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Case 17–3 (concluded)
Requirement 4
Two of the other amounts reported in the disclosure note are reported in the
Requirement 5
Gains and losses occur when either the PBO or the return on plan assets turns out
to be different than expected. LGD’s net gain indicates that cumulative previous
gains of either type have exceeded cumulative previous losses of either type. The
Requirement 6
As mentioned in the previous part, losses and gains are reported in the statement
of comprehensive income as they occur. These amounts accumulate as a net gain or
net loss in the balance sheet as part of accumulated other comprehensive income,
one of the components of shareholders’ equity.
17–38 Intermediate Accounting, 8e
Communication Case 17–4
First, this case has no right or wrong answer. The process of developing the
proposed solutions will likely be more beneficial than the solutions themselves.
Students should benefit from participating in the process, interacting first with other
group members, then with the class as a whole.
Solutions should take into account the facts brought out in the solution to the
previous case on which this one is based. Also, it is likely that some of the
suggestions will be variations of the following alternatives:
1. The FASB “funded status” approach as described in the text.
Real World Case 17–5
Requirement 1
PetSmart’s pension plan is a defined contribution plan in the form of a 401(k) plan. It
is described in disclosure note 10:
Note 10 — Employee Benefit Plans (in part)
We have a defined contribution plan, or the “Plan,” pursuant to Section 401(k) of the
Requirement 2
Defined contribution plans promise defined periodic contributions to a pension fund,
17–40 Intermediate Accounting, 8e
Case 17–5 (concluded)
Requirement 3
PetSmart matches contributions dollar for dollar. Also, both employee and employer
contributions vest immediately. So, she is entitled to roll over $2,400:
Employee contribution $1,000
Requirement 4
PetSmart’s plan is a 401(k) plan—named after the Tax Code section that specifies the
Ethics Case 17–6
Mr. Maxwell’s apparent motivation for the change in the way contributions are
handled is to have the company benefit from the earning power of the contributed
Research Case 17–7
Results will vary depending on companies chosen.
Requirement 2
Walmart has a defined contribution plan in the form of a 401k plan.
The company provided the following disclosures in its annual report for the year
ending January 31, 2014:
Note 12. Retirement-Related Benefits (in part)
The Company offers 401(k) plans for associates in the United States and Puerto Rico,
under which associates generally become participants following one year of
Requirement 3
For Walmart, annual contribution expense for U.S. defined contribution plans were
$877 million, $818 million and $752 million for fiscal years ended January 31, 2014,
Case 17–7 (concluded)
Older, more mature, companies are more likely to have defined benefit plans.
Requirement 4
For Macy’s, the following weighted average assumptions were used to determine
benefit obligations for the supplementary retirement plan at February 1, 2014 and
February 2, 2013:
Discount rate 4.50% 4.15%
Specifically, section k states:
k. On a weighted-average basis, all of the following assumptions used in the
accounting for the plans, specifying in a tabular format, the assumptions used to
determine the benefit obligation and the assumptions used to determine net benefit
cost:
1. Assumed discount rates (refer to paragraph 715-30-35-45 for a discussion of
17–44 Intermediate Accounting, 8e
Real World Case 17–8
Answers will vary depending on the year of the financial statements used. The
following answers are based on FedEx’s fiscal 2013 financial statements.
Requirement 1
FedEx sponsors both defined benefit and defined contribution pension plans as
well as a postretirement healthcare plan. These are described in disclosure note 13:
PENSION PLANS. Our largest pension plan covers certain U.S. employees age 21
and over, with at least one year of service. Pension benefits for most employees are
accrued under a cash balance formula we call the Portable Pension Account. Under
the Portable Pension Account, the retirement benefit is expressed as a dollar
POSTRETIREMENT HEALTHCARE PLANS. Certain of our subsidiaries offer
medical, dental and vision coverage to eligible U.S. retirees and their eligible
dependents. U.S. employees covered by the principal plan become eligible for
Case 17–8 (continued)
Requirement 2
A pension plan is underfunded when the obligation (PBO) exceeds the resources
available to satisfy that obligation (plan assets) and overfunded when the opposite
is the case. The PBO exceeds plan assets in both years reported. Thus, a net
Postretirement
Pension Plans Healthcare Plans
2013 2012 2013 2012
Accumulated Benefit Obligation ("ABO") $21,958 $21,556
Changes in Projected Benefit Obligation ("PBO") and Accumulated Postretirement Benefit Obligation
("APBO")
PBO/APBO at the beginning of year $22,187 $17,372 $90 $648
Service cost 692 593 42 35
Change in Plan Assets
Fair value of plan assets at the beginning of year $17,334 $15,841 $ — $ —
Actual return on plan assets 2,081 1,235 — —
17–46 Intermediate Accounting, 8e
Case 17–8 (concluded)
Requirement 3
FedEx reports three actuarial assumptions used to determine projected benefit
obligations:
Pension Plans 2014 2013
Discount rate 4.79% 4.44%
Rate of increase in future
Real World Case 17–9
Requirement 1
The increase in a company’s PBO attributable to making a plan amendment
retroactive is referred to as the prior service cost. Prior service cost adds to the
cost of having a pension plan. Amending a pension plan typically is done with the
Requirement 2
The amendment increased GM’s pension obligation. GM’s pension expense will
Analysis Case 17–10
Requirement 1
Normally, a company’s net periodic pension cost represents an expense and
therefore decreases earnings. Often, though, circumstances cause this element of
Consider the following disclosure adapted from a pension disclosure note in a
previous annual report of Qwest Communications that indicated that “the pension
plan contributed” $87 million to reported earnings during the year:
($ in millions)
Service cost $ 170
Case 17–10 (concluded)
Requirement 2
Companies must report the actuarial assumptions used to make estimates
concerning pension plans, namely the discount rate, the average rate of
compensation increase, and the expected long-term rate of return on plan assets.
• The expected long-term rate of return on assets directly affects the net pension
expense. The higher the rate, the higher the “expected return on assets,” a
17–50 Intermediate Accounting, 8e
Research Case 17–11
The specification of postretirement benefit coverage in the Content Specification
Outline will depend on the date the website is accessed.
The examination structure comprises four separately scored sections:
• Auditing & Attestation
Postretirement benefits are not specifically mentioned by name. However, the content
specification outline indicates testing of standards for presentation and disclosure in
the balance sheet and of comprehensive income and, more specifically, employee
benefits are tested in the Financial Accounting & Reporting section.
The education requirements to sit for the CPA exam vary somewhat from state to
state. In Tennessee, examination candidates must have a minimum of 150 semester
(225 quarter) hours, which includes:
• A baccalaureate or higher degree from a Board-recognized academic institution,
Analysis Case 17–12
Requirement 1
($ in millions)
Net loss, February 2, 2013 $1,326
Requirement 2
Gains or losses should not be part of pension expense unless and until total net
gains or losses exceed a defined threshold. Specifically, a portion of the excess is
($ in millions)
Net loss, February 2, 2013 $ 1,326.0
Less: 10% corridor (threshold)* (355.5)
17–52 Intermediate Accounting, 8e
Case 17–12 (concluded)
Requirement 3
($ in millions)
Net gain, February 2, 2013 $23
Requirement 4
Note 10 states the effect on expense of a 1% decrease in the healthcare
Air France–KLM Case
Requirement 1
Under IAS No. 19, prior service cost (called past service cost under IFRS) is
combined with service cost as part of net periodic pension cost and reported within the
Requirement 2
AF used IFRS, and thus reports gains and losses among OCI items
“Remeasurements of defined benefit pension plans” in the statement of
Requirement 3
Under IFRS the various components of pension expense are not reported as a
single net amount. AF separately reports service cost (including past service cost) net
17–54 Intermediate Accounting, 8e
AF Case (concluded)
Requirement 4
As shown in Note 23. Pension Assets, AF reported a Net pension cost for 2013 of
