Accounting Chapter 17 Homework The Gain And Loss Becomes Part The

PENSION PLAN ASSETS

Global Communications funds its defined benefit pension plan

by contributing each year the year’s service cost plus a portion

of the prior service cost. Cash of $48 million was contributed to

the pension fund in 2016.

Plan assets at the beginning of 2016 were valued at $300

million. The expected rate of return on the investment of those

assets was 9%, but the actual return in 2016 was 10%.

Retirement benefits of $38 million were paid at the end of 2016

to retired employees.

What is the value of the company’s pension plan assets at the

end of 2016?

($ in millions)

Plan assets at the beginning of 2016 $300

T17-11

17–22 Intermediate Accounting, 8/e

PENSION EXPENSE

CHANGES IN THE PENSION LIABILITY AND

PENSION PLAN ASSETS AFFECT PENSION EXPENSE

CHANGES IN THE PBO:

Included currently:

Service cost – increase in the employer’s obligation attributed to employee

service during the period

Delayed recognition (recognized in pension expense over time):

Losses or (gains) on the PBO – increases or (decreases) in the estimate of the

PBO from revisions in underlying assumptions

CHANGES IN PLAN ASSETS:

Included currently:

Return on the plan assets – increase in the value of plan assets during the

PENSION EXPENSE

Reports from the actuary and the trustee of plan assets:

PLAN

($ in millions) PBO ASSETS

Beginning of 2016 $400 Beginning of 2016 $300

Service cost 41 Return on plan assets,

T17-13

17–24 Intermediate Accounting, 8/e

AMORTIZATION OF PRIOR SERVICE COST

➢ By the straight-line method, prior service cost is recognized

over the average remaining service life of the active employee

group.

($ in millions)

Service cost $41

T17-14

GAINS AND LOSSES

Projected Benefits Return on

Obligation Plan Assets

T17-15

17–26 Intermediate Accounting, 8/e

AMORTIZATION OF NET LOSS–PENSIONS

We assume a net loss–AOCI of $55 million at the beginning of

2016. The PBO and plan assets are $400 million and $300 million,

respectively, at that time.

($ in millions)

Net loss–pensions (previous losses exceeded previous gains) $55

REPORTING THE FUNDED STATUS

OF THE PENSION PLAN

A company must report in its balance sheets a liability for the

underfunded (or asset for the overfunded) status of its postretirement plans.

T17-17

17–28 Intermediate Accounting, 8/e

Recording Gains and Losses

($ in millions)

Loss–OCI (from change in assumption) 23

PBO ………………………. .. 23

T17-18

RECORD PENSION EXPENSE

($ in millions)

Pension expense (total) ……………………………….. 43

T17-19

17–30 Intermediate Accounting, 8/e

RECORD PENSION FUNDING AND RETIREE

BENEFITS

When Global adds its annual cash investment to its plan

assets, the value of those plan assets increases by $48

million:

T17-20

PENSION SPREADSHEET

($ in millions)

Note: ( )s indicate credits; debits

otherwise

PBO

Plan

Assets

Prior

Service

Cost

Net

Loss

Pension

Expense

Cash

Net Pension

(Liability) /

Asset

Balance, Jan. 1, 2016

(400)

300

56

55

(100)

Amortization of:

Balance, Dec. 31, 2016

(450)

340

52

74

(110)

T17-21

17–32 Intermediate Accounting, 8/e

INTERNATIONAL FINANCIAL REPORTING STANDARDS

➢

Actuarial Gains and Losses. Under both U.S.

GAAP and IFRS we report gains and losses among

OCI items in the statement of comprehensive

income, thus subsequently become part of AOCI

T17-22

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Prior Service Cost. Under U.S. GAAP, prior service cost is

included among OCI items in the statement of

T17-23

17–34 Intermediate Accounting, 8/e

INTERNATIONAL FINANCIAL REPORTING STANDARDS

➢ Under IFRS the various components of pension

expense are not reported as a single net amount. We

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