CH20 PDF

Intermediate Accounting
IFRS Edition – 2nd

Donald E. Kieso, Jerry J. Weygandt , Terry D. Warfield
Chapter - 20
Accounting for Pensions and Postretirement Benefits

ANSWERS TO QUESTIONS
**1. A private pension plan is an arrangement whereby a company undertakes to provide its retired
employees with benefits that can be determined or estimated in advance from the provisions of a
document or from the company’s practices.
In a contributory pension plan the employees bear part of the cost of the stated benefits
whereas in a noncontributory plan the employer bears the entire cost.
**2. A defined contribution plan specifies the employer’s contribution to the plan usually based on a
formula, which may consider such factors as age, length of service, employer’s profit, or
compensation levels.
A defined benefit plan specifies a determinable pension benefit that the employee will receive at
a time in the future. The employer must determine the amount that should be contributed now to
provide for the future promised benefits.
In a defined contribution plan, the employer’s obligation is simply to make a contribution to the
plan each year based on the plan formula. The benefit of gain or risk of loss from assets con-
tributed to the plan is borne by the employee. In a defined benefit plan, the employer’s obli-
gation is to make sufficient contributions each year to provide for the promised future benefits.
Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the
promised benefits.
**3. The employer is the organization sponsoring the pension plan. The employer incurs the costs
and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating
the cost of the pension plan to the proper accounting periods, (2) measuring the amount of
pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in
the financial statements.
The pension fund or plan is the entity which receives the contributions from the employer, adminis-
ters the pension assets, and makes the benefit payments to the pension recipients. Accounting
for the fund involves identifying receipts as contributions from the employer sponsor, income from
fund investments, and computing the amounts due to individual pension recipients. Accounting for
the pension costs and obligations of the employer is the topic of this chapter; accounting for the
pension fund is not.
**4. When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a
funding agency for the purpose of meeting pension benefits when they become due. When the
term “fund” is used as a verb, it means to pay over to a funding agency (as to fund future pension
benefits or to fund pension cost).
**5. An actuary’s role is to ensure that the company has established an appropriate funding pattern to
meet its pension obligations, to make predictions and assumptions about future events and
conditions that affect pension costs, and to assist the accountant in measuring facets of the pen-
sion plan that must be reported (costs, liabilities and assets). In order to determine the company’s
pension obligation, the actuary must first determine the expected benefits that will be paid in the
future. To accomplish this requires the actuary to make actuarial assumptions, which are esti-
mates of the occurrence of future events affecting pension costs, such as mortality, withdrawals,
disablement and retirement, changes in compensation, and changes in discount rates to reflect
the time value of money.
**6. In measuring the amount of pension benefits under a defined benefit pension plan, an actuary
must consider such factors as mortality rates, employee turnover, interest and earnings rates,
early retirement frequency, and future salaries.
1
Questions Chapter 20 (Continued)
**7. One measure of the pension obligation is the vested benefit obligation. This measure uses only
current salary levels and includes only vested benefits; that is, benefits the employee is already
entitled to receive even if the employee renders no additional services under the plan.
A company’s accumulated benefit obligation is the actuarial present value of benefits attributed
by the pension benefit formula to service before a specified date and is based on employee
service and compensation prior to that date. The accumulated benefit obligation differs from the
defined benefit obligation in that it includes no assumption about future compensation levels. The
defined benefit obligation is based on vested and nonvested services using future salaries.
**8. Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by
the employer to the pension fund in any period; pension funding serves as the basis for expense
recognition under the cash basis.
Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize

pension cost in the same period in which the company receives benefits from the services of its
employees.
Not infrequently, the amount which an employer must fund for pension purposes during a particular
period is unrelated to the economic benefits derived from the pension plan in that period. Cash-
basis accounting recognizes the amount funded as periodic pension cost and the amount funded
may be discretionary and vary widely from year to year. Funding is a matter of financial
management, based on working capital availability, tax considerations, and other matters
unrelated to accounting considerations.
9. The net defined benefit obligation (asset) is the deficit or surplus related to a defined pension
plan. The deficit or surplus is the defined benefit obligation less the fair value of plan assets (if
any). The deficit or surplus is often referred to as the funded status of the plan. If the defined
benefit obligation is greater than the plan assets, the pension plan has a deficit. Conversely if the
defined pension obligation is less than the plan assets, the pension plan has a surplus.
10. The three components of the change in the net benefit obligation (asset) and their reporting are:
Service cost. Service cost is either current service cost or past service cost. Current service cost
is the increase in the defined benefit obligation from employee service in the current period. Past
service cost is the change in the present value of the defined benefit obligation for employee
service for prior periods -- generally resulting from a plan amendment (for example, changes to
the plan). This component is reported in the statement of comprehensive income in the operating
section of the statement and affects net income.
Net interest. Net interest is the net amount computed by multiplying the discount rate by the plan
assets and the defined benefit obligation. If the plan has a net defined benefit obligation at the
end of the period, the company reports interest expense. Conversely if it has a net defined
benefit asset, it reports interest revenue. This approach is justified on the basis of its simplicity
and that any financing costs should be based on the funded status of the plan. This amount is
often shown below the operating section of the income statement in the financing section and
affects net income.
Remeasurements. Remeasurements are gains and losses related to the defined benefit
obligation (changes in discount rate or other actuarial assumptions) and gains or losses on the
fair value of the plan assets (actual rate of return less interest revenue included in the finance
component). This component is reported in other comprehensive income, net of tax. These
remeasurement gains or losses therefore affect comprehensive income but not net income.
2
11. The components of pension expense are:
(1) Service cost component—the actuarial present value of benefits attributed by the pension
benefit formula to employee service during the period, including past service costs
(amendments and cutailments).
(2) Interest expense component—the increase in the defined benefit obligation as a result of
the passage of time, computed as the discount rate multiplied by the defined benefit
obligation.
(3) Interest revenue component—interest earned on the plan assets by multiplying the
discount rate by the plan assets.
Note to instructor: The net of interest expense and interest revenue is referred to as net interest.
Any difference between interest revenue and the actual return on plan assets is recorded in other
comprehensive income, not in pension expense.
12. The service cost component of pension expense is determined as the actuarial present value
of benefits attributed by the pension benefit formula to employee service during the period. The
plan’s benefit formula provides a measure of how much benefit is earned and, therefore, how
much cost is incurred in each individual period. The IASB concluded that future compensation
levels had to be considered in measuring the present obligation and periodic pension expense if
the plan benefit formula incorporated them.
13. Net interest is defined as the amount that accrues by multiplying the net defined benefit
obligation by the discount rate (using defined benefit obligation and the pension asset balances
as of the beginning of the year. The discount rate is based on the yields of high-quality bonds
with terms consistent with the company’s pension obligation. Net interest is then computed as
indicated in the following equation.
Net Interest = [Defined Benefit Obligation X Discount Rate] – [Plan Assets X Discount Rate]
Because payment of the pension obligation is deferred, companies record the pension liability
on a discounted basis. As a result, the liability accrues interest over the service life of the
employee (passage of time), which is essentially interest expense. Similarly, companies earn a
return on plan assets. That is, a company assumes that it earns interest based on multiplying
the discount rate by the plan assets. Net interest is a component of pension expense, which is
reported in net income. Note that the actual return on plan assets may differ from the assumed
interest revenue computed, resulting in an unrealized gain or loss on plan assets. These gains
or losses are recorded in other comprehensive income.
14. Computation of actual return on plan assets

Fair value of plan assets at end of period $10,150,000
Deduct: Fair value of plan assets at beginning of period 9,200,000
Increase in fair value of assets 950,000
Deduct: Contributions to plan during the period $1,000,000
Less benefits paid during the period 1,400,000 (400,000)
Actual return on plan assets $ 1,350,000
3
15. Service cost is the actuarial present value of benefits attributed by the pension benefit formula to
employee service during the period. Actuaries compute service cost at the present value of
the new benefits earned by employees during the year. Past service cost is the change in the
defined benefit obligation (either positive or negative) resulting from a plan amendment or
curtailment. Also included in past service costs are the reduction in benefits, arising from
curtailments – a significant reduction in the number of employees covered by the plan. The cost of
the retroactive benefits is the increase in the defined benefit obligation at the date of the
amendment and is recognized in pension expense in the period of the change.
16. When a defined benefit plan is either initiated or amended, credit is often given to employees for
years of service provided before the date of initiation or amendment. The cost of these retroactive
benefits are referred to as past service costs. Employers grant retroactive benefits because they
expect to receive benefits in the future. Also included in past service costs are the reduction in
benefits, arising from curtailments – a significant reduction in the number of employees covered by
the plan. The cost of the retroactive benefits is the increase in the defined benefit obligation at the
date of the amendment and is recognized in pension expense in the period of the change.
17. Also included in past service costs are the reduction in benefits, arising from curtailments. A
curtailment is a significant reduction in the benefit obligation due to a significant reduction in the
number of employees covered by the plan (for example, due to a restructuring or down-sizing of
operations). The curtailments are recognized in pension expense in the period of the change.
18. Sarah is not correct in her assertion. Remeasurements arise from sudden and large changes in
the fair value of plan assets or changes in actuarial assumptions that affect the amount of the
defined benefit obligation. Remeasurements are recognized in other comprehensive income (and
they are never “recycled” into net income in subsequent periods). Thus, remeasurements do not
affect pension expense and net income. The rationale for this reporting is that the predictive
nature of remeasurements is much different than the other two components of pension cost --
service cost and net interest.
19. An asset gain occurs when the actual return on the plan assets is greater than the interest
revenue on plan assets while an asset loss occurs when the actual return is less than the
interest revenue on the plan assets.
20. Liability gains and losses are unexpected gains or losses from changes in the defined benefit
obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting
from unexpected increases) are recognized in other comprehensive income in the Other
Comprehensive Income account (along with asset gains and losses). They are accumulated from
year to year Accumulated Other Comprehensive Income and are not recycled to net income in
subsequent periods.
21. If pension expense recognized in a period exceeds the current amount funded, a liability account
referred to as Pension Liability arises; the current portion is reported as a current liability, if due
in 12 months. Otherwise, report as non-current.
If the current amount funded exceeds the amount recognized as pension expense, an asset
account referred to as Pension Asset arises; it is reported in the other assets section. Often, one
general account is used, referred to as Pension Asset/Liability. If it has a credit balance, it is
identified as a liability; if a debit balance, it is an asset.
4
*22. Bill is not correct. Liability gains and losses, although not included in pension expense, are
recorded in other comprehensive income in the period that they arise. Total comprehensive
income is comprised of net income (including pension expense) and other comprehensive
income. Thus, total comprehensive income will include the gains and losses. A similar analysis
applies to asset gains and losses.
*23. Jacob Inc. would report a pension liability of €27,000 (€125,000 – €98,000).
*24. Joshua Co. would report a pension asset of £10,000 (£345,000 – £335,000).
Note: The liability gain is recognized in the defined benefit obligation and is reflected in the net
pension asset.
*25. (a) A contributory plan is a pension plan under which employees contribute part of the cost.
In some contributory plans, employees wishing to be covered must contribute; in other
contributory plans, employee contributions result in increased benefits.
(b) Vested benefits are benefits for which the employee’s right to receive a present or future
pension benefit is no longer contingent on remaining in the service of the employer.
(c) Retroactive benefits are benefits granted in a plan amendment (or initiation) that are
attributed by the pension benefit formula to employee services rendered in periods prior to
the amendment.
*26. Compromises by the IASB to full capitalization or recognition in the financial statements of
relevant pension data resulted in nonrecognition of the defined benefit obligation and plan assets
on a gross basis. These unrecognized items (as well as changes in the items during the period)
are disclosed in a separate schedule in such a way that the total obligation and funded status
(either over- or underfunded) of the pension plan are reconciled to the pension asset/liability
reported in the statement of financial position by acknowledging the unrecognized pension
elements (defined benefit obligation and plan assets).
27. Postretirement benefits other than pensions include healthcare and other welfare benefits
provided to retirees, their spouses, dependents, and beneficiaries. The other welfare benefits
include life insurance offered outside a pension plan, dental care as well as medical care, eye
care, legal and tax services, tuition assistance, day care, and housing activities.
28. The major differences between pension benefits and postretirement benefits are listed below:
Differences between Postretirement Healthcare Benefits and Pensions
Item Pensions Healthcare Benefits

Funding Generally funded. Generally NOT funded.
Benefit Well-defined and level dollar amount. Generally uncapped and great
variability.
Beneficiary Retiree (maybe some benefit to Retiree, spouse, and other
surviving spouse). dependents.
Benefit Payable Monthly. As needed and used.
Predictability Variables are reasonably predictable. Utilization difficult to predict.
Level of cost varies geographically
and fluctuates over time.
Additionally, although healthcare benefits are generally covered by the fiduciary and reporting
standards for employee benefit funds, in many jurisdictions the stringent minimum vesting,
participation, and funding standards that apply to pensions do not apply to healthcare benefits.
5
29. The underlying concepts for the accounting for postretirement benefits are similar between U.S.
GAAP and IFRS—both U.S. GAAP and IFRS view pensions and other postretirement benefits as
forms of deferred compensation. Other similarities include: (1) IFRS and U.S. GAAP separate
pension plans into defined contribution plans and defined benefit plans. The accounting for
defined contribution plans is similar. (2) Both IFRS and U.S. GAAP compute unrecognized past
service costs (PSC) (referred to as prior service cost in U.S. GAAP) in the same manner. (3)
Both U.S. GAAP and IFRS include interest expense on the liability in pension expense.
Regarding asset returns, IFRS reduces pension expense by the amount of interest revenue
(based on the discount rate times the beginning fair value of pension assets).
Differences include: (1) IFRS recognizes past service cost as a component of pension expense in
income immediately. U.S. GAAP amortizes PSC over the remaining service lives of employees.
(2) U.S. GAAP includes an asset return component based on the expected return on plan assets;
(3) Under IFRS, companies recognize both liability and asset losses (referred to as
remeasurements) in other comprehensive income. These gains and losses are not ‘recycled’ into
income in subsequent periods. U.S. GAAP recognizes liability and asset gains and losses in
“Accumulated other comprehensive income” and amortized these amounts to income over
remaining service lives, using the “corridor approach”.
30. The IASB and the FASB have been working collaboratively on a postretirement benefit project.
The recent amendments issued by the IASB moves IFRS closer to U.S. GAAP with respect to
recognition of the funded status on the statement of financial position. However, as illustrated in
the “About the Numbers” section, significant differences remain in the components of pension
expense. The FASB is expected to begin work on a project, which will reexamine expense
measurement of postretirement benefit plans. The FASB likely will consider the recent IASB
amendments in this area, which could lead to a converged standard.
6
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 20-1
Service cost HK$316,000,000

Interest on DBO 342,000,000
Interest revenue on plan assets (371,000,000)
Pension expense HK$287,000,000
BRIEF EXERCISE 20-2
Ending plan assets €2,000,000

Beginning plan assets (1,680,000)
Increase in plan assets 320,000
Deduct: Contributions €120,000
Less benefits paid 200,000 (80,000)
Actual return on plan assets € 400,000
BRIEF EXERCISE 20-3
UDDIN COMPANY
General Journal Entries Memo Record
Pension Defined
Pension Asset/ Benefit Plan
Items Expense Cash Liability Obligation Assets
1/1/15 250,000 Cr. 250,000 Dr.
Service cost 27,500 Dr. 27,500 Cr.
Interest expense 25,000 Dr. 25,000 Cr.
Interest revenue 25,000 Cr. 25,000 Dr.
Contributions 20,000 Cr. 20,000 Dr.
Benefits 17,500 Dr. 17,500 Cr.
Journal entry 27,500 Dr. 20,000 Cr. 7,500 Cr.
12/31/15 7,500 Cr. 285,000 Cr. 277,500 Dr.
7
BRIEF EXERCISE 20-4
Pension Expense ..................................................... 61,000,000

Pension Asset/Liability ................................... 9,000,000
Cash .................................................................. 52,000,000
BRIEF EXERCISE 20-5
Pension expense
Service cost (current)........................................................ $ 23,000
Past service cost ............................................................... 120,000
Net interest ......................................................................... 8,000
$151,000
BRIEF EXERCISE 20-6
Current service cost .......................................................... €26,000

Past service cost ............................................................... (125,000)
Interest expense ................................................................ 9,000
Interest revenue ................................................................. (2,500)
Pension expense ............................................................... (€92,500)
BRIEF EXERCISE 20-7
Actual return ...................................................................... €1,500

Interest revenue ................................................................. (2,500)
Asset loss .......................................................................... €1,000
The asset loss will be recorded in other comprehensive income in the

statement of comprehensive income.
8
12
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Copyright © 2014 John Wiley & Sons, Inc.
BRIEF EXERCISE 20-8

Refer to the worksheet below for a summary of the pension measurement for 2015.
(a) Pension expense: R$62,000

(b) Pension assets at 12/31/15: R$3,110,000
(c) Total pension losses: R$428,000 (R$14,000 asset; R$414,000 liability). The losses for 2015 are reported in other comprehensive income;
the ending balance in accumulated OCI is reported in shareholders’ equity.
Annual
Pension Pension Defined Benefit
Items Expense Cash OCI - Gain/Loss Asset/Liability Obligation Plan Assets
Balance, January
1, 2015 200,000 Cr. 3,100,000 Cr. 2,900,000 Dr.
Kieso, IFRS, 2/e, Solutions Manual

Benefits 150,000 Dr. 150,000 Cr.
Asset Loss
(174,000 – 160,000) 14,000 Dr. 14,000 Cr.
Liability Loss 414,000 Dr. 414,000 Cr.*
Journal entry for
2015 62,000 Dr. 200,000 Cr. 428,000 Dr. 290,000 Cr.
(For Instructor Use On
Accumulated OCI
12/31/14 0
Balance, Dec. 31,
2015 428,000 Dr. 490,000 Cr. 3,600,000 Cr. 3,110,000 Dr.
*R$3,600,000 – (R$3,100,000 + R$50,000 + R$186,000 – R$150,000)
9
BRIEF EXERCISE 20-9
Statement of Comprehensive Income
Revenues ............................................................................. €125,000

Expenses ............................................................................. 85,000
Pension expense ................................................................. 14,000
Net income ........................................................................... 26,000
Other comprehensive income
Actuarial loss on defined
benefit plan ....................................................................... 750
Total comprehensive income ............................................. € 25,250
BRIEF EXERCISE 20-10
Defined benefit obligation ........................................................... €(510,000)

Plan assets at fair value ............................................................... 322,000
Pension asset/liability (funded status) ....................................... €(188,000)
Service cost .................................................................................. $40,000

Interest expense ........................................................................... 52,400
Interest revenue ............................................................................ (26,900)
Postretirement expense ............................................................... $65,500
Postretirement expense ................................................ 240,900

Cash ........................................................................ 160,000
Postretirement Asset/Liability .............................. 80,900
10
SOLUTIONS TO EXERCISES
EXERCISE 20-1 (15–20 minutes)
(a) Computation of pension expense:

Service cost ..................................................... $60,000
Interest expense ($500,000 X .10) .................. 50,000
Interest revenue ............................................... (15,000)
Pension expense for 2012 .............................. $95,000
(b) Pension Expense .................................................... 95,000

Cash .................................................................. 90,000
Pension Asset /Liability ................................... 5,000
Computation of pension expense:

Service cost ............................................................. €90,000
Interest expense ($700,000 X 10%) ........................ 70,000
Interest revenue on plan assets............................. (64,000)
Pension expense for 2015 ...................................... €96,000
11
2/e, Solutions Manual
VELDRE COMPANY
Pension Worksheet—2015
Annual Cash Pension Defined Plan Assets
(For Instructor Use Only)
Pension Asset/Liability Benefit

Items Expense Obligation
Balance, January 1, 2015 60,000 Cr. 700,000 Cr. 640,000 Dr.
Interest expense* 70,000 Dr. 70,000 Cr.
Interest revenue** 64,000 Cr. 64,000 Dr.
Kieso, IFRS,

Journal entry for 2015*** 96,000 Dr. 105,000 Cr. 9,000 Dr.
Balance, Dec. 31, 2015 51,000 Cr. 820,000 Cr. 769,000 Dr.
*€70,000 = €700,000 X 10%.

**€640,000 X 10%
***Pension Expense ................................................... 96,000

***Pension Asset/Liability ......................................... 9,000
Cash .............................................................. 105,000
12
20-
16
20-
BOUDREAU INC.
Annual Pension Defined
Balance, January 1, 2015 490,000 Cr. 490,000 Dr.

Journal entry, December 31 40,000 Dr. 25,000 Cr. 15,000 Cr.
Balance, December 31, 2015 15,000 Cr. 535,800 Cr. 520,800 Dr.
*£39,200 = £490,000 X .08.

**£39,200 = £490,000 X .08.
13
(a) Computation of Actual Return on Plan Assets
Fair value of plan assets at 12/31/15........................ ₺ 2,725,000

Fair value of plan assets at 1/1/15............................ (2,400,000)
Increase in fair value of plan assets ........................ 325,000
Deduct: Contributions to plan during 2015 ............ ₺280,000
Less benefits paid during 2015 ................ 350,000 (70,000)
Actual return on plan assets for 2015 ..................... ₺ 395,000
(b) Asset Gain = [(₺2,400,000 X 7%) – ₺395,000] = ₺227,000.

The gain is reported in other comprehensive income in the statement
of comprehensive income.
14
18
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YANG CORP.
Prior service cost 120,000 Dr. 120,000 Cr.
Balance, Jan. 1, 2015 680,000 Cr. 546,200 Dr.

Journal entry for 2015 190,042 Dr. 65,000 Cr. 125,042 Cr.
*¥61,200 = ¥680,000 X .09.
**¥49,158 = ¥546,200 X .09.

15
(a)
Annual
Pension Pension Defined Benefit
Expense Cash OCI - Gain/Loss Asset/Liability Obligation Plan Assets
Kieso, IFRS,
Balance, January 1, 2015 1,400,000 Cr. 6,300,000 Cr. 4,900,000 Dr.

Interest expense ($6,300,000
X .07) 441,000 Dr. 441,000 Cr.
Interest revenue ($4,900,000
X .07) 343,000 Cr. 343,000 Dr.
Benefits 300,000 Dr. 300,000 Cr.
Asset Loss ($343,000 –
$295,000) 48,000 Dr. 48,000 Cr.
Liability Loss 89,000 Dr. 89,000 Cr.
Journal entry for 2015 218,000 Dr. 400,000 Cr. 137,000 Dr. 45,000 Dr.
Accumulated OCI 12/31/14 0

Balance, Dec. 31, 2015 137,000 Dr. 1,355,000 Cr. 6,650,000 Cr. 5,295,000 Dr.
16
20-
EXERCISE 20-7 (Continued)
(b) Pension Expense ........................................................ 218,000

OCI – G/L ...................................................................... 137,000
Pension Asset/Liability ............................................... 45,000
Cash .............................................................. 400,000
(c) The pension loss of $137,000 ($48,000 asset loss; $89,000 liability loss)
is recognized in other comprehensive income. The balance at 12/31/15
of $137,000 is reported in accumulated other comprehensive income in
shareholders’ equity.
(a) Note to financial statements disclosing components of 2015 pension

expense:
Note X: Net pension expense for 2015 is composed of the following
components of pension cost:
Service cost .............................................................. € 94,000

Interest expense ....................................................... 164,220
Interest revenue (€2,278,329 X .06) ......................... (136,700)
Pension expense .............................................. € 121,520
(b) Other comprehensive income, 2015
Asset loss (€136,700 – €130,000) ............................ € 6,700

Other comprehensive loss ...................................... € 6,700
Comprehensive income, 2015

Net income ................................................................ € 35,000
Other comprehensive loss ...................................... 6,700
Comprehensive income ........................................... € 28,300
17
(c) Accumulated OCI at December 31, 2015 is €6,700; this amount is

comprised of the following:
Gain/Loss
Balance Jan. 1, 2015 € 0
Asset loss* 6,700 Dr.
Balance Dec. 31, 2015 € 6,700 Dr.
*€136,700 – €130,000.
18
22
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Pension OCI— Asset/ Benefit
Expense Cash Gain/Loss Liability Obligation Plan Assets
1
Balance, Jan. 1, 2015 423,780 Cr. 2,618,780 Cr. 2,195,000 Dr.2
Benefits 140,000 Dr. 140,000 Cr.

Asset loss 6,700 Dr. 6,700 Cr.
Journal entry for 2015 121,520 Dr. 93,329 Cr. 6,700 Dr. 34,891 Cr.
Accumulated OCI, Dec. 31, 2014 0
Balance, Dec. 31, 2015 6,700 Dr. 458,671 Cr. 2,737,000 Cr. 2,278,329 Dr.
1
€2,737,000 + €140,000 – €164,220 – €94,000.
2
€2,278,329 + €140,000 – €93,329 – €130,000.
19
EXERCISE 20-9 (20-25 minutes)
(a) WEBB CORP

Pension Worksheet
Items Expense Cash Gain/Loss Liability Obligation Plan Assets
Balance, Jan. 1, 2015 120,000 Cr. 600,000 Cr. 480,000 Dr.

Asset gain*** 26,200 Cr. 26,200 Dr.
Liability increase 76,000 Dr. 76,000 Cr.
Kieso, IFRS,

Balance, December 31, 2015 49,800 Dr. 168,000 Cr. 717,000 Cr. 549,000 Dr.
*$36,000 = $600,000 X .06.

**$480,000 X .06.
***$55,000–$28,800
(b) Journal Entry
Pension Expense .................................................................. 97,200
Other Comprehensive Income (G/L) ................................... 49,800
Cash .......................................................................... 99,000
Pension Asset /Liability ........................................... 48,000
20
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(a) Pension expense for 2015 composed of the following:

Service cost ....................................................... £56,000
Interest expense
(9% X £900,000).............................................. 81,000
Interest on plan assets
(£600,000 X 9%)............................................. (54,000)
Pension expense ....................................... £83,000
(b) Pension Expense ...................................................... 83,000

Pension Asset /Liability ............................................ 62,000
Cash .................................................................... 145,000
(c) Income Statement

Pension expense ............................................... £83,000
Comprehensive Income Statement

Net income ................................................................. £ XXXX
Other comprehensive income
Asset gain (£60,000 – £54,000) .............................. 6,000
Comprehensive income ............................................ £ XXXX
Statement of Financial Position
Liabilities
Pension liability ................................................. £232,000*
*Defined benefit obligation £(1,037,000)
Plan assets 805,000
Pension liability £ (232,000)
Defined Benefit
Partial worksheet Plan Assets Obligation
Bal. January 1, 2015 £600,000 £ 900,000
Service cost 56,000
Interest expense 81,000
Actual return 60,000
Contribution 145,000
Bal. December 31, 2015 £805,000 £1,037,000
Equity
Accumulated OCI (G/L) Jan. 1, 2015 £40,000 (Loss)
Asset gain 6,000
Accumulated OCI (PSC) Dec. 31, 2015 £34,000 (Loss)
21
(a) Pension expense for 2015 composed of the following:

Service cost .................................................... € 77,000
Interest expense
(10% X €1,500,000) ..................................... 150,000
Interest revenue
(10% X €800,000) ........................................ (80,000)
Pension expense ............................................ € 147,000
(b) Pension Expense ................................................... 147,000

Pension Asset /Liability ......................................... 303,000
Cash ................................................................ 250,000
Other Comprehensive Income (G/L) ............. 200,000
(To record pension expense and
employer’s contribution)
(c) Income Statement:

Pension expense ............................................ € 147,000

Net income ...................................................... € XXXX
Other comprehensive income (loss)
Liability gain............................................. 200,000
Comprehensive income ........................................ € XXXX

Liabilities
Pension liability ...................................... € 397,000*
Equity
Accumulated OCI (G/L) .................................. € 200,000
*Defined benefit obligation, Dec. 31, 2015 €(1,527,000)

Plan assets, Dec. 31, 2015 1,130,000
Pension liability € (397,000)
22
26
20-
Note to instructor: To prove the amounts reported, a worksheet might be prepared as follows:

Annual Defined
Pension OCI— Pension Benefit
Items Expense Cash Gain/Loss Asset/Liability Obligation Plan Assets
Balance, Jan. 1, 2015 700,000 Cr. *1,500,000 Cr. 800,000 Dr.

Liability gain 200,000 Cr. 200,000 Dr.
Journal entry, for 2015 147,000 Dr. 250,000 Cr. 200,000 Cr. 303,000 Dr.
Balance, Dec. 31, 2015 200,000 Cr. 397,000 Cr. 1,527,000 Cr. 1,130,000 Dr.
*€1,500,000 X 10%.
**€800,000 X 10%.
23
(a) Actual Return = (Ending – Beginning) – (Contributions – Benefits)

Fair value of plan assets,
December 31, 2015 ...................................................... £2,620
Deduct: Fair value of plan assets,
January 1, 2015 ........................................................... 1,700
Increase in fair value of plan assets .............................. 920
Deduct: Contributions .................................................... £700
Less benefits paid ............................................ 200 500
Actual return on plan assets in 2015 ............................. £ 420
(b) Computation of pension liability gains and losses and pension asset gains and losses.
1. Difference between 12/31/15 actuarially computed DBO and 12/31/15 recorded

defined benefit obligation (DBO):
DBO at end of year ........................................ £3,300
DBO per memo records:
1/1/15 DBO ................................................. £2,500
Add interest (10%) .................................... 250
Add service cost ....................................... 400
Less benefits paid..................................... 200 2,950
Liability loss .............................................. £350
2. Difference between actual fair value of

plan assets and
12/31/15 actual fair value
of plan assets ........................................ 2,620
Expected fair value
1/1/15 fair value of plan assets ................ 1,700
Interest revenue
(£1,700 X 10%) ....................................... 170
Add contributions ..................................... 700
Less benefits paid..................................... 200 (2,370)
Asset gain .................................................. 250
Net (gain) or loss........................................... (£100)
(c) The amount recorded in other comprehensive income is the asset gain and
liability loss:
Asset gain .................................................................................... £ 250
Liability loss ................................................................................ 350
Net loss ........................................................................................ 100
Accumulated OCI (G/L)
12/31/15 ........................................................................................ 0
Accumulated OCI (G/L) ........................................................................ £ 100
24
28
20-
ERICKSON COMPANY
General Journal Entries Memo Record Entries
Defined
Annual Pension OCI— Pension Benefit Plan
Items Expense Cash Gain/Loss Asset/Liability Obligation Assets
Balance, Jan. 1, 2015 800 Cr. 2,500 Cr. 1,700 Dr.
Service cost 400 Dr. 400 Cr.
Interest expense(a) 250 Dr. 250 Cr.
Interest revenue(b) 170 Cr. 170 Dr.
Contributions 700 Cr. 700 Dr.
Benefits 200 Dr. 200 Cr.
Asset gain (c) 250 Cr. 250 Dr.
Liability increase(d) 350 Dr. 350 Cr.
Journal entry for 2015 480 Dr. 700 Cr. 100 Dr. 120 Dr.
Balance, Dec. 31, 2015 100 Dr. 680 Cr. 3,300 Cr. 2,620 Dr.
(a)
£2,500 X 10%
(b)
£1,700 X 10%
(c)
Actual return £420
Interest revenue (£1,700 X 10%) (170)
Asset gain £250
(d)
£350 = £3,300 – (£2,500 + £400 + £250 – £200)
25
Journal entries 12/31/15
Other Comprehensive Income (G/L) .................... 100

Pension Expense ................................................... 480
Pension Asset /Liability ......................................... 120
Cash ................................................................ 700
Statement of Financial Position at December 31, 2015
Liabilities
Pension liability ............................................. £680
Shareholders’ equity
Accumulated other comprehensive
loss (G/L) .................................................... £100

Service cost .................................................... $ 80,000
Interest expense ($700,000 X .10) ................. 70,000
Interest revenue ($675,000* X .10) ................ (67,500)
Pension expense for 2015 ............................. $ 82,500
*$700,000 – $25,000
Pension Expense ................................................... 82,500

Pension Asset /Liability ................................. 32,500
Cash ................................................................ 50,000
(b) Income Statement:

Pension expense ............................................ 82,500
Statement of Financial Position:

Liabilities
Pension liability ..................................... $ 57,500*
*$25,000 + $32,500
See next page for pension worksheet.
26
30
20-

Defined
Annual Pension Pension Benefit Plan
Expense Cash Asset/Liability Obligation Assets
Balance, Jan. 1, 2015 25,000 Cr. 700,000 Cr. 675,000 Dr.*
*$700,000 – $25,000.
**$675,000 X 10%
27
(a) Below is the completed worksheet, indicating debit and credit entries.

Annual Defined
Pension OCI—Gain/ Pension Benefit Plan
Expense Cash Loss Asset/Liability Obligation Assets
Service cost 500 Dr. 500 Cr.
Interest expense 280 Dr. 280 Cr.
Interest revenue 170 Cr. 170 Dr.
Contributions 800 Cr. 800 Dr.
Benefits 200 Dr. 200 Cr.
Asset gain 50 Cr. 50 Dr.
Liability loss 365 Dr. 365 Cr.
Journal entry 610 Dr. 800 Cr. 315 Dr. 125 Cr.
Balance, Dec. 31, 2015 315 Dr. 1,225 Cr. 3,745 Cr. 2,520 Dr.
(b) Pension Expense .......................................... 610

Other Comprehensive Income (G/L) ........... 315
Pension Asset/Liability ............................ 125
Cash .......................................................... 800
Postretirement benefit expense is comprised of the following:
Service cost .............................................................. –P 45,000

Interest expense (8% X –P 330,000) ......................... 26,400
Interest expense (8% X –P 110,000) ......................... (8,800)
Postretirement expense ........................................... –P 62,600
28

Annual
Postretirement Postretirement
Expense Cash Asset/Liability DPBO Plan Assets
Postretirement Expense ........................................ 62,600

Postretirement Asset/Liability ....................... 52,600
Cash ................................................................. 10,000
Service cost .................................................................... $ 83,000

Interest expense
benefit obligation (10% X $710,000) .......................... 71,000
Interest revenue ............................................................. (34,000)
Postretirement expense ................................................ $120,000
Service cost .................................................................... € 90,000

Interest expense
(9% X €760,000) .............................................................. 68,400
Interest revenue (€710,000 X 9%) ................................. (63,900)
Postretirement expense ................................................ € 94,500
See worksheet on next page.
29
ENGLEHART CO.
Postretirement Benefit Worksheet—2015

Annual
Postretirement OCI— Postretirement Plan
Items Expense Cash Gain/Loss Asset/Liability DPBO Assets
Kieso, IFRS,

Asset loss*** 1,900 Dr. 1,900 Cr.
Accumulated OCI, Dec. 31, 2014 100 Dr.
Balance, Dec. 31, 2015 2,000 Dr. 90,400 Cr. 878,400 Cr. 788,000 Dr.
*(€760,000 X 9%)
**(€710,000 X 9%)
***€63,900 – €62,000
30
20-
*EXERCISE 20-21 (25–30 minutes)
(a) Below is the completed worksheet, indicating debit and credit entries.

Other
Annual Comprehensive Postretirement Plan
Expense Cash Income—G/L Asset/Liability DPBO Assets

Accumulated OCI, Dec. 31, 2014 18,200 Dr.
(b) Postretirement Expense .................................... 82,100

Other Comprehensive Income (G/L) ................ 8,800
Cash ............................................................. 66,000
Postretirement Asset/Liability ................... 24,900
(c) The discount (settlement) rate can be determined by dividing the interest
expense by the beginning DPBO:
€36,900 ÷ €410,000 = 9%
31
TIME AND PURPOSE OF PROBLEMS
Problem 20-1 (Time 40–50 minutes)

Purpose—to provide a problem that requires preparation of a pension worksheet for two separate
years’ pension transactions. Included in the problem are an asset loss.

Purpose—to provide a problem that requires preparation of a pension worksheet for three separate years’
pension transactions, three years of general journal entries for the pension plan, and reporting in financial
statements for the third year.

Purpose—to provide a problem that requires computation of the annual pension expense, preparation of
the pension journal entries, measurement of gains and losses, and presentation in financial statements.

Purpose—to provide a problem that requires computation of pension expense and preparation of the
pension journal entries.

Purpose—to provide a problem that requires computation of the pension expense for three separate
years and the preparation of the pension journal entries for three years.

Purpose—to provide a problem that requires computation, computation of pension expense and
preparation of pension journal entries.

Purpose—to provide a problem that requires preparation of a worksheet.

Purpose—to provide a problem that requires preparation of a comprehensive worksheet for two years,
covering all facets of pension accounting.

Purpose—to provide a problem that requires preparation of a worksheet for two years, journal entries,
and indicates financial statement presentation.

Purpose—to provide a problem to understand elements of a pension worksheet.

Purpose—to provide a problem that requires preparation of a worksheet, journal entries, and indicates
financial statement presentation (year 2 of P20-10).
32
Time and Purpose of Problems (Continued)

Purpose—to provide a problem that requires preparation of a worksheet, journal entries, and indicates
financial statement presentation.

Purpose—to provide a problem that requires preparation of a worksheet and entries for postretirement
benefit expense.

Purpose—to provide a problem that requires a worksheet for two years, journal entries, and indicates
financial statement presentation.
33
(a)
HARRINGTON COMPANY
Pension Worksheet––2015 and 2016
SOLUTIONS TO PROBLEMS
Annual Defined
Items Pension OCI—Gain/ Pension Benefit Plan
Expense Cash Loss Asset/Liability Obligation Assets
Balance, Jan. 1, 2015 300,000 Cr. 4,500,000 Cr. 4,200,000 Dr.
PROBLEM 20-1
Benefits 200,000 Dr. 200,000 Cr.
Journal entry for 2015 180,000 Dr. 240,000 Cr. 0 60,000 Dr.
Accumulated OCI, Dec. 31, 2014
Kieso, IFRS,
Balance, Dec. 31, 2015 240,000 Cr. 4,900,000 Cr. 4,660,000 Dr.
Additional PSC, 1/1/2016 500,000 Dr. 500,000 Cr.
Balance, Jan. 1, 2016 5,400,000 Cr.
Interest expense** 540,000 Dr. 540,000 Cr.
Benefits 280,000 Dr. 280,000 Cr.
Asset loss**** 206,000 Dr. 206,000 Cr.
*€450,000 = €4,500,000 X 10%.

**€4,200,000 X 10%
***€540,000 = €5,400,000 X 10%.
****(€4,660,000 X 10%) – €260,000.
(b) Journal Entry (2016)

Pension Expense ............................................................... 754,000
Other Comprehensive Income (G/L) ................................ 206,000
Cash ........................................................................... 285,000
Pension Asset/Liability ............................................ 675,000
34
20-
38
20-
JACKSON COMPANY
Pension Worksheet—2014, 2015, 2016
Annual Defined
Pension OCI— Pension Benefit Plan
Expense Cash Gain/Loss Asset/Liability Obligation Assets

Interest expense(a) 25,000 Dr. 25,000 Cr.
Interest revenue(b) 20,000 Cr. 20,000 Dr.

Balance, Jan. 1, 2015 437,000 Cr.
Interest expense(c) 43,700 Dr. 43,700 Cr.
Interest revenue(d)
PROBLEM 20-2
22,200 Cr. 22,200 Dr.

Asset loss(e) 200 Dr. 200 Cr.
Journal entry for 2015 200,500 Dr. 40,000 Cr. 200 Dr. 160,700 Cr.
Balance, Dec. 31, 2015 200 Dr. 215,700 Cr. 483,300 Cr. 267,600 Dr.

Interest expense(f) 48,330 Dr. 48,330 Cr.
Interest revenue(g) 26,760 Cr. 26,760 Dr.
Asset loss(h)
2,760 Dr. 2,760 Cr.

Liability gain(i) 16,630 Cr. 16,630 Dr.
Journal entry for 2016 47,570 Dr. 48,000 Cr. 13,870 Cr. 14,300 Dr.
Accumulated OCI, Dec. 31, 2015 200 Dr.
Balance, Dec. 31, 2016 13,670 Cr. 201,400 Cr. 520,000 Cr. 318,600 Dr.
35
PROBLEM 20-2 (Continued)
Worksheet computations:
(a)
$25,000 = $250,000 X 10%
(b)
$200,000 X 10%
(c)
$43,700 = $437,000 X 10%
(d)
$222,000 X 10%
(e)
$22,200 – $22,000
(f)
$48,330 = $483,300 X 10%
(g)
$267,600 X 10%
(h)
$26,760 – $24,000
(i)
$16,630 = ($483,300 + $26,000 + $48,330 – $21,000 – $520,000)
(b) Journal entries:
2014
Pension Expense ...................................................... 21,000
Cash ................................................................... 16,000
Pension Asset /Liability .................................... 5,000
2015
Pension Expense ...................................................... 200,500
Other Comprehensive Income (G/L) ....................... 200
Cash ................................................................... 40,000
2016
Pension Expense ...................................................... 47,570
Pension Asset /Liability ............................................ 14,300
Cash ................................................................... 48,000
36
(c) Financial Statements—2016

Income Statement
Pension expense .............................................. $ 47,570

Net Income ........................................................ $ XXXX
Asset gain (loss) ............................................... $ (2,760)
Liability gain (loss) ........................................... 16,630 13,870
Comprehensive income ........................................... $ XXXX

Liabilities
Pension liability ............................................. $201,400
Equity
income (G/L)................................................... 13,670
37
PROBLEM 20-3
(a) Pension expense for 2015 comprises the following:
Service cost............................................................. £52,000

Interest on defined benefit obligation
(10% X £380,000) ................................................. 38,000
Interest revenue (£200,000 X 10%) ........................ (20,000)
Pension expense ............................................. £70,000
(b) Journal Entries—2015

Other Comprehensive Income (G/L) ..................... 29,000*
Pension Expense .................................................... 70,000
Cash ................................................................. 65,000
Pension Asset /Liability .................................. 34,000
*Computed in part (c)

(c) 2015 Increase/Decrease in Gains/Losses
(1) 12/31/15 new actuarially computed
DBO £490,000
Less: Defined benefit obligation
per memo record:
1/1/15 DBO £380,000
Add interest (10% X £380,000) 38,000
Add service cost (given) 52,000
Less benefit payments 0
470,000
Liability loss £20,000
38
(2) 12/31/15 fair value of plan assets £276,000
Less: Expected fair value
1/1/15 fair value of plan
assets £200,000
Add Interest revenue
(10% X £200,000) 20,000
Add pension plan contribution 65,000
Less benefit payments 0
285,000
Asset loss 9,000
Net loss at 12/31/15 (£20,000 liability
loss + £9,000) £29,000
The £29,000 net loss in the accumulated OCI (G/L) account becomes
the beginning balance in 2016.
(d) Financial Statements—2015

Income Statement
Pension expense ............................................. £ 70,000
Net Income ............................................................... £ XXXX
Asset gain (loss) .............................................. £ (9,000)
Liability gain (loss) .......................................... (20,000) (29,000)
Comprehensive income .......................................... £ XXXX
Liabilities
Pension asset /liability........................... £214,000*
Equity
Accumulated other
comprehensive loss ........................... £ 29,000
*(£380,000 – £200,000) + £34,000
39

Annual Defined
Kieso, IFRS,

Contributions 65,000 65,000 Dr.
Liability loss 20,000 Dr. 20,000 Cr.
Journal entry for 2015 70,000 65,000 29,000 Dr. 34,000 Cr.
40
20-
PROBLEM 20-4
2015 2016
Service cost ........................................................ ($60,000 $90,000
Interest expense ($700,000 X .09)
and ($800,000 X .09) ...................................... 63,000 72,000
Interest revenue ($560,000 X .09) and
($699,000 X .09) ............................................... (50,400) (62,910)
Pension expense ............................................... ($72,600 ($99,090
(b)
2015
Pension Asset/Liability ..................................... (39,000
Pension Expense .............................................. 72,600
Cash.............................................................. (115,000
2016
Pension Expense ................................................ 99,090
Other Comprehensive Income (G/L) ................. 32,910
Cash......................................................... 120,000
Pension Asset / Liability.......................... 12,000
Note to instructors: Although not required, students could be encouraged

to prepare a 2-year pension worksheet, as shown on the following page.
41

Annual Defined

Kieso, IFRS,

Liability gain 23,000 Cr. 23,000 Dr.**
Journal entry for 2015 72,600 Dr. 115,000 Cr. 3,400 Dr. 39,000 Dr.
Accumulated OCI, Jan. 1, 2015 0

*($700,000 – $140,000)
**($700,000 + $60,000 + $63,000) – $800,000
42
20-
PROBLEM 20-5
(a) Pension expense for 2015 consisted only of the service cost component
amounting to €60,000. There was no net gain or loss, plan assets, or
defined benefit obligation as of January 1, 2015.
Pension expense for 2016 comprised the following:
Service cost ...................................................................... € 85,000

Interest expense
(€60,000 X 11%) ............................................................ 6,600
Interest revenue
(€50,000 X 11%) ............................................................ (5,500)
Pension expense ...................................................... € 86,100
Pension expense for 2017 comprised the following:
Service cost ...................................................................... €119,000

Interest expense
(€200,000 X 8%) ............................................................ 16,000
Interest revenue
(€85,000 X 8%) .............................................................. (6,800)
Pension expense ...................................................... €128,200
43
(b) Journal Entries—2015

Pension Expense ...................................................... 60,000
Cash ................................................................... 50,000
Journal Entries—2016
Pension Expense ...................................................... 86,100
Other Comprehensive Income (G/L) ....................... 78,900
Cash ................................................................... 60,000
Pension Expense ....................................................... 128,200
Other Comprehensive Income (G/L) ........................ 5,800
Cash .................................................................... 105,000
Pension Asset /Liability ..................................... 29,000
Note to instructors: Although not required, students could be encouraged

to prepare a 3-year worksheet, as presented on the following page.
44
48
20-

Annual Defined
Balance, Jan. 1, 2015
Interest expense
Interest revenue


Asset loss 500 Dr. 500 Cr.


Asset gain 1,700 Cr. 1,700 Dr.
Liability loss* 7,500 Dr. 7,500 Cr.
*€324,000 – (€200,000 + €119,000 + €16,000 – €18,500).
45
PROBLEM 20-6
(a) Pension expense for 2015 comprised the following:
Service cost......................................................................... $200,000

Interest expense* ................................................................ 500,000
Interest on plan assets** .................................................... (300,000)
Pension expense ......................................................... $400,000
***($5,000,000 X 10% = $500,000)

***[ $3,000,000 X 10%]
(b) Pension liability, beginning of year.................................. $2,000,000

Less: Pension liability, end of year .................................. 750,000*
Decrease in liability ................................................... $1,250,000
*$4,850,000 – $4,100,000
Pension Expense ................................................... 400,000
Pension Asset /Liability ......................................... 1,250,000
Other Comprehensive Income (G/L) ............. 875,000
Cash ................................................................ 775,000
46
(c) 12/31/15 Fair value of plan assets $4,100,000

Less: Expected fair value of assets
1/1/15 fair value of plan assets $3,000,000
Interest revenue
(10% X $3,000,000) 300,000
Add contributions to the plan 775,000
Less benefits 0 4,075,000
Asset gain 25,000
12/31/15 Actuarially computed DBO 4,850,000

Less: 1/1/15 DBO $5,000,000
Add interest
(10% X $5,000,000) 500,000
Add service cost 200,000
Less benefits 0 5,700,000
Liability gain 850,000
Net gain 12/31/15 $ 875,000
47

Annual Defined
Balance, Jan. 1, 2015 2,000,000 Cr. 5,000,000 Cr. 3,000,000 Dr.
Kieso, IFRS,

Asset gain*** 25,000 Cr. 25,000 Dr.
Liability gain 850,000 Cr. 850,000 Dr.
Journal entry for 2015 400,000 Dr. 775,000 Cr. 875,000 Cr. 1,250,000 Dr.
Balance, Dec. 31, 2015 875,000 Cr. 750,000 Cr. 4,850,000 Cr. 4,100,000 Dr.
*$5,000,000 X 10%
**$3,000,000 X 10%.
***$325,000 – $300,000.
48
20-
52
20-
Annual Defined
Pension HANSON CORP.
OCI— Penison Benefit Plan
Items Expense Pension
Cash Worksheet—2015
Gain/Loss Asset/Liability Obligation Assets
Annual Defined
Pension OCI— Penison Benefit Plan
Interest expense* 63,000 Dr. 133,000 Cr. 63,000 Cr.
PROBLEM 20-7
Contributions 133,000 Dr.
Interest
Benefitsrevenue** 46,800 Cr. 46,800
85,000 Dr. 85,000 Cr.Dr.
Contributions
Asset loss** 133,000 Cr. 4,000 Dr. 133,000
4,000 Cr.Dr.
Benefits
Journal entry for 2012 119,000 Dr. 133,000 Cr. 4,000 Dr. 10,000 Dr. 85,000 Dr. 85,000 Cr.
Asset gain**
Accumulated OCI, Dec. 31, 2011 1,200 Cr.
91,000 Dr. 1,200 Dr.
Journal
Balance,entry
Dec. for
31, 2015
2012 124,200 Dr. 133,000 Cr. 1,200 Cr.
92,300 10,000Cr.
Dr. 170,000 Dr. 786,000 Cr. 616,000 Dr.
Balance, Dec.
*£63,000 31, 2015 X .09.
= £700,000 89,800 Dr. 170,000 Cr. 786,000 Cr. 616,000 Dr.
**£520,000 X .09.
***£4,000 == (£520,000
*£63,000 £700,000 XX .09.
.10) – $48,000.
**£520,000 X .09.
***£1,200 = (£520,000 X .09) – $48,000.
****£91,000 – £70,000 = £21,000; £21,000 ÷ 10 = £2,100.
49
LEMKE COMPANY
Pension Worksheet—2015 and 2016
Items Expense Cash Gain/Loss Liability Obligation Plan Assets
PROBLEM 20-8
Asset loss(c) 5,000 Dr. 5,000 Cr.
Kieso, IFRS,

Interest expense(d) 75,550 Dr. 75,550 Cr.
Interest revenue(e) 51,150 Cr. 51,150 Dr.
Asset gain(f) 9,850 Cr. 9,850 Dr.
50
20-
(a)
R60,000 = R600,000 X 10%.
(b)
R410,000 X 10%
(c)
R41,000 – R36,000.
(d)
R75,550 = R755,500 X 10%.
(e)
R511,500 X 10%
(f)
R51,150 – R61,000.
(b) 2015
Pension Expense ....................................................... 59,000
Other Comprehensive Income (G/L) ......................... 92,000
Cash ..................................................................... 97,000
Pension Asset /Liability ...................................... 54,000
2016
Pension Asset /Liability.............................................. 7,450
Pension Expense ....................................................... 83,400
Cash ..................................................................... 81,000
Other Comprehensive Income (G/L) ................. 9,850
51

Income Statement
Pension expense ............................................. R 83,400

Net Income .............................................................. R XXXX
Asset gain (loss) ............................................. 9,850
Comprehensive income ......................................... R XXXX
Liabilities
Pension liability ........................................ R236,550
Equity
loss (G/L) ............................................... R 82,150
52
PROBLEM 20-9
(a) See worksheet on next page.
(b) December 31, 2015
Other Comprehensive Income (G/L) ...................... 208,000

Pension Expense .................................................... 150,000
Cash .................................................................. 200,000
Pension Asset /Liability ................................... 158,000
(c) See worksheet on next page. The entry is below.
December 31, 2016
Other Comprehensive Income (G/L) ...................... 133,200

Pension Expense .................................................... 845,800
Cash .................................................................. 184,658
Pension Asset/Liability ................................... 794,342

Income Statement
Pension expense ............................................. €845,800
Liabilities
Pension liability......................................... €952,342
Equity
loss (G/L) ................................................. €341,200
53
(a) HOBBS COMPANY

Pension Worksheet—2015 and 2016

Annual Defined
Balance, Jan. 1, 2015 4,600,000 Cr. 4,600,000 Dr.

Benefits 220,000 Dr. 220,000 Cr.
Asset loss(c) 208,000 Dr. 208,000 Cr.
Accumulated OCI Dec. 31, 2014 0
Kieso, IFRS,
Balance, Jan. 1, 2016 5,590,000 Cr.

Interest expense(d) 559,000 Dr. 559,000 Cr.
Interest revenue(e) 483,200 Cr. 483,200 Dr.
Benefits 280,000 Dr. 280,000 Cr.
Asset loss(f) 133,200 Dr. 133,200 Cr.
(a)
€460,000 = €4,600,000 X 10%.
(b)
€4,600,000 X 10%.
(c)
€252,000 – €460,000.
(d)
€559,000 = (€4,990,000 + €600,000) X 10%.
(e)
€4,832,000 X 10.
(f)
€350,000 – €483,200.
54
20-
58
20-
Annual Defined

Interest cost 26,000 Dr. 26,000 Cr.
PROBLEM 20-10
(b) 2015
Pension Expense ................................................................................ 29,600
Other Comprehensive Income (G/L) ................................................. 41,900
Cash.......................................................................................... 41,000
Pension Asset/Liability ........................................................... 30,500
(c) 1. Discount Rate: $26,000 ÷ $325,000 = 8% based on interest expense or $16,400 ÷ $205,000 = 8%, based on
interest revenue.
55
PROBLEM 20-11
KRAMER COMPANY
(a) Completed Worksheet—2016

Annual Defined
Kieso, IFRS,

Journal entry for 2016 71,040 Dr. 51,000 Cr. 12,080 Cr. 7,960 Cr.
56
20-
Interest expense: $31,960 = $399,500 X 8%

Interest revenue = $249,000 X 8% = $19,920.
Asset gain: $12,080 = $32,000 – $19,920.
(b) 2016
Pension Expense ......................................................... 71,040
Pension Asset/Liability ........................................ 7,960
Other Comprehensive Income (G/L) ................... 12,080
Cash ...................................................................... 51,000

Income Statement
Pension expense ................................................... $71,040

Net Income .................................................................... $ XXXX
Asset gain (loss) ................................................... 7,960
Comprehensive income ............................................... $ XXXX

Liabilities
Pension liability ....................................................... $158,460
Equity
Accumulated other comprehensive loss (G/L) ..... $ 29,820
57
CHEN CORP.
Annual Defined
PROBLEM 20-12
Kieso, IFRS,

Asset gain*** 8,100 Cr. 8,100 Dr.
*¥23,800 = ¥340,000 X .07.

**¥270,000 X .07
***¥27,000 − ¥18,900.
58
20-
(b) 2016
Pension Expense ...................................................... 49,900
Cash ................................................................... 65,000

Income Statement
Pension expense ............................................... ¥49,900

Net Income ................................................................ ¥ XXXX
Asset gain (loss) ............................................... 8,100
Comprehensive income ........................................... ¥ XXXX

Liabilities
Pension liability ...................................................... ¥46,800
Equity
Accumulated other comprehensive loss (G/L) .... ¥30,900
59
(a) HOLLENBECK FOODS INC.
Postretirement Benefit Worksheet—2015

Annual
Postretirement OCI—Gain/ Postretirement
Items Expense Cash Loss Asset/Liability DPBO Plan Assets
Balance, Jan. 1, 2015 200,000 Cr. 200,000 Dr.
Interest revenue* 20,000 Cr. 20,000 Dr.

PROBLEM 20-13
Asset loss** 5,000 Dr. 5,000 Cr.
Journal entry, for 2015 70,000 Dr. 65,000 Cr. 5,000 Dr. 10,000 Cr.
Kieso, IFRS,
*$200,000 X .10 = $20,000

**$15,000 – $20,000 = $5,000
(b) Journal Entry

Postretirement Expense ................................................... 70,000
Other Comprehensive Income (G/L) ............................... 5,000
Postretirement Asset/Liability.................................. 10,000
Cash............................................................................ 65,000
Financial Statements
Income Statement
Postretirement expense ................................................... $70,000
Comprehensive Income
Net income ............................................................................. $ XXXX
Asset gain (loss) ............................................................... (5,000)
Comprehensive income ........................................................ $ XXXX
Liabilities
Postretirement asset/liability ................................... $10,000
Equity
Accumulated other comprehensive income (loss) ($ 5,000)
60
20-
PROBLEM 20-14
(a) See worksheet on next page.
(b) December 31, 2015

Postretirement Expense ...................................... 75,000
Cash ............................................................... 45,000
Postretirement Asset/Liability ..................... 115,000
(c) See worksheet on next page. The entry is below.
December 31, 2016

Postretirement Expense ...................................... 289,000
Cash ............................................................... 35,000
Postretirement Asset/Liability ..................... 373,500

Income Statement
Postretirement expense ............................... $289,000

Net Income ........................................................... € XXXX
Asset gain (loss) .......................................... €(119,500)
Comprehensive income ...................................... € XXXX

Liabilities
Postretirement liability ........................................... € 488,500
Equity
Accumulated other comprehensive loss (G/L) .... € 204,500
61

Annual OCI— Postretirement Plan
Expense Cash Gain/Loss Asset/Liability DPBO Assets
Balance, Jan. 1, 2015 2,250,000 Cr. 2,250,000 Dr.
Interest expensea 225,000 Dr. 225,000 Cr.

Interest revenueb 225,000 Cr. 225,000 Dr.
Asset lossc 85,000 Dr. 85,000 Cr.
Kieso, IFRS,

2014
Balance, Jan. 1, 2016 2,685,000 Cr.
Interest expensed 268,500 Dr. 268,500 Cr.
Interest revenuee 239,500 Cr. 239,500 Dr.
Asset lossf 119,500 Dr. 119,500 Cr.
Accumulated OCI, Dec. 31, 85,000 Dr.
2015
a
€2,250,000 X 10%
b
€2,250,000 X 10%
c
€225,000 – €140,000.
d
€2,685,000 X 10%
e
€2,395,000 X 10%
f
€239,500 – €120,000.
62
20-
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
(IFRS)
CA 20-1 (Time 30–35 minutes)

Purpose—to provide the student with the opportunity to discuss some of the more traditional issues
related to pension reporting. Specifically, the student is asked to define a pension plan, distinguish
between a funded and unfunded plan, differentiate between accounting for the employer and the
pension fund. In addition, justification for accrual accounting must be developed, as well as a determination
of the relative objectivity of the accrual versus the cash basis.

Purpose—to provide the student with the opportunity to discuss the terminology employed in IAS No.
19. The student is required to explain the significance of such items as pension asset/liability, pension
expense, and asset loss as a component of accumulated other comprehensive income.

Purpose—to provide the student with the opportunity to discuss the reasons why accrual accounting is
followed for pension reporting. In addition, certain terms are required to be explained and the proper
footnote disclosures identified.

Purpose—to provide the student with the opportunity to study some of the implications of IAS No. 19.
The student is required to identify the components of pension expense and how to report gains and
losses.

Purpose—to provide the student with the opportunity to discuss the implications of IAS No. 19, given a
number of different factual situations. This case is quite thought-provoking and should stimulate a great
deal of class discussion.

Purpose—to provide the student with the opportunity to consider the ethical implications of the impact
of pension benefits and their impact on financial statements.
63
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 20-1
(a) A private pension plan is an arrangement whereby a company undertakes to provide its retired
employees with benefits that can be determined or estimated in advance from the provisions of a
document or from the company’s practices.
In a contributory pension plan the employees bear part of the cost of the stated benefits whereas
in a noncontributory plan the employer bears the entire cost.
(b) The employer is the organization sponsoring the pension plan. The employer incurs the costs
and makes contributions to the pension fund. Accounting for the employer involves: (1) allocating
the cost of the pension plan to the proper accounting periods, (2) measuring the amount of
pension obligation resulting from the plan, and (3) disclosing the status and effects of the plan in
the financial statements.
The pension fund or plan is the entity which receives the contributions from the employer,
administers the pension assets, and makes the benefit payments to the pension recipients.
Accounting for the fund involves identifying receipts as contributions from the employer sponsor
and as income from fund investments and computing the amounts due to individual pension
recipients.
(c) 1. Relative to the pension fund the term “funded” refers to the relationship between pension
fund assets and the present value of expected future pension benefit payments; thus, the
pension fund may be fully funded or underfunded. Relative to the employer, the term
“funded” refers to the relationship of the contributions made by the employer to the pension
fund and the pension expense accrued by the employer; if the employer contributes
annually to the pension fund an amount equal to the pension expense, the employer is fully
funded.
2. Relative to the pension fund, the pension liability is an actuarial concept representing an
economic liability under the pension plan for future cash payments to retirees. From the
viewpoint of the employer, the pension liability is an accounting credit that results from an
excess of amounts expensed over amounts contributed (funded) to the pension fund.
(d) 1. The theoretical justification for accrual recognition of pension costs is based on the expense
recognition principle. Pension costs are incurred during the period over which an employee
renders services to the enterprise; these costs may be paid upon the employee’s
retirement, over a period of time after retirement, as incurred through funding or insurance
plans, or through some combination of any or all of these methods.
2. Although cash (pay-as-you-go) accounting is highly objective for the final determination of
actual pension costs, it provides no measurement of annual pension costs as they are
incurred. Accrual accounting provides greater objectivity in the annual measurement of
pension costs than does cash accounting if actuarial funding methods are applied to actuarial
valuations to determine the provision for pension costs. While cash accounting provides a
more precise determination of the final cost, accrual accounting provides a more objective
measure of the annual cost.
64
CA 20-1 (Continued)
(e) Terms and their definitions as they apply to accounting for pension plans follow:
1. Service cost is the actuarial present value of benefits attributed by the pension benefit formula
to employee service during that period. The service cost component is a portion of the
defined benefit obligation and is unaffected by the funded status of the plan.
2. Past service costs are the retroactive benefits granted in a plan amendment (or initiation).
Retroactive benefits are benefits granted in a plan amendment (or initiation) that are
attributed by the pension benefit formula to employee services rendered in periods prior to
the amendment.
3. Vested benefits are benefits that are not contingent on the employee continuing in the service
of the employer. In some plans the payment of the benefits will begin only when the
employee reaches the normal retirement date; in other plans the payment of the benefits
will begin when the employee retires (which may be before or after the normal retirement
date). The actuarially computed value of vested benefits represents the present value: (a) the
benefits expected to become payable to former employees who have retired, or who have
terminated service with vested rights, at the date of determination; and (b) the benefits
(based on service rendered prior to the date of determination) expected to become payable
at future dates to present employees, taking into account the probable time that employees
will retire.
CA 20-2
1. Pension asset/liability is the cumulative contributions in excess of accrued net pension expense.
This item is reported in the asset section of the statement of financial position and is reduced
when pension expense is greater than the contribution made to the fund during a period.
2. Pension asset/liability is the cumulative net pension expense accrued in excess of the employer’s
contributions. This item is reported in the liability section of the statement of financial position and
is increased when pension expense is greater than the contribution made to the fund.
3. Asset loss as a component of Accumulated Other Comprehensive Income arises when the actual
return on plan assets is less than interest revenue (beginning fair value of assets x discount rate).
This account should be reported in the equity section as a component of accumulated other
comprehensive income. In addition, it should be shown as part of other comprehensive income.
4. Pension expense is the amount recognized in an employer’s financial statements as the expense
for a pension plan for the period. Components of pension expense are service cost and net
interest.
65
CA 20-3
(a) 1. The theoretical justification for accrual recognition of pension costs is based on the expense
recognition principle. Pension costs are incurred during the period over which an employee
renders services to the enterprise; these costs may be paid upon the employee’s
retirement, over a period of time after retirement, as incurred through funding or insurance
plans, or through some combination of any or all of these methods.
2. Although cash (pay-as-you-go) accounting is highly verifiable for the final determination of
actual pension costs, it provides no measurement of annual pension costs as they are
incurred. Accrual accounting provides move relevance in the annual measurement of
pension costs than does cash accounting but may result in less neutrality due to estimate.
(b) Terms and their definitions as they apply to accounting for pensions follow:
1. Fair value of pension assets, when based on a calculated value, is a moving average of
pension plan asset values over a period of time. Considerable flexibility is permitted in
computing this amount. In many cases, companies will undoubtedly use the actuarial asset
value employed by the actuary as their fair value of pension assets for purposes of
applying this concept to pension reporting.
2. The defined benefit obligation is the present value of vested and nonvested employee
benefits accrued to date based on employees’ future salary levels. This is the pension
liability adopted by the IASB in IAS 19.
3. Net interest is a component of pension expense. It is computed by multiplying the discount

rate by the plans funded status (defined benefit obligation minus plan assets). If the plan
has a net defined benefit obligation at the end of the period, the company reports interest
expense. Conversely if it has a net defined benefit asset, it reports interest revenue. This
approach is justified on the basis of its simplicity and that any financing costs should be
based on the funded status of the plan. This amount is often shown below the operating
section of the income statement in the financing section and affects net income.
(c) The following disclosures about a company’s pension plans should be made in financial
statements or their notes (see Illustration 20-25)
Amounts reported in the financial statements

Companies should provide reconciliation from the beginning balance to the ending balance for
each of the following:
1. Plan assets.
2. Defined benefit obligation.
3. Funded status of the plan.
This reconciliation should report the following, where appropriate.
• Current service cost.
• Interest revenue or expense.
• Remeasurements of the net defined benefit liability (asset) showing separately, (a) the
return on plan assets, excluding amounts of interest revenue computed in (2), and (b)
actuarial gains and losses arising from changes in the defined benefit obligation.
• Past service cost and curtailments.
• Contributions and payments to the plan.
66
CA 20-3 (Continued)
Information on how the defined benefit plan may affect the amount, timing, and
uncertainty of future cash flows
(1) Sensitivity analysis for each significant actuarial assumption, showing how the defined
benefit obligation would have been affected by changes in the relevant actuarial assumption
that were reasonably possible at the reporting date.
(2) Methods and assumptions used in preparing the sensitivity analyses required by (1) and the
limitations of those methods.
(3) Changes from the previous period in the methods and assumptions used in preparing the
sensitivity analyses and the reasons for such changes.
(4) Description of any funding arrangements and funding policy that affect future contributions.
(5) Expected contributions to the plan for the next annual reporting period.
(6) Information about the maturity profile of the defined benefit obligation, including information
about the distribution of the timing of benefit payments, such as a maturity analysis of the
benefit payments.
CA 20-4
(a) Pension benefits are part of the compensation received by employees for their services. The
actual payment of these benefits is deferred until after retirement. The pension expense
measures this compensation and consists of the following two elements:
1. The service cost component is the present value of the benefits earned by the employees
during the current period.
2. Net interest – Since a pension represents a deferred compensation agreement, a liability is
created when the plan is adopted. The interest cost component is the increase in that
liability, the defined benefit obligation, due to the passage of time, net of interest revenue
accrued on the assets, using the same discount rate.
(b) The major similarity between the vested benefit obligation and the defined benefit obligation is
that they both represent the present value of the benefit attributed by the pension benefit formula
to employee service rendered prior to a specific date. All things being equal, when an employee
is about to retire, the vested benefit obligation will be equal to the defined benefit obligation.
The major difference between the vested benefit obligation and the defined benefit obligation is
that the former is based on current salary levels and the latter is based on vested and unvested
amounts and estimated future salary levels. Assuming salary increases over time, the defined
benefit obligation should be higher than the vested benefit obligation.
(c) (1) Pension gains and losses, sometimes called remeasurements, result from changes in the
value of the defined benefit obligation or the fair value of the plan assets. These changes
arise from the deviations between the estimated conditions and the actual experience, and
from changes in assumptions. The volatility of these gains and losses may reflect an
unavoidable inability to predict compensation levels, length of employee service, mortality,
retirement ages, and other relevant events accurately for a period, or several periods.
Therefore, recognizing the gains or losses on the income statement may result in volatility
that does not reflect actual changes in the funded status of the plan in that period.
(2) These remeasurements are recognized in other comprehensive income. They accumulate
there and are not recycled into net income in subsequent periods.
67
CA 20-5
1. This situation can exist because companies vary as to whether they are using an implicit or ex-
plicit set of assumptions when interest rates are disclosed. In the implicit approach, two or more
assumptions do not individually represent the best estimate of the plan’s future experience with
respect to these assumptions, but the aggregate effect of their combined use is presumed to be
approximately the same as that of an explicit approach. In the explicit approach, each significant
assumption reflecting the best estimate of the plan’s future experience solely with respect to that
assumption must be stated. As a result, some companies are presently using an implicit approach,
others an explicit approach. IAS 19 requires the use of explicit assumptions. As a result, this large
variance in interest rates will probably disappear to some extent. However, it should be noted that
companies will have some leeway in establishing discount rates.
2. This situation will occur because of the pension liability required to be reported. That is, companies
are required to report as a liability the excess of their defined benefit obligation over the fair value
of plan assets. In the past, the basic liability companies reported was the excess of the amount
expensed over the amount funded.
3. This statement is questionable. If a financial measure purports to represent a phenomenon that is

volatile, the measure should show that volatility or it will not be representationally faithful. Never-
theless, many argue that volatility is inappropriate when dealing with such long-term measures as
pensions. A good example of where dampening might be useful is the recognition of gains and
losses. If assumptions prove to be accurate estimates of experience over a number of years,
gains or losses in one year will be offset by losses or gains in subsequent periods, and amorti-
zation of unrecognized gains and losses would be unnecessary. The main point is that volatility
per se should not be considered undesirable when establishing accounting principles. Although
some managements may consider volatility bad particularly when reflected in net income, this
belief should not influence standard-setting. However, it is clear from some of the compromises
made in IAS 19 (e.g., recognizing remeasurements in other comprehensive income) that certain
procedures were provided to dampen the volatility effect.
4. These gross pension plan assets are not reported on the employer’s books. However, the fair
value of plan assets are required to be reported in the footnote, so that a reader of the financial
statements can determine the funded status of the plan.
5. (a) In a defined contribution plan, the amount contributed is the amount expensed. No significant
reporting problems exist here. On the other hand, defined benefit plans involve many difficult
reporting issues which may lead to additional expense and liability recognition.
Significant amendments will generally increase past service cost which are included in
pension expense in the year of the amendment.
(b) Plan participants are of importance, because the expected future years of service com-
putation can have an impact on the total defined benefit obligation.
(c) If the plan is underfunded, pension expense will generally increase (all other factors
constant). If the plan is overfunded, pension expense will generally decrease (all other
factors constant). The reason is that the expected return on plan assets will be less if the
plan is underfunded and vice versa.
(d) If the company is using an actuarial funding method different than the one prescribed
in IAS 19 (straight-line approach), some changes in the computation of pension expense
will occur for the company.
68
CA 20-6
While Selma may be correct in assuming that the termination of non-vested employees would decrease
its pension-related liabilities and associated expenses, she is callous to suggest that firing employees is
a reasonable approach to correcting the underfunding of College Electronix’s pension plan. Arbitrarily
dismissing productive employees on the basis of being vested or not vested in the pension plan in order
to avoid capitalizing a liability and recognizing expenses is a capricious and unsound business decision.
Richard Nye should discuss the ethical, legal, and financial implications of the alternatives available as
well as the accounting requirements relating to this situation. This obligation and its effect on the financial
statements should have been known to Cardinal Technology when it performed its due diligence audit of
CE at the time of merger negotiations. Cardinal Technology should capitalize the pension obligations of
CE as required by IFRS.
69
FINANCIAL REPORTING PROBLEM
(a) M&S has funded pension plans (defined–benefit) for UK employees

and the majority of employees oversees.
(b) 2013 Pension expense £47,200,000

2012 Pension expense £32,100,000
(c) Impact on 2013 financial statements: credit to pension expense

decreased net income by £47.2 million; a net benefit asset of £193 for
Marks & Spencer UK retirement benefit, and an actuarial gain of £90.7
less tax effects of £19.9 recognized in comprehensive income.
(d) M&S’s Analysis of assets and expected rates of return portion of its
pension footnote details the major categories of assets, which are
property partnership interest; UK equities; overseas equities; govern-
ment bonds; interest rate swaps; corporate bonds; and cash and
other. In general, the expected long-term rate of return on these
assets increases with an increase in risk for the asset. M&S’s overall
expected rate of return is 4.4%.
Note to instructors: The amendments to IAS 19 have not yet been applied
by M&S at year end 2013.
70
COMPARATIVE ANALYSIS CASE
(a) adidas has defined-benefit plans comprising a variety of post-

employment benefit arrangements (including defined contribution
plans).
Puma has both defined-benefit and defined contribution plans.
(b) adidas reported “pension expense” of €24 million in 2012.
Puma reported “defined-benefit expense” of €11.9 million in 2012.
(c) 2012 Funded Status (millions)

adidas (€251 liability)
Puma (€30.7 liability)
(d) Relevant rates used to compute pension information:
adidas
Discount rate 3.5%
Expected pension increases 2.1%
Expected rate of salary increase 3.2%
Expected return on plan assets 4%
Puma
Discount rate 3.7%
Expected on assets return 4.51%
Future salary increases 3.59%
Future pension increases 2.05%
(e) adidas paid benefits of €4 million in 2012 and made contributions to

the pension plan of €4 million.
Puma paid €3.5 million of benefits in 2012 and made contributions of

€1.8 million to the pension plan.
Note to instructors: The amendments to IAS 19 have not yet been applied
by adidas and Puma at year end 2012.
71
INTERNATIONAL REPORTING CASE
(a) One difference that students might note are the relatively high
discount rate and expected return assumptions used by this U.S.
company. For example, many U.S. companies use rates up to three
times as high as the rates used by international companies. Asset and
liability gains and losses are amortized as are past service costs under
U.S. GAAP. Under IFRS, asset gains and losses are reported as part of
comprehensive income and past service costs are recognized as part
of pension expense as incurred.
It should be noted that there are several similarities. Under U.S. GAAP,
the pension obligation is measured based on the projected (defined)
benefit obligation and the amount recognized is based on an amount
net of the liability and plan assets. Other than as discussed in the
preceding paragraph, the components of pension expense are similar.
(b) Under IFRS, no amortization of past service costs results in higher

pension expense with respect to prior (past) service costs in the year
past service costs are incurred and lower expense in other years.
Depending on whether the company has unrealized gains or losses,
these are not recorded in net income, which reduces the volatility of
net income under IFRS, but future net income will contain amortization
of PSC and pension gains & losses. However on the statement of
financial position, under U.S. GAAP and IFRS the net pension asset or
liability will be measured at the net of the liability and fund assets.
(c) As indicated above, income and equity likely will be lower due to
higher pension expense and lower net income. If there are significant
asset gains (which is possible given the low expected return
assumptions), then income could be higher as the gains are amortized
into income more quickly. The lower discount rate used to measure the
pension obligation will result in lower interest cost in income, but gives
a higher measure of the projected (defined) benefit obligation.
72
76
20-
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Annual
Pension Defined Benefit
Expense Cash OCI - Gain/Loss Pension Asset/Liability Obligation Plan Assets
Balance, January 1, 2015 102.00 Cr. 820.50 Cr. 718.50 Dr.
Service cost 42.00 Dr. 42.00 Cr.
Interest expense 82.05 Dr. 82.05 Cr.

Interest revenue 71.85 Cr. 71.85 Dr.
Contributions 70.00 Cr. 70.00 Dr.
Benefits 40.00 Dr. 40.00 Cr.
Asset Loss 11.25 Dr. 11.25 Cr.
Journal entry for 2015 52.20 Dr. 70.00 Cr. 11.25 Dr. 6.55 Dr.
Accumulated OCI 12/31/14 92.00 Dr.
Balance, Dec. 31, 2015 103.25 Dr. 95.45 Cr. 904.55 Cr. 809.10 Dr.
73
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
Journal entry:
Pension Expense ................................................................ 52.20

OCI – G/L .............................................................................. 11.25
Pension Asset/Liability ....................................................... 6.55
Cash ............................................................................ 70.00
PENCOMP, INC.
Income Statement for the year ended Dec. 31, 2015
Revenues:
Sales ............................................................................ €3,000.00
Expenses:
Cost of goods sold .................................................... €2,000.00
Salary expense........................................................... 700.00
Pension expense ....................................................... 52.20
Depreciation expense ............................................... 80.00
Interest expense ........................................................ 100.00
Total expenses and losses ............................. 2,932.20
Net income ................................................................. € 67.80
74
PENCOMP, INC.
at December 31, 2015
Assets:
Plant, and equip. ............................................................. €2,000.00

Accumulated dep............................................................ (320.00)
€1,680.00
Inventory.......................................................................... 1,800.00
Cash ................................................................................. 368.00
2,168.00
Total Assets ...................................................... €3,848.00
Equity:
Share capital ................................................................... €2,000.00

Retained earnings .......................................................... 752.55
Total Equity ....................................................... €2,752.55
Liabilities:
Note payable ................................................................... 1,000.00

Pension liability .............................................................. 95.45
Total Liabilities ................................................. 1,095.45
Total Equity & Liabilities ................................. €3,848.00
Plant and equip. = no change from previous statement of financial position.

Accumulated depreciation = €(240) + €(2,000 ÷ 25) = €(320)
Determination of non-pension balances:

Inventory = €1,800 given
Cash = €438 – €700 + €3,000 – €2,000 – €100 – €200 – €70 = €368
Note payable = no change from previous statement of financial position.
Share capital = no change from previous statement of financial position.
Retained earnings = €896.0 + €67.80 – €200 – €11.25 = €752.55
75
ANALYSIS
ROE = €67.80 ÷ €2,752.55 = 0.0246 or 2.46%.
In this example, only the loss on plan assets ‘skipped’ the income
statement and went to other comprehensive income. Had this item been
included in income, ROE would have been = (€67.80 – €11.25) ÷ €2,752.55 =
2.05% (a half % lower). Whether this ‘should’ be included in a return on
equity calculation is debatable. The rationale for excluding this from
current period income (and therefore from ROE) is that a defined benefit
pension plan is a long-term contract and so it is the long term expected
return on the plan’s assets that is relevant to measuring the cost of
sponsoring the plan. Some people believe that a particularly high or low
return in a given year is not indicative of the long-term return. Others argue
that all returns, high or low, accrue to the plan sponsor and so pension
expense should reflect all returns.
PRINCIPLES
The effects of plan amendments and asset/liability gains and losses in a

given year can be thought of as fairly transitory items with respect to
income. In other words, these are items that are not likely to repeat at the
same dollar amount year in and year out. Including these items in income
arguably makes identifying the company’s ‘permanent’ income more
difficult. Therefore, the IASB has (so far!) decided to keep those items out of
the income statement.
76
PROFESSIONAL RESEARCH
(a) According to IAS 19, (pars 127-130) 127 Remeasurements of the net defined benefit liability
(asset) comprise: (a) actuarial gains and losses (see paragraphs 128 and 129);(b) the return on
plan assets (see paragraph 130), excluding amounts included in net interest on the net defined
benefit liability (asset) (see paragraph 125); and (c) any change in the effect of the asset ceiling,
excluding amounts included in net interest on the net defined benefit liability (asset) (see
paragraph 126).
128 Actuarial gains and losses result from increases or decreases in the present value of the
defined benefit obligation because of changes in actuarial assumptions and experience
adjustments. Causes of actuarial gains and losses include, for example: (a) unexpectedly high
or low rates of employee turnover, early retirement or mortality or of increases in salaries,
benefits (if the formal or constructive terms of a plan provide for inflationary benefit increases) or
medical costs;
129 Actuarial gains and losses do not include changes in the present value of the defined
benefit obligation because of the introduction, amendment, curtailment or settlement of the
defined benefit plan, or changes to the benefits payable under the defined benefit plan. Such
changes result in past service cost or gains or losses on settlement.
130 In determining the return on plan assets, an entity deducts the costs of managing the plan
assets and any tax payable by the plan itself, other than tax included in the actuarial
assumptions used to measure the defined benefit obligation (paragraph 76). Other
administration costs are not deducted from the return on plan assets.
According to par. 122: Remeasurements of the net defined benefit liability (asset) recognized in
other comprehensive income shall not be reclassified to profit or loss in a subsequent period.
However, the entity may transfer those amounts recognised in other comprehensive income
within equity.
(b) The IASB made the following points in it basis for conclusion for amendments to IAS 19 (pars
BC99 – BC99):
BC90 The Board confirmed the proposal made in the 2010 ED that an entity should recognize
remeasurements in other comprehensive income. The Board acknowledged that the Conceptual
Framework and IAS 1 do not describe a principle that would identify the items an entity should
recognise in other comprehensive income rather than in profit or loss. However, the Board
concluded that the most informative way to disaggregate the components of defined benefit cost
with different predictive values is to recognise the remeasurements component in other
comprehensive income.
BC95 However, most respondents to the 2010 ED expressed the view that it would be
inappropriate to recognise in profit or loss short-term fluctuations in an item that is long-term in
nature. The Board concluded that in the light of the improved presentation of items of other
comprehensive income in its amendment to IAS 1 issued in June 2011, the most informative
way to disaggregate the components of defined benefit cost with different predictive values is to
recognise the remeasurement component in other comprehensive income.
77
PROFESSIONAL RESEARCH (Continued)
With respect to recycling these amounts into net income in subsequent periods:
BC99 Both before and after the amendments made in 2011, IAS 19 prohibits subsequent
reclassification of remeasurements from other comprehensive income to profit or loss. The
Board prohibited such reclassification because:
(a) there is no consistent policy on reclassification to profit or loss in IFRSs, and it would
have been premature to address this matter in the context of the amendments made to
IAS 19 in 2011.
(b) it is difficult to identify a suitable basis to determine the timing and amount of such
reclassifications.
(c) According to IAS 19 (pars. 63-65),
63 An entity shall recognise the net defined benefit liability (asset) in the statement of financial
position.
64 When an entity has a surplus in a defined benefit plan, it shall measure the net defined
benefit asset at the lower of: (a) the surplus in the defined benefit plan; and (b) the asset ceiling,
determined using the discount rate specified in paragraph 83.
65 A net defined benefit asset may arise where a defined benefit plan has been overfunded or
where actuarial gains have arisen. An entity recognises a net defined benefit asset in such
cases because:
(a) the entity controls a resource, which is the ability to use the surplus to generate future
benefits;
(b) that control is a result of past events (contributions paid by the entity and service
rendered by the employee); and
(c) future economic benefits are available to the entity in the form of a reduction in future
contributions or a cash refund, either directly to the entity or indirectly to another plan in
deficit. The asset ceiling is the present value of those future benefits.
78
82
20-
PROFESSIONAL SIMULATION
J2 ∗ G3
G3 – H3
Measurement J2 ∗ H3
(a)
A B C D E F G H I J
1 Memo Discount
General Journal Entries Record Rate
2
Annual Defined
Pension Pension Benefit Plan
Expense Cash OCI - Gain/Loss Asset/Liability Obligation Assets 9.00%
3 Balance,
January 1,
2015 145,000 625,000 480,000

4 Service cost 90,000 90,000
5 Interest
expense 56,250 56,250
6 Interest
revenue 43,200 43,200
7 Contributions 99,000 99,000
8 Benefits 85,000 85,000
9 Asset gain 13,800 13,800
10 Liability loss 76,000 76,000
11 Journal entry
for 2015 103,050 99,000 62,200 66,250

12
Accumulated
OCI 12/31/14 0
13 Balance, Dec.
31, 2015 62,200 211,250 762,250 551,000
14
79
PROFESSIONAL SIMULATION (Continued)
(b) Simply change the discount rate in J2 to .07.
Journal Entry
OCI – G/L ........................................................................... 62,200
Pension Expense .............................................................. 103,050
Cash ........................................................................... 99,000
Disclosure
Defined Benefit Obligation .............................................. $(762,250)

Plan Assets at Fair Value ................................................. 551,000
Pension Asset/Liability ............................................ $(211,250)
80

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Intermediate Accounting

IFRS Edition – 2nd

Accounting for Pensions and Postretirement Benefits

Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize

11. The components of pension expense are:

14. Computation of actual return on plan assets

Differences between Postretirement Healthcare Benefits and Pensions

Item Pensions Healthcare Benefits

BRIEF EXERCISE 20-1

Service cost HK$316,000,000

BRIEF EXERCISE 20-2

Ending plan assets €2,000,000

BRIEF EXERCISE 20-3

Pension Expense ..................................................... 61,000,000

BRIEF EXERCISE 20-5

BRIEF EXERCISE 20-6

Current service cost .......................................................... €26,000

BRIEF EXERCISE 20-7

Actual return ...................................................................... €1,500

The asset loss will be recorded in other comprehensive income in the

BRIEF EXERCISE 20-8

(a) Pension expense: R$62,000

Service cost 50,000 Dr. 50,000 Cr.

*R$3,600,000 – (R$3,100,000 + R$50,000 + R$186,000 – R$150,000)

Statement of Comprehensive Income

Revenues ............................................................................. €125,000

BRIEF EXERCISE 20-10

Defined benefit obligation ........................................................... €(510,000)

BRIEF EXERCISE 20-11

Service cost .................................................................................. $40,000

BRIEF EXERCISE 20-12

Postretirement expense ................................................ 240,900

EXERCISE 20-1 (15–20 minutes)

(a) Computation of pension expense:

(b) Pension Expense .................................................... 95,000

EXERCISE 20-2 (10–15 minutes)

Computation of pension expense:

Pension Asset/Liability Benefit

Contributions 105,000 Cr. 105,000 Dr.

*€70,000 = €700,000 X 10%.

***Pension Expense ................................................... 96,000

Interest expense* 39,200 Dr. 39,200 Cr.

*£39,200 = £490,000 X .08.

(a) Computation of Actual Return on Plan Assets

Fair value of plan assets at 12/31/15........................ ₺ 2,725,000

(b) Asset Gain = [(₺2,400,000 X 7%) – ₺395,000] = ₺227,000.

Benefits 40,000 Dr. 40,000 Cr.

*¥61,200 = ¥680,000 X .09.

**¥49,158 = ¥546,200 X .09.

EXERCISE 20-7 (20–25 minutes)

General Journal Entries Memo Record

Balance, January 1, 2015 1,400,000 Cr. 6,300,000 Cr. 4,900,000 Dr.

Service cost 120,000 Dr. 120,000 Cr.

Accumulated OCI 12/31/14 0

(b) Pension Expense ........................................................ 218,000

EXERCISE 20-8 (25–35 minutes)

(a) Note to financial statements disclosing components of 2015 pension

Service cost .............................................................. € 94,000

Asset loss (€136,700 – €130,000) ............................ € 6,700