190,042 (65,000) (121,920)
Dec. 31, 2019 (135,720) (759,200) 623,480

19-25 Copyright © 2020 Property of Christina Maco (UWO) ($135,720) liability

 Time to Practice
Exercise 19-17
1. Refer to the information in Exercise 19-16 and complete the
following requirements:
a) Prepare a post-retirement worksheet for 2020.
• Refer to the template found on OWL.

b) Prepare all required journal entries related to the plan.

The company applies IFRS.
2. You have 20 minutes.

19-26 Copyright © 2020 Property of Christina Maco (UWO)

 Presentation
Statement of Financial Position
u Report the Net defined benefit liability / asset

u If the company has two or more defined benefit plans, that

results in a net defined benefit asset for one plan and a net
defined liability for another plan, then report these plans
separately

u Usually has a long-term classification

Statement of Income
u Most companies report the benefit cost as a single cost

u Remeasurement gain/loss-OCI must be reported separately

under OCI
19-27 Copyright © 2020 Property of Christina Maco (UWO)
 Disclosure
ASPE IFRS
• Description of each type of plan • Describe the characteristics of the
(pension plan, post-employment defined benefit plan(s), and risks
health-care plan, etc) and any major associated with them
changes in the terms of the plan • Amounts in the DBO and plan assets
during the year
• How the defined benefit plan helps
• Effective date of the most recent users asses amounts, timing, and cash
actuarial valuation for funding flows associated with future benefits
purposes
• Reconciliation of the opening and
• Year-end surplus or deficit, closing balances of the net defined
including the fair value of the plan benefit liability / asset, DBO, plan
assets and defined benefit asset
obligation
• Amount in net income for pension
• An explanation of any difference expense and its components
between the amount reported on the
• Amounts in OCI related to the plan
balance sheet and the plan’s surplus
or deficit • And other disclosures …
• Components making up pension
expense
19-28 Copyright © 2020 Property of Christina Maco (UWO)
 Disclosure Examples
Balance Sheet
Long-term Liabilities
Net defined benefit liability (Note 5)

Income Statement
Operating expenses
Pension expense (Note 5)
Note 5

Defined benefit obligation $ xxxxx

Fair value of Plan assets xxxxx
Plan Deficit xxxxx Would provide a reconciliation
of these accounts, and the net
Pension expense includes the following items: defined benefit liability, similar
Service cost xxxx to the continuity schedules.
Past service cost xxxx
Net interest cost xxxx
Remeasurement gain (xxxx)
19-29 Copyright © 2020 Property of Christina Maco (UWO)