Chapter

17

Pensions and
Other
Postretirement
Benefits
 PART A: The Nature of Pension
Plans
Pension plans: Designed to provide income to
individuals during their
retirement years
Accomplished by On
setting aside funds Theretirement
accumulated
during an funds
employees working Earnings from
years investing those funds
Pension plans provide employees with a
degree of retirement security and often
enhance productivity, reduce turnover,
satisfy union demands, and allow employers
to compete in the labor market
Types of Pension Plans
Defined contribution
pension plans
Promise fixed annual contributions to a
pension fund
Example:
Employer contributes 5% of the
employees pay
Defined benefit pension
plans
Promise fixed retirement benefits
defined by a designated formula
Pension formula bases retirement pay on
the employees (a) years of service, (b)
annual compensation, and sometimes (c)
 LO17-1

Defined Contribution and

Defined Benefit Pension Plans
 LO17-1

Defined Contribution Pension Plans

Promise fixed periodic contributions to a
pension fund, without further commitment
regarding benefit amounts at retirement
Variations of this plan include:
Money purchase plan Employers contribute a
Thrift plan fixed percentage of
employees salaries
Permit voluntary
Savings plan
contributions by employees
401(k) plan
Employees make
Contributory plan contributions to the plan in
addition to employer
When plans link the amount of contributions to
contributions
company performance, labels include profit-
sharing plans, incentive savings plans,
 LO17-1

Defined Contribution Plan

Microsoft Corporation

Sometimes the amount the employer contributes

is tied to the amount of the employee contribution
 LO17-1

Accounting for a Defined

Contribution Plan
If a plan promises an annual contribution equal
to 3% of an employees salary that amounts to
$110,000 in a particular year. The employer
would simply recognize pension expense for the
amount of the contribution.
Journal Debi Cre
Entry
Pension expense t
3,300 dit
Cash ($110,000 3%) 3,300
 LO17-1

Defined Benefit Pension Plans

Promise fixed retirement benefits defined

by a pension formula
Example
An employee retires after 30 years of
service, with a final salary of $100,000, the
annual benefits are calculated as 1.5%
times 30 years times final years salary:
1.5% Years of service Final
years salary
1.5% 30 years $100,000
= $45,000
 LO17-1

Defined Benefit Pension Plans

(Continued)

Uncertainties inherent in a defined benefit

plan :
o Rate of return on plan assets
o Number of employees eligible for
retirement benefits
o Age at which employees will choose to
retire
Invariably deviates from the
o Life expectancies of the life
actual outcome
o Inflation, future compensation levels, and
interest rates
Actuary: A professional trained in a
particular branch of statistics and
mathematics, hired by the firm, to assess the
 LO17-1

Defined Benefit Pension Plans

(Continued)

Pension
gains and
When the pension losses When the return on
obligation is plan assets is
higher or lower higher or lower than
than expected expected
Key elements of a defined benefit
Employers pension plan:
obligation to pay retirement
benefits in the future
Plan assets set aside by the employer from
which to pay the retirement benefits in the
future
Periodic expense of having a pension plan
 LO17-1

Defined Benefit Plan vs. Defined

Contribution Plan
Reasons for companies to shift from defined benefit
plan to defined contribution plan:
1. Government regulations make defined benefit
plans cumbersome and costly to administer
2. Employers are increasingly unwilling to bear the
risk of defined benefit plans;
With defined contribution plans, the companys
obligation ends when contributions are made
3. There has been a shift among many employers
from trying to buy long-term loyalty (with
defined benefit plans) to trying to attract new
talent (with more mobile defined contribution
plans)
Components of Pension Expense
LO17-1

Overview

Interest and investment return are financing

aspects of the pension cost
Recognition of some elements of the pension
expense is delayed
 LO17-2
PART B: Pension Obligation and Plan Assets
Illustration: Ways to Measure the Pension
Obligation
The three different ways to measure the pension
obligation that have meaning in pension
accounting:
 LO17-2

Accumulated Benefit Obligation

An estimate of the discounted present

value of the retirement benefits earned so
far, applying the plans pension formula
using existing compensation levels
Ignores possible pay increases in the
future
 LO17-2

Vested Benefit Obligation

Vested benefits: Those that employees

have the right to receive even if their
employment were to cease today
Today, benefits must vest:
(a)fully within five years or
(b)20% within three years with another
20% vesting each subsequent year until
fully vested after seven years
 LO17-2

Vested Benefit Obligation (Continued)

Pension Benefit Guaranty

Corporation (PGBC)
To impose liens on corporate assets for
unfunded pension liabilities in certain
instances and to administer terminated
pension plans
Financed by premiums from employers
equal to specified amounts for each
covered employee to make retirement
payments for terminated plans when
pension liabilities exceed assets
 LO17-3

Projected Benefit Obligation

Estimates retirement benefits by applying
the pension formula using projected
future compensation levels
Less reliable but more relevant and
representationally faithful

Alternative
Measures of
the Pension
Obligation
 LO17-3

Projected benefit Obligation

Jessica Farrow was hired by Global Communications in
2005. The company has a defined benefit pension plan
that specifies annual retirement benefits equal to:

1.5% Service years Final years

salary
Farrow is expected to retire in 2044 after 40 years
service. Her retirement period is expected to be 20
years. At the end of 2014, 10 years after being hired, her
salary is $100,000. The interest rate is 6%. The
companys actuary projects Farrows salary to be
$400,000 at retirement. What is the companys
projected benefit obligation with respect to Jessica
Farrow?
Steps to calculate the projected benefit obligation:
1. Use the pension formula (including a projection of
future salary levels) to determine the retirement
 LO17-3

Illustration: Projected benefit

Obligation (Continued)
3. Present value (n = 30, i = 1. Actuary estimates employee
6%) of has
retirement benefits at 2014 is earned (as of 2014) retirement
$688,195 .17411 = benefits of
$119,822 (PBO) 1.5% 10 years $400,000 =
2005 2014 $60,000 per year
2044 2064

10 30 20 years
years Service years Retiremen
period t
2. Present value (n = 20, i = 6%) of
the retirement annuity at the
retirement date is
$60,000 11.46992 =
$688,195
 LO17-3

PBO in 2015
If the actuarys estimate of the final salary hasnt
changed, the PBO a year later at the end of 2015
would be $139,715 as demonstrated:
3. Present value (n = 29, i = 1. Actuary estimates employee
6%) of has
retirement benefits at 2015 is earned (as of 2015) retirement
$757,015 .1846 = benefits of
$139,715 (PBO) 1.5% 11 years $400,000 =
2005 2014 2044
$66,000 per year 2064

11 29 20 years
years Service years Retiremen
period t
One more service The employee 2. Present value (n = 20, i = 6%) of
year is one year the retirement annuity at the
is included in the closer to retirement date is
pension formula retirement $66,000 11.46992 =
 LO17-3

Five Reasons the Balance of PBO

Might Change
1) Service cost
Each years service adds to the obligation to
pay benefits
This represents the increase in the projected
benefit obligation attributable to employee
service performed during the period
2) Interest cost
Interest accrues on PBO balance as time
passes
Calculated as the assumed discount rate
multiplied by the projected benefit obligation
at the beginning of the year
 LO17-3

Five Reasons the Balance of PBO

Might Change (Continued)
3) Prior service cost
When a pension plan is amended, credit
often is given for employee service
rendered in prior years. The cost of doing
so is called prior service cost.
Example:
Global communications in our illustration
revised the pension formula, formulas
salary percentage is increased in 2015 from
1.7% Service years Final years
1.5% to 1.7%.
salary
(revised pension formula)
 LO17-3

Prior Service

Cost Increase in the PBO as a Result of

Making an Amendment Retroactive

PBO without PBO with

1. 1.5% Amendment
10 yrs. =$ 1.7% Amendment
10 yrs. =$
$400,000
2. $60,000 11.46992 60,000
= $400,000
$68,000 11.46992 68,000
=
3. $688,195 .17411 688,195
= $779,955 .17411 779,955
=
119,822 135,798

$15,976
Prior service cost
 LO17-3

Prior Service Cost

Increase in the PBO as a result of making an

amendment retroactive
PBO at the beginning of 2015 (end of 2014) $119,822
Prior service cost (determined previously) 15,976
PBO including prior service cost at the 135,798
beginning of 2015
Service cost: (1.7% 1 yr. $400,000) 14,395
11.46992 Annual
.18456retirement To discount To
benefits to 2044 discoun
Interest cost: from 2015
service
6% t 8,148
to 2015
PBO at the end of 2015 $158,341

Present value of an ordinary annuity of $1: n = 20, i = 6%.

Present value of $1: n = 29, i = 6%
Includes the beginning balance plus the prior service cost because
the amendment occurred at the beginning of the year
 LO17-3

Prior Service Cost (Continued)

The plan amendment would affect not only the year in

which it occurs, but also each subsequent year
because the revised pension formula determines each
PBOyears
at the beginning of 2016 (end of 2015)
service cost. $158,341
Service cost: (1.7% 1 yr. $400,000) 15,258
11.46992Annual
.19563retirement To To
benefits discount discount
from
Interest cost: 2016 service
$158,341 6% to 2044 to 2016 9,500
PBO at the end of 2016 $183,099

Present value of an ordinary annuity of $1: n = 20, i = 6%.

Present value of $1: n = 28, i = 6%
des the beginning balance plus the prior service cost because
the amendment occurred at the beginning of the year
 LO17-3

Five Events That Change the

Balance of the PBO
4) Gains or losses Increased by 5%
Decrease and increase in estimates of the PBO
because of periodic re-evaluation of uncertainties
PBO without Revised PBO with Revised
Estimate
1. 1.7% 12 yrs. =$ 1.7% 12Estimate
yrs. =$
$400,000
2. $81,600 11.46992 81,600
= $420,000
$85,680 11.46992 85,680
=
3. $935,945 .19563 935,945
= $982,743 .19563 982,743
=
183,099 192,254
$9,155
Loss on PBO
PBO at the beginning of $158,341
2016
Service cost (calculated 15,258
above)
Interest cost (calculated 9,500
above)
Loss on PBO (calculated 9,155
above)
PBO at the end of 2016 $192,254
 LO17-3

Five Events That Change the

Balance of the PBO (Continued)
If a revised estimate causes the PBO to be
lower than previously expected, a gain would
be indicated
Other possible estimate changes that would
affect the PBO:
Change in life expectancies
Expectation that retirement will occur earlier
than previously thought
Change in the assumed discount rate
5) Payment of retirement benefits
Obligation is reduced as benefits actually are
paid to retired employees
 LO17-3

Components of Change in the PBO

 LO17-3

The PBO Expanded to Include All

Employees

The changes in the PBO for Global

Communications during 2016 were as follows:
($ in millions)
PBO at the beginning of 2016 $40
Service cost, 2016 410
Interest cost: $400 6% 24
Loss (gain) on PBO 23
Less: Retiree benefits paid (38)
PBO at the end of 2016 $450

Amounts
assumed
 LO17-4

Pension Plan Assets

Resources with which a company will provide
the retirement benefits
Netted together with the PBO to report either
a net pension asset (debit balance) or a net
pension liability (credit balance) in the
balance sheet
Invest
Accepts TRUSTEE s Stocks,
employer bonds, and
contributio Other
An individual,
ns income-
a bank, or
producing
A trust
assets
company
Pays benefits to retired Accumulat
employees or their es the
 LO17-4

How Plan Assets Change

Global Communications funds its defined benefit
pension plan by contributing each year the years
service cost plus a portion of the prior service cost.
Cash of $48 million was contributed to the pension
fund at the end of 2016.
Plan assets at the beginning of 2016 were valued at
$300 million. The expected rate of return on the
investment of those assets was 9%, but the actual
return in 2016 was 10%. Retirement benefits of $38
Underfund
million were paid at the end edof 2016 to retired
employees. (Also, recall that Globals PBO ($ at
in the
millions)
end of
2016 is $450
Plan million.)
assets Now, whatofis2016
at the beginning the value of the
$300
companys
Actual pension
return onplan assets
plan assetsat(10%
the end
of 2016? 30
Cash contributions
$300) 48
Less: Retiree benefits paid (38)
Plan assets at the end of 2016 $340
 LO17-4

Expected Return on Plan Assets

Accumulat Return on the

ed balance investments Fund to
of the (dividends, pay
annual interest, market benefits
employer price
contributio appreciation)
ns Expected return on plan
assets

Higher Lower the

contribution required
from the employer
 LO17-5

Reporting the Funded Status of the

Pension Plan
Firms report the net difference between plan
assets and PBO, referred to as the funded
status of the plan ($ in millions)

2016 2015
Projected benefit obligation $450 $400
(PBO)
Fair value of plan assets 340 300
Underfunded status $110 $100
Net pension liability in 2016
balance
A company must report sheet
in its balance sheet a
liability for the underfunded (or asset for the
overfunded) status of its postretirement plans
PART C: Determining Pension Expense LO17-6

Illustration: Components of the Periodic

Pension Expense
 LO17-6

Illustration: Pension Expense

Reports from the actuary and the trustee of plan assets
indicate the following changes during 2016 in the PBO and
plan assets of Global Communications.
($ in millions) PBO Plan
Beginning of $400 Beginning of 2016 Assets
$30
2016
Service cost 41 Actual return on plan 0
30
Interest cost, 6% 24 assets,
Loss (gain) on 23 10%
Cash (9% expected)
contributions 48
PBO Retiree benefits (38)
Less: Less: Retiree (38)
End of 2016 $45 benefits
End of 2016 $34
0 0
Assume a prior service cost of $60 million was incurred at
the beginning of the previous year (2015) due to a plan
amendment increasing the PBO. Also assume that at the
beginning of 2016 Global had a net loss of $55 million
(previous losses exceeded previous gains). The average
 LO17-6

Pension Expense (Continued)

($ in PBO Plan
millions) of
Beginning $400 Beginning of 2016 Assets
$30
2016
Service cost 41 Actual return on plan 0
30
Interest cost, 6% 24 assets,
Loss (gain) on 23 10%
Cash (9% expected)
contributions 48
PBO Retiree benefits (38)
Less: Less: Retiree (38)
End of 2016 $45 benefits
End of 2016 $34
0 0
Globals 2016 Pension Expense Is
Determined as Follows: ($ in
millions)
Service cost $4
Interest cost (6% $400) 24 1
Expected return on the plan assets ($30 actual, (27
less $3 gain) of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
 LO17-6

Pension Expense (Continued)

Globals 2016 Pension Expense Is

Determined as Follows: ($ in
Service cost millions)
$4
Interest cost (6% $400) 1
24
Expected return on the plan assets ($30 actual, (27
less $3 gain) of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
3
1) Service Cost
$41 million service cost represents the increase in the
projected benefit obligation attributable to
employee service
Each year, this is the first component of the pension
expense
 LO17-6

Pension Expense (Continued)

Globals 2016 Pension Expense Is

Determined as Follows: ($ in
Service cost millions)
$4
Interest cost (6% $400) 241
Expected return on the plan assets ($30 actual, (27
less $3 gain) of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
3
2) Interest Cost
Calculated as the interest rate multiplied by the
projected benefit obligation at the beginning of the
year
Reported as the second component of the annual pension
expense
 LO17-6

Illustration: Pension Expense

(Continued)
Globals 2016 Pension Expense Is
Determined as Follows: ($ in
Service cost millions)
$4
Interest cost (6% $400) 241
Expected return on the plan assets ($30 actual, (27
less $3 gain) of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
3
3) Return on Plan Assets
Includes dividends, interest, and capital gains earned from
plan assets
When accounting for the return, we need to differentiate
between its two modes: the expected return and the
actual return
 LO17-6

Pension Expense (Continued)

Globals 2016 Pension Expense Is

Determined as Follows: ($ in
Service cost millions)
$4
Interest cost (6% $400) 241
Expected return on the plan assets ($30 actual, (27
less $3 gain) of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
3
Actual versus expected return
Expected return on plan assets each year reduces
the amount recorded as pension expense
Interest and return-on-assets components are financial
items created rather than direct employee
compensation
 LO17-6

Pension Expense (Continued)

Globals 2016 Pension Expense Is

Determined as Follows: ($ in
Service cost millions)
$4
Interest cost (6% $400) 241
Expected return on the plan assets ($30 actual, (27
less $3 gain)of prior service cost (calculated
Amortization 4)
later)
Amortization of net loss (calculated later) 1
Pension expense $4
3
Adjustment for loss or gain
The actual return should first be
adjusted by any difference between that
return and the amount that had been
expected (gain or loss)
 LO17-6

Pension Expense (Continued)

$60 million 15 years

4) Amortization of Prior Service Cost

Amortized over the average remaining service
life of the active employee group
Amortization of Prior Service($ in millions)
Service cost
Cost: $41
Interest cost 24
Expected return on the plan (27)
Amortization
assets of prior service 4
Amortization
costAOCI of net lossAOCI 1
Pension expense $43
Prior service cost is reported as a component of
accumulated other comprehensive income
(AOCI)
 LO17-6

Pension Expense (Continued)

Prior Service CostAOCI ($ in millions)

Prior service cost at the beginning $56

ofLess:
20162016 amortization (4)
Prior service cost at the end of $52
2016

The prior service cost balance in AOCI

declines by the amortization each year
 LO17-6

Pension Expense (Continued)

5) Amortization of a Net Loss or Net

Gain
Gains and losses are reported as OCI in
the statement of comprehensive income
as they occur
Gains and losses (net of subsequent
amortization) accumulate as a net loss
AOCI or a net gainAOCI, depending on
whether we have greater losses or gains
We report
over timethis amount in the balance sheet as
a part of accumulated other comprehensive
income (AOCI), a shareholders equity
account
 LO17-6

Illustration: Gains and Losses

Projected
Benefit Return on
Obligation Plan Assets
Higher
than
expected

Lower
than
expected
 LO17-6

Income Smoothing

If a net gain or a net loss gets too large,

pension expense must be adjusted
If it exceeds an amount equal to 10% of
the PBO,
or 10% of plan assets, whichever is
This threshold amount
higher is referred to as The
corridor
If net gains and losses exceeds the corridor,
the excess is not charged to pension expense
all at once
Instead, as a further concession to income
smoothing, only a portion of the excess is
included in pension expense
 LO17-6

Income Smoothing (Continued)

Minimum amount that should be included is

given by:
Excess at the beginning of the year
Average remaining service period of active
employees expected to receive benefits under the
plan
Determining Net Loss Amortization ($ in millions)
Net loss (previous losses exceeded previous $55
2016
10% of $400 ($400 is greater than $300): the (40)
gains)
corridor
Excess at the beginning of the year $15
Average remaining service period 15 years
Amount amortized to 2016 pension expense $1

Assume
 LO17-6

Income Smoothing (Continued)

If a net gain were being amortized, this
amount would be deducted from pension
Amortization of the Net Loss expense ($ in millions)
AOCI:
Service cost $41
Interest cost 24
Expected return on the plan assets (27)
Amortization of prior service cost 4
AOCI
Amortization of net lossAOCI 1
Pension expense $43
Net LossAOCI ($ in millions)

Net lossAOCI at the beginning of 2016 $55

Less: 2016 amortization (1)
Plus: 2016 loss on PBO 23
Less: 2016 gain on plan assets (3)
Net lossAOCI at the end of 2016 $74
 LO17-7

PART D: Reporting Issues

Recording Gains and Losses
Global records a lossOCI for the $23 million loss
that occurs in 2017 when it revises its estimate of
future salary levels causing its PBO estimate to
increase. Global also records a $3 million gainOCI
that occurred when the $30 million actual return on
plan assets exceeded the $27 million expected
To record
return. gains and losses ($ in millions)
Journal Debi Cre
LossOCI (from Entry
change in t
23 dit
assumption)
PBO 23
Plan assets 3
GainOCI 3

($30 actual return on assets $27

 LO17-7

Recording the Pension Expense

Service cost $41
Interest cost 24
Expected return on assets (27)
Amortization of prior service cost 4
Amortization of net loss 1
Pension expense $43

To record pension expense ($ in millions)

Pension expense (total) 43
Plan assets (Expected return on 27
PBO ($41 Service Cost + $24 Interest
assets) 65
Amortization of prior service cost
Cost) 4
OCIAmortization of net lossOCI 1
 LO17-7

Disclosure of Pension Expense

General Mills, Inc.
 LO17-7

Recording the Funding of Plan

Assets
Global adds $48 million to its plan assets and
pays $38 million to retired employees:

To Record Funding ($ in millions)

Journal Debi Cre
Plan assets Entry t
48 dit
Cash (contribution to plan assets) 48

To Record Payment of Benefits ($ in millions)

Journal Debi Cre
PBO Entry t
38 dit
Plan assets (payments to retired 38
employees)
 Recording Changes in the PBO and LO17-7

Plan AssetsPBO
400Balance
23 Loss
41Service cost
24Interest cost
Benefits paid38
450Balance

Plan Assets $450 340 = $110 millio

Balance300
Gain 3
Expected return27 Funded status
Funding 48 of the pension
38Benefits paid plan
Balance340
Statement of Comprehensive LO17-7

Income
More expansive view of income than
traditional net income
Encompasses all changes in equity other
than from transactions with owners
Includes up to four other changes in equity
 LO17-7

Balance Sheet Presentation of

Pension Amounts
 LO17-7

Income Tax Considerations

Gains and losses are reported along with their tax

effects in the statement of comprehensive
income
Tax expense for a gain, tax savings for a loss
Accomplished by presenting components of other
comprehensive income either net of related income
tax effects or before income tax effects
It should be accompanied with disclosure of the
income taxes allocated to each component either in
a disclosure note or parenthetically in the
statement
AOCI in the balance sheet also is reported net
of tax
 LO17-8

Pension Spreadsheet
 LO17-8

Settlement or Curtailment of
Pension Plans
Companies sometimes terminate defined
benefit plans to reduce costs and lessen
risk
Instead they provide defined contribution
plans
Illustration: Gain on the Termination of
a Defined Benefit PlanMelville
Corporation
Postretirement Benefits Other LO17-9

Than Pensions
Medical
coverage

Other
Life
benefits
insurance

Postretirement
benefits other
than pension
plans
Dental Group
coverage legal
services
Health
care
benefits
 LO17-9

What Is a Postretirement Benefit

Plan? Important to differentiate
between
Health care benefits
Retiree health care during an
benefits employees working
years

Benefits are simply

Benefits continue in part of the annual
to retirement compensation
expense

Eligibility usually is based on age and/or

years of service
 LO17-9

Postretirement Benefits Other

Than Pensions (Continued)
Accounting for postretirement benefits is similar in
most respects to accounting for pension benefits

Two forms of benefits are fundamentally similar

Form of deferred Estimated as the

compensation present value of
earned during the the cost of
employees service providing the
life expected future
benefits
 LO17-9

Postretirement Benefits Other

Than Pensions (Continued)

Expected future health care costs for

retirees must be recognized as an expense
over the years necessary for employees
to become entitled to the benefits
Accrual
basis
 LO17-9

Illustration: DisclosuresGeneral
Motors
 LO17-9

Estimating the Net Cost of Benefits

Many of the assumptions needed to estimate

postretirement health care benefits are the same
as those needed to estimate pension benefits:
A discount rate
Expected return on plan assets (if the plan is
funded)
Employee turnover
Expected retirement age
Expected compensation increases (if the plan is
pay-related)
 LO17-9

Estimating the Net Cost of Benefits

(Continued)

Additional assumptions become necessary

as a result of differences between pension
plans and other postretirement benefit
plans. They are:
Current cost of providing health care
benefits at each age that participants
might receive benefits
Demographic characteristics of plan
participants
Benefit coverage provided by Medicare,
other insurance, or other sources
Expected health care cost trend rate
 LO17-10

Postretirement Benefit Obligation

It is the discounted present value of

the benefits during retirement

APBO is reported in the balance sheet

only to the extent that it exceeds plan
assets
 LO17-10

Measuring the Obligation

Jessica Farrow (our illustration employee

from earlier in the chapter) during her
retirement years has a present value of
$10,842 as of the end of 2014. If the
benefits (and therefore the costs) relate to
an estimated 35 years of service and
10 of those years have been completed,
$10,842
the APBO would be 10 $3,098
Fraction =
EPBO 35
attributed to
APBO
service to date
 LO17-10

Measuring the Obligation (Continued)

If the assumed discount rate is 6%, a year

later the EPBO will have grown to $11,493
simply because of a years interest
accruing at that rate. The APBO, however,
is the portion of the EPBO related to
service up to a particular date.
Consequently, the APBO will have
increased both
$10,842 because
1.06 = of interest and
because the service fraction will be
$11,493
higher:
$11,49 11 $3,612
Fraction =
3 35
attributed to
APBO
EPBO service to date
 LO17-10

Measuring the Obligation (Continued)

The two elements of the increase in 2015

can be separated as follows:
APBO at the beginning of the year $3,09
Interest cost: $3,098 6% 1868
Service cost 328
APBO at the end of the year $3,61
2

( $11,493 1 35 ) portion of
EPBO attributed to the year
 LO17-10

Attribution

Process of assigning the cost of benefits

to the years that entitle the employees to
the benefits
Accomplished by assigning an equal
fraction of the EPBO to each year of
service from the employees date of
hire to the employees full eligibility
date
The date the employee has performed
all the service necessary to have earned
all the retiree benefits estimated to be
received by the employee
 LO17-10

Illustration: Determining the

Attribution Period
Jessica Farrow was hired by Global Communications at age 22 at the
beginning of 2005 and is expected to retire at the end of 2044 at age
61. The retirement period is estimated to be 20 years.
Globals employees are eligible for postretirement health care
benefits after both
reaching age 56 while in service and having worked 20 years.
Since Farrow becomes fully eligible at age 56 (the end of 2039),
retiree benefits are
Attributed to the 35-year period from her date of hire through that
date. Graphically, the situation can be described as follows:
 LO17-11

Measuring Service Cost

Primary difference between Pensions and Other

postretirement benefits
Accounting for Postretirement LO17-11

Benefit Plans
Other Than Pensions
To Record Postretirement Benefit
Journal Entry
Expense Debit Credit
Postretirement benefit XX
Plan expense XX
Amortization
assets of net gainOCI XX
APBO XX
Amortization of net lossOCI XX
Amortization of prior service cost XX
OCI
To Record Cash Funding of
Journal Entry
Plan Assets Debit Credi
Plan assets XX t
Cash (contribution to plan XX
Accounting for Postretirement LO17-11

Benefit Plans
Other Than Pensions (Continued)
To Record Gains and
Losses Journal Entry Debit Credit
Loss XX
OCIAPBO XX
or
APB XX
O GainOCI XX
 LO17-11

Determining the Postretirement

Benefit Obligation
Assume the actuary has estimated the net cost of retiree
benefits in each year of Jessica Farrows 20-year expected
retirement period to be the amounts shown in the calculation
below. She is fully eligible for benefits at the end of 2039 and
is expected to retire at the end of 2044.
 LO17-11

EPBO, APBO, and Service Cost in

2016
International Financial Reporting LO4-12

Standards
U.S. GAAP IFRS
Accounting for losses and Gains in Defined
Benefit Plans
We use different rates We use the same rate
for the interest cost on for both the interest cost
the defined benefit on the defined benefit
obligation and the obligation and the
interest revenue on the interest revenue on the
plan assets. plan assets.
OCI items in the OCI items in the
statement of statement of
comprehensive income comprehensive income
are gradually are not subsequently
amortized or recycled amortized out of OCI
out of OCI and into and into expense,
 LO17-12

International Financial Reporting

Standards (Continued)
($ in
Journal Entry Debit Credi
millions)
Net interest 6 t
Plan
cost assets 18
DBO 24

(6% [$400
300])
(6% $300: interest
income)
(6% $400: interest
cost)
 LO17-12

International Financial Reporting

Standards (Continued)
U.S. GAAP IFRS
Prior Service Cost
Prior service cost is Prior service cost is
reported as a separate combined with the
component of other current service cost
comprehensive income and reported within the
income statement.
 LO17-12

International Financial Reporting

Standards (Continued)
Journal Entry Debit Credi
Service (service cost-2015 plus XX t
cost $60)
DB (service cost- XX
O (past
DB 2015)
service 60
O cost)
 LO17-12

International Financial Reporting

Standards (Continued)
U.S. GAAP IFRS
Reporting Pension Expense
Pension expense is Reporting of pension
reported as a single net expense is divided into:
amount. The service cost
component, including
past service cost
The net interest
cost/income
component in the
income statement
Remeasurement
gains and losses as
other
 International Financial Reporting LO17-12

Standards (Continued)
U.S. GAAP ($ in
Journal Entry millions)
Debit Credi
Plan 3 t
assets
GainOCI ([10% 9% ] 3
$300)
Actual return = Expected return
10% = 9%
IFRS ($ in
Journal Entry millions)
Debit Credi
Plan 12 t
assets
Remeasurement gainOCI 12
([10% 6% ]
$300)
Actual return = High grade corporate bond rate
 LO17-12

International Financial Reporting

Standards (Continued)
U.S. GAAP ($ in
Journal Entry Debit Credi
millions)
LossOCI 23 t
PBO 23

IFRS ($ in
Journal Entry Debit Credi
millions)
Remeasurement 23 t
lossOCI
DBO 23
 LO17-12

International Financial Reporting

Standards (Continued)
 LO17-12

IFRSClassifying the Components

of the Net Pension Cost
 LO17-12

IFRSRecording the Components

of the Net Pension Cost
 LO17-12

IFRSRecording the Components

of the Net Pension Cost (Continued)
 LO17-12

IFRSReporting the Components

of the Net Pension Cost
End of Chapter
17