Chapter 19 - Pensions and Other Employee Future Benefits

Question 1

What is a pension plan? Who has the benefits of this asset? How long should these assets last?

Answer 1

A legal entity (a trust) separate from the company that sponsors the plan. The members of the plan or the employees. Lifetime annuities for the retirees.

Question 2

What is a contributory plan? What is a non-contributory plan?

Answer 2

Contributory means that the employer and employee both pitch into the plan. Non contributory means that only the employer pitches in.

Question 3

What is vesting? What is an example?

Answer 3

Employees gain title to benefits paid into the plan by the company or sponsor. You do not get the benefits of the CPP until you have worked for the company for at least 5 years.

Question 4

What happens to the contributions if an employee pulls out before the maturity contribution time of the employer?

Answer 4

They will only be able to get the contributions that they made and the earned interest on top of that. The portion that went to the quit employee will not be allocated to the other members of the plan.

Question 5

How long is the pension expense recorded? Why do we record the expense as they work and not when they are retired?

Answer 5

From the date that the plan member is hired until they are eligible to receive the benefits usually at the time of retirement. This is the point where there was an obligation to pay out the pension.

Question 6

What are the two major types of pension plans?

Answer 6

Defined contribution and a defined benefits plan.

Question 7

What happens under the contribution plan? Describe it.

Answer 7

Under the contribution plan, both the employee and employer will make periodic payments in which an independent trustee will administer the plan, thus distinct from the corporate entity.

Whatever the plan earns over the working life of the employee, is what they will get when they retire.

Question 8

Who are the beneficiaries of the trust?
What is the company’s obligation under the contributed plan

Answer 8

The employees are the beneficiaries of the trust.
They just must make their contribution, but there is no commitment as to what value it will grow to.

Question 9

What does the pension expense consist of? How do we account for contributions to past service employees? What happens if a company fails to contribute the amount within a given year?

Answer 9

It consists of the contributions payable for the past employees and the current year’s service costs. An obligation and the related expense immediately. A pension payable liability will arise.

Question 10

What is the only disclosure needed in this type of plan?

Answer 10

Only disclosure needed is the present value of required future contributions in respect of the past service.

Question 11

What are benefit plans? How are the pension benefits defined and why does this cause issues?

Answer 11

Similar to above, this is a separate legal entity. The employer guarantees that the employee will receive pension payments based on a percentage of earnings while they are working. The pension benefits are defined by an employment agreement, and therefore it is difficult to determine how much must be paid out each year.

Question 12

Under the benefits plan who administers it and who is the beneficiary?

Answer 12

The company is the beneficiary as they incur the risk of ensuring payments are made in the future, and the plan is still administered by a trust.

Question 13

What are factors that determine how much must be contributed to a plan?

Answer 13

1. Inflation
2. Mortality rates
3. Salary escalation plans
4. Expected rates of return
5. Number of years of work.

Question 14

What is an actuary? Why is accounting for benefit pension plans complex?

Answer 14

It is a professional that assists the company in determining these contributions. They are complex because of all the estimates involved, and the focus is on accounting from the perspective of the company sponsoring the plan.

Question 15

How do we record when an employer contributes to a pension plan?

Answer 15

Dr - Pension Liability
CR - Cash
(If contributions are less than the previously recorded expense)

Dr - Pension Asset
CR - Cash
(If contributions are greater than the previously recorded expense)

Question 16

What are the two major items on the statement of financial position from the pension plan? What is the pension obligation? How are the pension assets received?

Answer 16

The pension assets and the pension obligation.
The pension obligation is the present value of all future payments to the retired employees.
Pension assets are either received through the employees and company or they are earned by the plan.

Question 17

What is the goal of the pension plan administrators?

Answer 17

Ensure that the assets of the plan are roughly equal to or greater than the pension obligation.

Question 18

How do we value the pension obligation? What are the two actuarial methods to calculate these? What is the accounting standard required?

Answer 18

the pension obligation is the present value of the future payments of the plan to the retirees. The level contribution method and the accrued benefit method. The accrued benefits is required under accounting standards.

Question 19

What is the vested benefit obligation method?

Answer 19

This method is where the present value is only calculated through the vested benefits, this is only the obligation that the company has to the employee, and thus it may be quite understated, as eventually the employee may have all benefits vested to them.

Question 20

What is the accumulated benefit obligation method?

Answer 20

This calculates the present value by using both the vested and unvested portions of the obligation but it assumes that the salary of the employee will not rise over their working lives. Ignores salary escalation due to the uncertainty in the estimate.

Question 21

What is the projected benefit obligation?

Answer 21

This calculates the present value by using the vested, unvested, and expected future salaries, and this is the preferred method under accounting since it is conservative in nature, has a higher obligation and is more realistic.

Question 22

What does it mean when a pension plan lists this projected benefit obligation? Under ASPE, how is this value determined?

Answer 22

Under both IFRS and ASPE, it means that they are defined benefit obligations. Under ASPE and IFRS, this value is determined through actuarial valuation for accounting purposes, or another option under ASPE is the value for funding purposes (Legislative requirements, salary levels, and different discount rates.

Question 23

What is the funded status of the plan? What is an underfunded plan and what causes them, and who bears the risk?

Answer 23

It is the difference between the plan’s assets and the obligations. The situation where the pension obligation is greater than the assets. With the recession and low interest rates, the company bears the risk, thus this will be a liability on the financial statements.

Question 24

How will the funded status of the plan be shown by the company? What is the terminology used on the financial statements for the company? What is the terminology used for the financial statements for the pension plan provider?

Answer 24

It will be shown as a net asset or a net liability, and not separate assets and liabilities.

It will have a pension liability or a pension asset account for the company.

It will have pension plan asset and a pension plan obligation.

Question 25

With respect to pensions, what are two decisions that a company will make before preparing financial statements?

Answer 25

1. Determine the pension expense 2. Decide whether it will pay an amount into the plan right now.

Question 26

T or F: Pension Liability = Pension Plans Assets - Pension Plan Obligations

Answer 26

True

Question 27

T or F: If the pension plans assets and obligations change, it may impact the determination of the pension expense on the side of the company?

Answer 27

True

Question 28

What are the different parts of a pension expense.

Answer 28

1. Current service cost 2. Past service cost 3. Interest on present obligation 4. Expected return on plan assets 5. Re-measurement gains and losses 6. Actuarial gains and losses 7. Change in valuation allowance.

Question 29

What is the current service cost? How is this cost determined? When does this cost commence? What is an attribution period?

Answer 29

Benefit earned by employees for the current year of service. It is determined through actuarial calculations with various factors and future salary amounts. Commences when they are hired and continue past even when they receive all their future benefits. It is the time between when the employee is first hired and when they get their full benefits.

Question 30

What is a past service cost? Does this relate to prior periods and when do we record it as a pension expense?

Answer 30

A cost that arises when there is an adoption of a plan or an amendment that would create additional benefits for services that were done in the past. This does not classify as a prior period as the amendment or adoption did not previously exist, it it recorded as a pension expense in the year they arise.

Question 31

When calculating interest on the obligation what information is needed?

Answer 31

1. Average balance of the obligation between the beginning of the period and the end of the period. 2. Unless otherwise specified, the changes in the plan are evenly throughout the year. 3. Discount rate - Current market interest rate for high-quality debt instruments, but ASPE permits the settlement rate.

Question 32

What is the expected return on the plan's assets? What rate is used to calculate the return on assets? How do we calculate the expected return?

Answer 32

The interest or other income from the plan's assets. The same rate is used to calculate interest on the obligation. The expected return is calculated as the expected return on the average plan's assets during the year, not the opening plan's assets.

Question 33

What is an actuarial gain or loss? What causes these actuarial gains and losses?

Answer 33

It is when the plans obligation or assets are different compared to what was expected. Inaccurate estimates or assumptions made in determining the rate of return.

Question 34

What is an asset experience gain/loss? What is this referred to as?

Answer 34

When the actual return on the plan's assets differs from the expected return on the plan's assets. This is referred to as a remeasurement gain or loss.

Question 35

What is a liability experience gain / loss? What are these referred to as?

Answer 35

Arises when the assumptions about current service costs, or interest costs on the plan obligation differ from the actual results. These are referred to as actuarial gains or losses.

Question 36

When do we assume that actuarial gains and losses occur? When do we assume remeasurement gains and losses occur?

Answer 36

We assume that they happen at the end of the year. We assume that they occur throughout the year since they relate to the rate of return.

Question 37

Where are actuarial gains/losses and remeasurement gains/losses recorded under IFRS and ASPE?

Answer 37

IFRS - Recorded under OCI ASPE - Recorded under pension expense

Question 38

What does amendment IAS 19 state regarding financial reporting of the pension expense and the expected returns and interest costs?

Answer 38

While not required, it suggests that separating them from the pension expense and disclosing it that way, may be more beneficial.

Question 39

How does a pension asset or a pension liability appear on the statement of financial position for the firm?

Answer 39

It is a pension asset if it is overpaid, and it is a pension liability if it is underpaid.

Question 40

Describe the legal perspective of legal title for pension plans. How much can we value if we can state that we have legal title too.

Answer 40

From the legal perspective, it may be difficult to argue that we hold the asset, as it is in the hands of the pension plan. However, if it can, the value of the asset that the company can report as having legal title to is the ceiling.

Question 41

What is the valuation allowance? What is an example?

Answer 41

It is a contra account to the pension asset account. It would appear below the pension asset account. Assume that the pension asset is 25,000, but the ceiling to which you can claim legal title to is 5000, therefore recording the following entry: Pension Expense - 20,000 Valuation Allowance - 20,000

Question 42

What do we disclose under ASPE with regard to pension plans?

Answer 42

1. Description of the plans 2. Most recent actuarial valuation 3. Pension Expense (Components that do not recur separately on the face of the statement or notes) 4. Pension liability

Question 43

What do we disclose under IFRS with regard to pension plans?

Answer 43

1. Pension expense for the period 2. Pension asset or liability on the SFP 3. Assumption underlying pension calculations such as discount rate used to calculate the interest, expected rates and compensation increases. 4. Reconciliation of the movement in the defined benefits obligation and planned assets. 5. Sensitivity of assumptions made.