Chapter 17 The Amounts Each Are Reported The Disclosure

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