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					StIce | StIce |Skousen

 Employee Compensation -
Payroll, Pensions, and other
           Issues
                Chapter 17
 Intermediate Accounting
                       16E

  Prepared by: Sarita Sheth | Santa Monica College
       Learning Objectives
•   Account for payroll and payroll taxes, and
    understand the criteria for recognizing a
    liability associated with compensated
    absences.
•   Compute performance bonuses, and
    recognize the issues associated with
    postemployment benefits.
•   Understand the nature and
    characteristics of employer pension plans,
    including a detailed discussion of defined
    benefit plans.
        Learning Objectives
4.   Use the components of prepaid/accrued pension
     costs and changes in the components to
     compute the periodic expense associated with
     pensions.
5.   Prepare required disclosures associated with
     pensions, and understand the accounting
     treatment for pension settlements and
     curtailments.
6.   Describe the few remaining differences between
     U.S. pension accounting standards and the
     provisions of IAS 19.
7.   Explain the differences in accounting for
     pensions and postretirement benefits other than
     pensions.
Employee Compensation Event
           Line
   Payroll
   Payroll

       Compensated
       Compensated
         Absences
         Absences
              Stock Options
              Stock Options
              and Bonuses
               and Bonuses
    Ti
      m              Postemployment
                     Postemployment
          e              Benefits
                         Benefits
                              Pensions and
                               Pensions and
                             Postretirement
                              Postretirement
                           Benefits Other Than
                           Benefits Other Than
                                 Pensions
                                  Pensions
  Payroll and Payroll Taxes
 Social security and income tax legislation impose
 Social security and income tax legislation impose
            five taxes based on payrolls:
             five taxes based on payrolls:
• Federal old-age,           4. State unemployment
    survivors’, and
    disability (tax to both      insurance (tax to
    the employee and             employer only)
    employer)                5. Individual income tax
• Federal hospital               (tax to employee only
    insurance (tax to both
    employer and                 but withheld and paid
    employee)                    by employer)
• Federal
    unemployment
    insurance (tax to
    employer only)
               FICA
• Federal Insurance Contributions Act
  (FICA) – both the employers and
  employees are required to provide
  funds.
• Employer is required to withhold FICA
  taxes from each employee’s wages.
• In 2005, annual wages up to $90,000
  were subject to 6.20% of FICA tax.
                FICA
• FICA also includes Medicare tax for
  federal hospital insurance.
• This tax is separate from the
  previously discussed slide.
• The tax is applied to all wages earned
  and there is no upper limit.
• For 2005, the rate was 1.45% for both
  employer and employee.
                 FUTA
• Federal Social Security Act and the Federal
  Unemployment Tax Act (FUTA) established
  unemployment insurance plans.
• Employers are taxed quarterly; no tax levied
  on employees.
• Tax rate since on the first $7,000 of wages
  earned is 6.2%.
• Employer can apply for a credit limited to
  5.4% for taxes paid on state unemployment
  tax.
State Unemployment Insurance
• State unemployment tax laws (SUTA)
  differ across states. Most states only
  tax employers, but some both.
• As a result of the credit applied for
  federal taxes the amount of tax taking
  state rates into account does not
  exceed 0.8%.
Accounting for Payroll Taxes
• The employee’s gross earnings are an
  expense to the employer.
• Withholdings are an expense to the
  employee, not to the employer.
• Withholdings become a liability to the
  employer only because the employer
  keeps money earned by employees
  and pays obligations on their behalf.
Accounting for Payroll Taxes
 Assume salaries for Jan are $16,000. SUTA is 5.4%.
 Assume salaries for Jan are $16,000. SUTA is 5.4%.
    Withholdings are $1,600 and FICA is 7.65%.
     Withholdings are $1,600 and FICA is 7.65%.
The employer records for payroll and payroll taxes:
Salaries Expense                16,000
  FICA Taxes Payable                    1,224
  Employees Income Taxes Payable        1,600
  Cash                                 13,176

     To record payment of payroll and related
             employee withholdings.
Accounting for Payroll Taxes

 Payroll taxes are:
 Payroll taxes are:
 • An expense to the
 • An expense to the
   employer.
   employer.
 • A liability to the
 • A liability to the
   employer until
   employer until
   they are paid.
   they are paid.
Accounting for Payroll Taxes
 Assume salaries for Jan are $16,000. SUTA is 5.4%.
 Assume salaries for Jan are $16,000. SUTA is 5.4%.
    Withholdings are $1,600 and FICA is 7.65%.
     Withholdings are $1,600 and FICA is 7.65%.
Employer’s make this entry to record THEIR portion
of FICA and other payroll taxes:
Payroll Tax Expense                0.0765 x    2,216
                                    0.0765 x
  FICA Taxes Payable               $16,000
  1,224
                                    $16,000
                              0.054 x $16,000
                               0.054 x $16,000
                                0.008 x $16,000
  State Unemployment Taxes Payable x $16,000 864
                                 0.008
  FUTA Payable
         To
        128record payroll tax liability to the
                    employer.
Compensated Absences

Compensated absences
Compensated absences
 are payments by
 are payments by
 employers for:
 employers for:
• Vacations,
• Vacations,
• Holidays,
• Holidays,
• Sick days
• Sick days
• Other personal days
• Other personal days
   Compensated Absences
• At the end of the period, the firm has
  a liability for the earned by unused
  compensated absences.
• They must match the estimated
  amount of liability to current revenue.
• The tricky part comes when
  estimating how much should be
  accrued.
• FASB 43 provides guidance on this
  issue.
    Compensated Absences
FASB Statement No. 43 requires a
liability to be recognized for compensated
absences that—
•   Have been earned through services
    already rendered
•   Vest or can be carried forward to
    subsequent years
•   Are estimable and probable
Compensated Absences
      S&N Corporation has 20
    employees who are paid an
     average of $700 per week.
    During 2007, a total of 40
  vacation weeks was earned by
    all employees, but only 30
  weeks of vacation were taken.
   They took the remaining 10
     weeks of vacation in 2008
   when the average rate of pay
        was $800 per week.
   Compensated Absences
 Journal entry for 2007
 Journal entry for 2007
 Wages Expense        7,000
   Vacation Wages Payable   7,000
 To record accrued vacation wages ($700 x10 weeks).

 Journal entry for 2008
 Journal entry for 2008
Wages Expense          1,000
Vacation Wages Payable 7,000
  Cash                       8,000
To record payment at current rates of previously earned
           vacation time ($800 x 10 weeks).
Stock-Based Compensation and
          Bonuses
Photo Graphics, Inc. gives it store managers a 10%
   bonus based on individual store earnings. The
  bonus is to based on income after deducting the
   bonus, but before deduction for income taxes.
    Store X has income for the year of $100,000.
               Bonus calculation:
            B = 0.10($100,000 – B)
            B = $10,000 – 0.10B

           B + 0.10B = $10,000
                1.10B = $10,000
                    B = $9,091 (rounded)
  Postemployment Benefits
• Statement No 112, FASB extends
  recognition requirements to benefits
  that accrue to former or inactive
  employees after employment but
  before retirement.
• Examples of the types of benefits:
  –   Severance
  –   Benefits,
  –   Disability related benefits,
  –   Job training and counseling
       Stop and Think


Which ONE of the
following is NOT a
 criterion used in
    identifying a
 postemployment
benefit obligation?
    Accounting for Pensions
•   There are three main categories for
    pensions:
    –   Government plans, primarily Social
        Security
    –   Individual plans, such as individual
        retirement accounts (IRAs)
    –   Employer plans
 Nature and Characteristics of
  Employer Pension Plans
• Noncontributory- funded entirely by the
  employer
• Contributory - employee also contributes to
  the cost of the plan
• Defined Contribution -employer pays a
  periodic contribution which is administered
  by an independent third party.
• Defined Benefit- employee is guaranteed a
  specified retirement income.
• Vested Benefits- occurs when an employee
  has met certain requirements and is eligible
  to receive pension benefits at retirement.
      Defined Benefit Plans
                       Services
                                        Current
Employer
                  Wages and Salaries
                                       Employees
  Contributions




Pension                                 Retired
 Fund              Defined Benefits    Employees
Stop and Think


        Many companies are
         changing their plans
         from defined benefit
              to defined
          contribution. Why
         would employers do
                 this?
     Issues in Accounting for
       Defined Benefit Plans
•   The amount of net periodic pension
    expense to be recognized on the income
    statement.
•   The amount of pension liability or asset to
    be reported on the balance sheet.
•   Accounting for pension settlements,
    curtailments, and terminations.
•   Disclosures needed to supplement the
    amounts reported in the financial
    statements.
    Simple Illustration of Pension
              Accounting
•   Lorien Bach is 35 years old
•   She has worked for Thakkar for 10 years.
•   Her salary for 2007 was $40,000.
•   Pension payments begin after the employee turns 65.
•   The annual payment is equal to 2% of the highest
    salary times the number of years with the company.
•   Thakkar knows for certainty that Bach will live until
    she is 75.
•   Thakkar uses a discount rate of 10%.
•   As of January 1, 2008, Thakkar had a pension fund
    of $10,000.
•   During 2008 an additional $1,500 was contributed.
•    The fund earned $350 and the average return is
    12%.
   Simple Illustration
#1 Estimate Pension Obligation
#1 Estimate Pension Obligation

(2% x 10 years) x $40,000 = $8,000



                  The annual amount that
                 Bach should received on her
                         retirement
        Simple Illustration

       Accumulated Benefit Obligation (ABO)
       Accumulated Benefit Obligation (ABO)

 PV of a an
 annuity of
$8,000 per          X        X        X X X X X X X X
year for ten
                    $8,000

                             $8,000
                                      $8,000
                                               $8,000
                                               $8,000
                                                        $8,000




                                                                                            $8,000
                                                                 $8,000
                                                                          $8,000
                                                                                   $8,000
   years
deferred for
30 years is
  $2,817                                Accumulated benefit
               30 years                 obligation (ABO)
      Simple Illustration
      Projected Benefit Obligation (PBO)
      Projected Benefit Obligation (PBO)

  Assume Thakkar Company expects Bach’s
  Assume Thakkar Company expects Bach’s
    2007 salary of $40,000 to increase 5%
    2007 salary of $40,000 to increase 5%
         every year until retirement.
         every year until retirement.

(2% x 10 years) x $172,877 = $34,575 (rounded)

                      N = 30, is 5%
        PV = $40,000,The PBO I =the PV of ten
                     equal deferred PV of ten
                     The PBO is the payments
                     equal deferred payments
                       of $34,575 ($12,176).
                      of $34,575 ($12,176).
     Simple Illustration
        Accrued Pension Liability
        Accrued Pension Liability

PBO, January 1, 2005               $12,176
Pension fund at fair value,
                          January 1, 2005
     (10,000)
Accrued pension liability          $ 2,176
   FASB Statement No. 87 stipulates
    FASB Statement No. 87 stipulates
  that these two items be offset against
   that these two items be offset against
   one another and a single amount be
    one another and a single amount be
                  shown.
                  shown.
     Simple Illustration
            Interest Cost
             Interest Cost

   PBO,
Beginning of     Discount   Interest
  Period     x     Rate   = Cost
 $12,176     x     0.10   = $1,218
       Simple Illustration
  Service Cost
  Service Cost      Return on the Pension
                    Return on the Pension
                            Fund
                            Fund
 The impact of this
 extra year of service     Pension expense is
  is to increase the     reduced by the return
 December 31, 2008        on the pension fund
   PBO by $1,339.        for the year. Because
    Therefore, the         Thakkar expects a
service cost element       12% rate of return,
 of pension expense       the original $10,000
    for the year is       will have a return of
        $1,339.             $1,200 in 2008.
        Simple Illustration
                PBO, End of Year
                PBO, End of Year
             Service
  PBO,      cost and  Retirement      Change in
beginning + interest – benefits    ±   actuarial
 of year      cost       paid        assumptions

            Fair Value of Pension Fund
            Fair Value of Pension Fund

Fair value
    of     Employer   Retirement Actual return
 pension + contribu- – benefits ± on pension
  fund,      tions       paid        fund
beginning
 of year
     Simple Illustration
           Accrued Pension Liability
           Accrued Pension Liability

As of December 31, 2008, the PBO for Thakkar
As of December 31, 2008, the PBO for Thakkar
   is $14,733 and the total FVPF is $12,700
    is $14,733 and the total FVPF is $12,700
     ($10,000 + $1,200 return + $1,500 new
      ($10,000 + $1,200 return + $1,500 new
                 contributions).
                  contributions).
PBO, December 31, 2008                 $14,733
Pension fund at fair value,
                              December 31, 2008
  (10,000)
   Accrued pension liability           $ 2,176
      Simple Illustration
Thakkar would make the following entries for
2008:

Prepaid Expense                    1,357
  Prepaid/Accrued Pension Cost             1,357

Prepaid/Accrued Pension Cost      1,500
  Cash                                     1,500
                 Service cost ($1,339) + Interest
                 cost ($1,218) – Expected return
                            ($1,200)
                            New contributions
                             to pension fund
Comprehensive Illustration
   A Spreadsheet Approach

Net       Cash   Prepaid    PBO
Pension          Accrued
Expense          Pension
         The Basic Spreadsheet
                                     Formal Accounts               Memorandum Accounts
                                             Prepaid/   Periodic          Fair
                                Net          Accrued    Pension           Value    Unrecognized
                              Pension        Pension      Cost           of Plan   Prior Service
                              Expense Cash    Cost       Items     PBO   Assets        Cost

Beginning Balances
(a) Service Cost
(b) Interest Cost
(c) Actual Return
(d) Benefits Paid
(e) PSC Amortization
(g) Deferred Loss
(h) Amort. of Deferred Loss
Summary Journal Entries
(1) Accrual Pension
    Expense Accrual
(2) Annual Pension
     Contribution
(3) Minimum Liability
    Adjustment
Formal Accounts
                   Prepaid/   Periodic
    Net            Accrued    Pension
  Pension          Pension      Cost
  Expense   Cash     Cost      Items




 Left Side of Work Sheet
 Left Side of Work Sheet
     Formal Accounts
                         Prepaid/   Periodic
          Net            Accrued    Pension
        Pension          Pension      Cost
        Expense   Cash     Cost      Items

• Records total pension costs
  accrued.
• Debited for the sum of all
  periodic pension cost items.
      Formal Accounts
                          Prepaid/   Periodic
           Net            Accrued    Pension
         Pension          Pension      Cost
         Expense   Cash     Cost      Items

• Records cash expended for
  contributions to plan assets.
• Debited for actual amount of
  cash contributed to pension
  fund.
     Formal Accounts
                         Prepaid/   Periodic
          Net            Accrued    Pension
        Pension          Pension      Cost
        Expense   Cash     Cost      Items

• Reflects changes in net pension
  asset or liability.
• Debited for cash contributions
  to pension plan assets.
• Credited for net pension cost.
      Formal Accounts
                          Prepaid/   Periodic
           Net            Accrued    Pension
         Pension          Pension      Cost
         Expense   Cash     Cost      Items

• Records noncurrent asset arising
  from recognition of additional
  pension liability for unfunded
  pension plans.
• Account balance should not exceed
  the sum of unrecognized transition
  loss plus prior service costs.
Memorandum Accounts
Projected      Fair Value   Unrecognized
 Benefit       of Pension   Prior Service
Obligation        Fund          Cost




         Right Side of Work Sheet
         Right Side of Work Sheet
   Memorandum Accounts
   Projected       Fair Value   Unrecognized
    Benefit        of Pension   Prior Service
   Obligation         Fund          Cost

   Actuarial present value of pension benefits.
   Uses the benefits per year of service approach.
   Assumes future compensation levels.

                            Retirement Change in
PBO   PBO Service Interest
    =    +       +         – Benefits ± Actuarial
EoY BoY    Cost     Cost
                               Paid    Assumptions
   Memorandum Accounts
   Projected      Fair Value   Unrecognized
    Benefit       of Pension   Prior Service
   Obligation        Fund          Cost

• Amount that could be received from the sale
  of plan assets in a current sale between a
  willing buyer and seller.
• Increased by employer/employee
  contributions.
• Decreased by benefits paid.
                                        Actual
FVPF FVPA                   Benefits
     =     + Contributions–          ± Return
 EoY   BoY                   Paid
                                       on Assets
  Memorandum Accounts
 Projected     Fair Value   Unrecognized
  Benefit      of Pension   Prior Service
 Obligation       Fund          Cost


    When a pension plan is initially
    adopted or amended to provide
   increased benefits, employees are
granted additional benefits for services
 performed in years prior to the plan’s
       adoption or amendment.
Stop and Think


            What is the
        relationship between
        prior service cost and
         the measurement of
        the projected benefit
          obligation (PBO)?
   Thompson Electronics, Inc
      Pension Worksheet
                                   Prepaid/      Periodic
                    Net            Accrued       Pension
                  Pension          Pension       Expense
                  Expense   Cash     Cost         Items
Balance, 1/1/08                    $ (40,000 )




            Left Side of Work Sheet
            Left Side of Work Sheet
   Thompson Electronics, Inc
      Pension Worksheet
       Projected      Fair Value   Unrecognized
        Benefit       of Pension   Prior Service
       Obligation        Fund          Cost

Bal.   $(1,500,000)   $1,385,000     $75,000




             Right Side of Work Sheet
             Right Side of Work Sheet
    Thompson Electronics, Inc
    Pension Activity Info 2008
• Service cost as reported by actuaries….$75,000
• Contributions to pension plan………...$115,000
• Benefits paid to retirees………………. $125,000
• Fair value of pension fund
   at 12/31/08…………………………$1,513,5000
• Settlement interest rate             11.0%
• Long-term expected rate of return    10.0%
     Thompson Electronics, Inc
        Pension Worksheet
                                     Prepaid/     Periodic
                     Net             Accrued      Pension
                   Pension           Pension      Expense
                   Expense   Cash      Cost        Items
Bal. 1/1/08                         $ (40,000 )
(a) Service Cost                                  $ 75,000




               Left Side of Work Sheet
               Left Side of Work Sheet
       Thompson Electronics, Inc
          Pension Worksheet
         Projected       Fair Value   Unrecognized
          Benefit        of Pension   Prior Service
         Obligation         Fund          Cost
Bal.     $(1,500,000 )   $1,385,000       $75,000
(a)          (75,000 )




              Right Side of Work Sheet
              Right Side of Work Sheet
    Thompson Electronics, Inc
       Pension Worksheet
                                Prepaid/      Periodic
                 Net            Accrued       Pension
               Pension          Pension       Expense
               Expense   Cash     Cost         Items
Bal. 1/1/08                     $ (40,000 )
(a) Service Cost                              $ 75,000
(b) Interest Cost                              165,000




              Left Side of Work Sheet
              Left Side of Work Sheet
       Thompson Electronics, Inc
          Pension Worksheet
           Projected      Fair Value   Unrecognized
            Benefit       of Pension   Prior Service
           Obligation        Fund          Cost

Bal.    $(1,500,000 )    $1,385,000      $75,000
(a)          (75,000 )
(b)        (165,000 )




               Right Side of Work Sheet
               Right Side of Work Sheet
   Thompson Electronics, Inc
      Pension Worksheet
             Actual Return on the
             Actual Return on the
                Pension Fund
                 Pension Fund

Fair value of pension fund, 12/31/08 $1,513,500
Fair value of pension fund, 1/1/08    1,385,000
Increase in fair value               $ 128,500
Add benefits paid                       125,000
Deduct contributions made              (115,000)
   Actual return on the pension fund $ 138,500
    Thompson Electronics, Inc
       Pension Worksheet
                                 Prepaid/    Periodic
                Net              Accrued     Pension
              Pension            Pension     Expense
              Expense   Cash       Cost       Items
Bal. 1/1/08                    $ (40,000 )
(a) Service Cost                             $ 75,000
(b) Interest Cost                             165,000
(c) Actual Return                            (138,500 )




              Left Side of Work Sheet
              Left Side of Work Sheet
       Thompson Electronics, Inc
          Pension Worksheet
           Projected      Fair Value   Unrecognized
            Benefit       of Pension   Prior Service
           Obligation        Fund          Cost

Bal.    $(1,500,000 )    $1,385,000      $75,000
(a)          (75,000 )
(b)        (165,000 )
(c)                        138,500



                Right Side of Work Sheet
                Right Side of Work Sheet
    Thompson Electronics, Inc
       Pension Worksheet
                                 Prepaid/     Periodic
                 Net             Accrued      Pension
               Pension           Pension      Expense
               Expense    Cash     Cost        Items
Bal. 1/1/08                      $ (40,000)
(a) Service Cost                              $ 75,000
(b) Interest Cost                               165,000
(c) Actual Return   No entry on this side      (138,500)
(d) Benefits Paid      of work sheet




              Left Side of Work Sheet
              Left Side of Work Sheet
       Thompson Electronics, Inc
          Pension Worksheet
           Projected       Fair Value   Unrecognized
            Benefit        of Pension   Prior Service
           Obligation         Fund          Cost

Bal.    $(1,500,000)     $1,385,000
            $75,000
(a)          (75,000 )
(b)        (165,000 )
(c)                        138,500
(d)        125,000        (125,000 )

             Right Side of Work Sheet
             Right Side of Work Sheet
 Thompson Electronics, Inc
    Pension Worksheet
Amortization of Unrecognized Prior Service Cost
Amortization of Unrecognized Prior Service Cost
 Ten percent (15 employees) are expected to
 retire or quit with vesting privileges.
 N(N + 1)
            x D = Total future years of service
    2
 10(10 + 1)
     2      x 15 = 825

                                 15 employees
 150                              for 10 years
     x $75,000 = $13,636
 825
    Thompson Electronics, Inc
       Pension Worksheet
                                 Prepaid/       Periodic
                  Net            Accrued        Pension
                Pension          Pension        Expense
                Expense   Cash     Cost          Items
Bal. 1/1/08                      $ (40,000 )
(a) Service Cost                               $ 75,000
(b) Interest Cost                                165,000
(c) Actual Return                               (138,500)
(d) Benefits Paid
(e) PSC Amortization                             13,636

             Left Side of Work Sheet
             Left Side of Work Sheet
       Thompson Electronics, Inc
          Pension Worksheet
           Projected      Fair Value    Unrecognized
            Benefit       of Pension    Prior Service
           Obligation        Fund           Cost

Bal.    $(1,500,000 )    $1,385,000       $75,000
(a)          (75,000 )
(b)        (165,000 )
(c)                         138,500
(d)         125,000        (125,000 )
(e)                                       (13,636 )

              Right Side of Work Sheet
              Right Side of Work Sheet
    Thompson Electronics, Inc
       Pension Worksheet
                               Prepaid/      Periodic
  Left Side of
  Left Side of     Net         Accrued       Pension
  Work Sheet
  Work Sheet     Pension       Pension       Expense
                 Expense   Cash Cost          Items
Bal. 1/1/08                    $ (40,000)
(a) Service Cost                            $ 75,000
(b) Interest Cost                            165,000
(c) Actual Return                            (138,500)
(d) Benefits Paid
(e) PSC Amortization                           13,636
(1) Annual Pension
Expense Accrual $115,136        (115,136 )
    Thompson Electronics, Inc
       Pension Worksheet
                                     Prepaid/    Periodic
  Left Side of
  Left Side of       Net             Accrued     Pension
  Work Sheet
  Work Sheet       Pension           Pension     Expense
                   Expense    Cash     Cost       Items
Bal. 1/1/08                        $ (40,000)
(a) Service Cost                               $ 75,000
(b) Interest Cost                                165,000
(c) Actual Return                                (138,500)
(d) Benefits Paid
(e) PSC Amortization                               13,636
(1) Annual Pension
Expense Accrual    $115,136           (115,136 )
(2) Annual Pension
Contribution                (115,000) 115,000
       Thompson Electronics, Inc
          Pension Worksheet
           Projected      Fair Value    Unrecognized
            Benefit       of Pension    Prior Service
           Obligation        Fund           Cost
Bal.    $(1,500,000 )    $1,385,000       $75,000
(a)          (75,000 )
(b)        (165,000 )
(c)                         138,500
(d)        125,000         (125,000 )
(e)                                        (13,636 )
(1)
(2)
                           115,000

                   Right Side of Work Sheet
                   Right Side of Work Sheet
    Thompson Electronics, Inc
       Pension Worksheet
                                  Prepaid/    Periodic
                  Net             Accrued     Pension
                Pension           Pension     Expense
                Expense   Cash      Cost       Items
Bal. 12/31/08                    $ (40,136)


                           Only column added
                            on column added
                           Only the left side of
                            on the left side of
                              the work sheet
                             the work sheet

            Left Side of Work Sheet
            Left Side of Work Sheet
   Thompson Electronics, Inc
      Pension Worksheet
             Projected     Fair Value   Unrecognized
              Benefit      of Pension   Prior Service
             Obligation       Fund          Cost

12/31/08   $(1,615,000)   $1,513,500
           $61,364

Prepaid/Accrued Pension Cost 115,000
Prepaid/Accrued Pension Cost 115,000
  Cash
  Cash                                     115,000
                                           115,000
       To record 2005 contribution to the pension
       To record 2005 contribution to the pension
                      plan.
                       plan.

           Right Side of Work Sheet
           Right Side of Work Sheet
     Thompson Electronics, Inc
     Pension Activity Info 2009
•   Service cost as reported by actuaries….$87,000
•   Contributions to pension plan………....$75,000
•   Benefits paid to retirees………………. $132,000
•   Actual return on pension plan……….…$26,350
•   Actuarial change increasing PBO……...$80,000
•   Settlement interest rate             11.0%
•   Long-term expected rate of return    10.0%
Thompson Electronics, Inc
 Pension Worksheet 2009
 Deferral of Difference between
  Actual and Expected Return
                        Income         Balance
                       Statement        Sheet
Deferred gain         Inc pension   Inc net pension
 Debit net pension      expense          liability
      expense
 Credit net pension
      liability
Deferred loss       Dec net pension    Dec net pension
 Credit net pension       liability         expense
      expense
 Debit net pension
      liability
     Thompson Electronics, Inc
     Pension Activity Info 2010
•   Service cost as reported by actuaries.$115,000
•   Contributions to pension plan………....$80,000
•   Benefits paid to retirees………………. $140,000
•   Actual return on pension plan………..$175,500
•   Settlement interest rate              11.0%
•   Long-term expected rate of return     10.0%
Thompson Electronics, Inc
 Pension Worksheet 2010
     Corridor Amortization
• Corridor amount- the accumulated
  unrecognized pension gain/loss from prior
  years that is more than an amount defined
  by the FASB.
• Amortization is required only on a portion
  of the unrecognized net gain or loss that
  exceeds 10% of the greater of:
   – PBO, or
   – market-related value of plan assets at the
     beginning of the year.
    Corridor Amortization
• May use any amortization method
  that:
   – equals or exceeds straight-line
     amortization over remaining
     expected service years of covered
     employees, and
   – is consistently applied.
Stop and Think

       When would a company
         find itself exceeding
        the corridor amount?
Minimum Pension Liability
• Net amount of pension liability that must be
  reported for underfunded plans.
• Measured as difference between ABO and Fair
  Value of Plan Assets.




 Minimum Pension             ABO – FV Plan
     Liability  =              Assets
    Deferred Pension Cost
• An employer may be required to
  record an additional pension liability if
  they are applying the minimum
  liability provisions.
• FASB Statement No. 87 indicates that
  the offsetting charge should be to the
  Deferred Pension Cost account, which
  is an intangible asset.
      Deferred Pension Cost
      Clapton Corporation computes the following
          balances as of December 31, 2008:

  Accumulated benefit obligation          $1,250,000
  Fair value of the pension fund           1,140,000
  Accrued pension cost                        16,000
  Unrecognized prior service cost             80,000
                                        $110,000
     •The minimum pension liability is80,000
Deferred Pension Cost
Deferred Pension Cost
              ($1,250,000 – $1,140,000).80,000
Excess of Additional Pension Liability
Excess of Additional Pension Liability
 over Unrecognized Prior Service Cost 14,000
       Unrecognized pension liability
 over •An additionalPrior Service Costof14,000
  Additional Pension Liability           $94,000
                                               94,000
       ($110,000 – $16,000) would be recorded.94,000
   Additional Pension Liability
        To recognize additional pension liability.
        To recognize additional pension liability.
Disclosure of Pension Plans
     Statement No. 132 requires the
         following major disclosure
       requirements for most publicly
              traded companies:
 –   A reconciliation between the beginning
     and ending balances for the projected
     benefit obligation
 –   A reconciliation between the beginning
     and ending balances in the fair value of
     the pension fund
Disclosure of Pension Plans
 3. A disclosure of the accumulated benefit
    obligation when the ABO exceeds the fair value
    of the pension fund
 4. The funded status of the plans, the amounts
    not recognized in the balance sheet, and the
    amount recognized in the balance sheet
 5. The components of pension expense for the
    period
 6. Any effects on the other comprehensive income
    section as a result of changes in the additional
    pension liability
Disclosure of Pension Plans

 7. The assumptions used relating to (a) discount
    rate, (b) rate of compensation increase, and (c)
    expected long-term rate of return on the
    pension fund
 8. Disclosure of the percentage of the different
    types of investments held in the pension fund
    along with a description of the investment
    strategy
 9. For each of the next 5 years, disclose an
    estimate of the amount of cash to be paid in
    benefits and the amount of cash to be
    contributed by the company to the pension fund.
 10. Certain information about postretirement
     benefits
Settlements and Curtailments
• Settlement occurs when an employer takes
  an irrevocable action that relieves the
  employer of primary responsibility for all or
  part of the obligation.
• Curtailment arises from an event that
  significantly reduces the benefits that will
  be provided for present employees’ future
  services.
  – Termination of an employee earlier than
    expected
  – Termination or suspension of a pension plan
      International Pension
      Accounting Standards
 IFRS 19 was revised to require that a company’s
  IFRS 19 was revised to require that a company’s
  pension obligation be measured using the same
   pension obligation be measured using the same
      approach as is used under U.S. GAAP.
       approach as is used under U.S. GAAP.

  IFRS 19 does not include any provision for the
   IFRS 19 does not include any provision for the
   recognition of an additional minimum liability.
    recognition of an additional minimum liability.

   IFRS 19 does not allow the recognition of a net
    IFRS 19 does not allow the recognition of a net
  pension asset unless the amount is less than the
  pension asset unless the amount is less than the
discounted present value of any employee refunds to
discounted present value of any employee refunds to
  the company plus any anticipated reductions in
   the company plus any anticipated reductions in
           future pension contributions.
            future pension contributions.
    Postretirement Benefits other
            than Pensions
•    For some firms, other postretirement
     benefits like healthcare for retirees
     represent a bigger economic obligation
     than pension obligations.
•    Accounting is similar to the accounting for
     a defined benefit pension plan. Some
     differences include:
    •   Often not a function of salary level.
    •   They may not be funded.
    •   There is no minimum liability provision.

				
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