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P14-12 Evaluating the effects of unreasonable rate of return
assumptions (LO14-3, LO14-4, LO14-6, LO14-9)
Requirement 1: US GAAP pension expense
New Service Cost $300.00
0
= Pension expense / (income) ($223.80)
11.20
***0.25 x $4,000 = $1,000
Note that if the CFO had used the traditional expected return on plan assets
corridor
-Expected Return on Plan Assets ***400.00
11.20
***0.10 x $4,000 = $400
period.
Requirement 2: IFRS pension expense
New Service Cost $300.00
rate of return to equal the discount rate.
Requirement 3: Effect of overstatement on U.S. GAAP amounts
To compute the incremental effect under U. S. GAAP, we first need to update
computed as follows:
Jan 1 2016 AOCI Balance $900.00
= Dec 31 2016 / Jan 1 2014 AOCI Balance $1578.80
Note that if the CFO had used the traditional estimate for return on plan
Jan 1 2016 AOCI Balance $900.00
= Dec 31 2016 / Jan 1 2017 AOCI Balance $978.8
Therefore, the net effect of the income management efforts is that there is an
of the Fair Value of Plan Assets as follows:
Jan 1 2016 PBO Balance $6,200.00
= Dec 31 2016 / Jan 1 2017 PBO Balance $6,650.00
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14-2
Jan 1 2016 FVPA Balance $4,000.00
= Dec 31 2016 / Jan 1 2017 PBO Balance $4,160.00
The corridor is 10% of Maximum $($6,650 PBO, $4,160 plan assets) or
$665.
In 2017, the amortization would be computed as follows:
[$978.80 actuarial loss – $665.00 corridor] / 25 years = $12.55
So, the “cost” of the aggressive accounting scheme is that 2017 pension
expense.
Requirement 4: Effect under IFRS
There is no incremental effect under IFRS because there is no
Financial Reporting and Analysis (7th Ed.)
Chapter 14 Solutions
Pensions and Postretirement Benefits
Cases
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or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part.
14-3
C14-1. GE Corporation: Interpreting OPEB disclosures (LO14-6, LO14-7)
Requirement 1:
(in millions)
1DR Retiree benefit plans cost $538
CR OCI - Prior service cost 48
To record amortization components
3DR Retiree health plans – due after one year 586
4DR OCI – Net actuarial loss (gain) 1,440
5DR OCI - Net actuarial loss (gain) 6
6DR Retiree health plans - due after one year 518
7DR Retiree health plans - due within one year 13
To reclassify between long-term and short-term health obligations and life
insurance obligations
The first six entries are very similar to the ones made for the GE pension
below. The debit of $48 to Retiree health plans – due after one year is offset
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or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part.
14-4
Retiree health plans -
due after one year
January 1, 2014 $7,095
6Employer contribution 518
$7,975
Retiree health plans -
due within one year
January 1, 2014 $531
Retiree life plans
January 1, 2014 $1,384
Requirement 2:
Presented below are t-accounts for AOCI – prior service cost and
AOCI – actuarial (gain) loss.
AOCI -
prior service cost
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on a website, in whole or part.
14-5
$24
AOCI -
actuarial (gain) loss
$1,667
$71
The credits to OCI – prior service cost decreases GE’s AOCI – prior
service cost from a $963 debit balance to a $24 credit balance. The credits
ending $71 credit balance and the beginning $1,667 credit balance, or a
negative $1,596.
Note that the $353 prior service cost amortization and the $48 curtailment
represent new losses that increase the retiree benefit liability and the Net
actuarial loss.
in the statement of comprehensive income and balance sheet.
C 14-2. Novartis: Interpreting IFRS pension accounting (LO14-3, LO14-6,
LO14-9)
Requirement 1:
The adoption of IAS 19 (R) increased Novartis’ annual pension expense in
Requirement 2:
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on a website, in whole or part.
14-6
IAS 19 (R) required firms to adjust the prior year’s reporting to help with
instead chosen to expense through net income all at one time.
Requirement 3:
There are likely no cash flow implications (ignoring potential tax
projected benefit obligation or of the fair value of the plan assets.
C 14-3. ExxonMobil: Interpreting pension and OPEB footnote
disclosures (LO14-3, LO14-6, LO14-7)
Using the Excel template will save students considerable time
because they will not have to enter all of the amounts.
All amounts are in millions.
Requirement 1 – Assets or liabilities on the balance sheet
Funded status equals a liability of $8,598. It is computed as the December
ExxonMobil’s balance sheet.
Requirement 2 – Analysis of AOCI – Actuarial (Gains) Losses for U.S
pensions
Accumulated Other
Comprehensive Income -
Actuarial (Gains) Losses
(U.S. Pension Plans)
Beginning $ 6,589
Amortization from curtailment $ 499
(-307-830)
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14-7
Requirement 3 – Expense for subsequent year
Service cost should be lower because of the increase in discount rate from
4.00% to 4.25%.
Interest cost will be similar to the 2015 amount. The increase in discount rate
reduced the December 31, 2015 PBO, as demonstrated by the PBO actuarial
indicates that the payments are for both unfunded and funded plans, while
note 1 under plan assets indicates that the payments are for only funded
plans.
Expected return will be 15% less because pension plan assets declined 15%
Based on the answer to part 2, there is a net decline in Actuarial losses
subject to amortization of $451 (ending balance of $6,138 less beginning
addition, we would not expect to see the curtailment loss amortization of
$499.
Given the lower amortization expense more than offsets the decline in
Requirement 4 – Short-term risk ratios
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14-8
The U.S. and non-U.S. pension amounts should summed to obtain the values
below. Using the Excel template facilitates substantially these calculations.
Market Cap = Stock price of $77.95 x 4,156 million shares
= $323,960
Mkt Cap
$323,960
Mkt Cap
$323,96
0
Requirement 5 – Long-term risk ratios
The U.S. and non-U.S. pension amounts should summed to obtain the values
below. Using the Excel template facilitates substantially these calculations.
LT Pension PBO
=
$44,700
=
0.138
Requirement 6 – Interpretation of risk ratios
From the chapter, we see that the median short-term pension ratio is 0.02
exceeds the median but is below the 75th percentile. Its short-term OPEB ratio
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14-9
of 0.024 is within the range of most OPEB ratios. Based on these ratios, we
would conclude that ExxonMobil has medium short-term retiree benefit risk.
The median long-term pension ratio 0.13, and the 75th percentile is 0.29, and
on these ratios, we would conclude that ExxonMobil has medium long-term
retiree benefit risk.
C 14-4. ExxonMobil: Comparing U.S. GAAP and IFRS pension and OPEB
accounting (LO14-9)
Note to Instructor: This solution focuses on ExxonMobil’s U.S. pension
Requirement – Comparison to IAS 19 (Revised 2011)
All referenced amounts are in millions.
1. ExxonMobil would still recognize its actuarial losses in OCI/AOCI and
return would by recognized in OCI in 2015, but they would not be
amortized in subsequent periods.
2. The effects of new amendments would be recognized as an increase or
costs are recognized immediately, pension and OPEB expense would
exclude amortization.
3. The expected return would be computed using the discount rate. If the
contributions and payments were made evenly during the year, then the
net income is $301 (interest cost of $785 less the recalculated expected
return of $484). The difference between the actual return of $(307) and
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or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website, in whole or part.
14-10
the recomputed expected return of $484 equals $791. This amount
financing cost of $301 (interest cost of $785 less the recomputed
expected return of $484) would be included as a financing component.
The amortization components would no longer be part of pension
between the expected and actual return would be recognized in OCI
without subsequent amortization.
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or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
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14-11
