Chapter 20 Post Employment Benefits

Front 1

Service Cost

Back 1

actuarial present value of the benefits attributed by the pension benefit formula to services of the employees during the current period.

Hint 1

present value of deferred compensation to be paid to employees during their retirement in return for their current services

Front 2

Interest Cost

Back 2

the increase in the projected benefit obligations due to the passage of time. Projected benefit obligation is the present value of the deferred compensation earned by the employees to date.

Hint 2

The interest cost is the projected benefit obligation at the beginning of the period multiplied by the discount rate used by the company.

Front 3

Expected return on plant assets

Back 3

expected increase in the plant assets due to investing activities.

Hint 3

Investments in stocks, securities, etcetra.

Front 4

Amortization of Prior Service Cost

Back 4

Retroactive benefits based on prior service which increases the projected benefit obligation

Front 5

Gain or Loss

Back 5

difference between projected benefits and fair value of pension plan assets. Also changes in assumptions

Hint 5

Any gain or loss is not recognized in pension expense in the period it occurs but recognized as an asset or liability of other comprehensive income

Front 6

Components of pension Expense

Back 6

Service Cost + Interest Cost (PBO x discount rate) - Expected return of plant assets (Fair value x expected long term rate of return) + Amortization of prior service cost (Present value of additional benefits amortized over service life of active employees)

Hint 6

+- Gain or Loss (Amortization of cumulative net gain or loss from previous periods in excess of the corridor)

Front 7

Ending Projected Benefit Obligation:

Back 7

Beg projected benefit obligation+Prior Service Cost=Adjusted beginnig PBO balance+Service cost for period+Interest Cost on PBO +-actuarial losses or gains -Payment to retirees

Front 8

Ending Fair Value of Pension Plan Assets

Back 8

Beginning fair value of pension plan assets+Actual return on plan assets+Contributions (amount funded) by the company -Payment to retirees

Front 9

Interest Cost (Discount Rate)

Back 9

Calculated (Previous Projected Benefit Obligation + Service Cost + Interest less payment to retirees)

Front 10

Amortization of Prior Service Cost original entry
Dr Comprehensive Income $2,000,000
Cr Accrued Pension Cost $2,000,000

Back 10

When it is amortized, it is included in pension expense which is part of net income and needs to be taken out of comprehensive income to avoid double counting.

Hint 10

Amortization Entry

Dr Accrued/Prepaid Pension Cost $100,000
Cr Comprehensive Income $100,000

Front 11

Amortization of Net Gain

Dr Accrued/Prepaid Pension Cost 50,000
Cr Comprehensive Income 50,000

Back 11

When it is amortized, it reduces pension expense and is included in net income. It must be taken out of comprehensive income to avoid double counting

Hint 11

Net Gain Amortization entry

Dr Comprehensive income 5,000
Cr Accrued/Prepaid Pension Cost 5,000

Front 12

Amortization of Net Loss

Dr. Comprehensive Income 60,000
Cr. Accrued/Prepaid Pension Cost 60,000

Back 12

When it is amortized, it increases pension expense and included in net income. Needs to be taken out of Other Comprehensive Income

Hint 12

Net Loss Amortization

Dr. Accrued/Prepaid Pension Cost 6,000
Cr. Other Comprehensive Income 6,000

Front 13

PBO calculation
Post Employment Benefit Obligation

Back 13

Increase
Prior Service Cost
Service Cost
Interest

Hint 13

Decrease
Contribution
Earnings (Return on Assets)

Front 14

Interest Cost

Back 14

Each year the employee gets closer to retirement, hence the present value of the obligation increases