2. 19 PENSIONS AND OTHER EMPLOYEE FUTURE BENEFITS
After studying this chapter, you should be able to:
Understand the importance of pensions from a business perspective.
Identify and account for a defined contribution benefit plan.
Identify and explain what a defined benefit plan is and the related accounting issues.
Explain what the employer’s benefit obligation is, identify alternative measures for this obligation, and prepare a continuity schedule of transactions and events that change its balance.
Identify transactions and events that change benefit plan assets, and calculate the balance of the assets.
Explain what a benefit plan’s funded status is, calculate it, and identify what transactions and events change its amount.
Identify the components of pension expense, and account for a defined benefit pension plan under the immediate recognition approach.
Account for defined benefit plans with benefits that vest or accumulate other than pension plans.
Identify the types of information required to be presented and disclosed for defined benefit plans, prepare basic schedules, and be able to read and understand such disclosures.
Identify differences between the IFRS and ASPE accounting for employee future benefits and what changes are expected in the near future.

3. Pensions and Other Employee Future Benefits
Introduction and Benefit Plan Basics
Overview of pensions and their importance from a business perspective
Defined contribution plans
Defined benefit plans
Defined Benefit Pension Plans
The employer’s obligation
Plan assets
Funded status
Defined benefit cost components and the immediate recognition approach
Other defined benefit plans
Presentation, Disclosure, and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

4. Benefit Plans Three examples of benefit plans:
Pension and other post-retirement plans (e.g. health care and life insurance)
Post-employment benefit plans (e.g. severance benefits and long-term disability benefits)
Compensated absences (e.g. parental leaves, unrestricted sabbatical leaves)
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5. Nature of Pension Plans
A pension plan provides benefits (payments) to retirees for services provided during employment
The employer sponsors and contributes to the fund and incurs the cost of the pension plan
Requires accounting for the employer
The pension plan receives the contributions, administers pension assets and makes pension payments to the beneficiaries
Requires accounting for the pension plan
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6. $ Pension Fund Stream PENSION FUND EMPLOYER
Cash paid to pension plan (contributions) $
Fund
Assets
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Pension recipients (benefits)

7. Pension Terminology Funded Contributory Non-contributory
Employer sets aside money for future pension benefits in a separate legal entity
Contributory
Employee and employer make contributions to the plan
Non-contributory
Employers bear the full cost of the pension plan
No contributions made by employee
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8. Pension Plans The two most common types of pension plans are:
Defined contribution (DC) plans
Defined benefit (DB) plans
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9. Defined Contribution Plans
Employer contributes a defined sum (either a fixed sum or related to salary) to a third party
Ownership of plan assets assumed by plan trustee
Trustee is responsible for investment and distribution of plan assets
Employee assumes the economic risk
No guarantee made by employer as to benefits paid
Plan does not specify the benefits the employees will receive or the method used to determine benefits
Cost of the plan in the current year is known with certainty
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10. Defined Contribution Plans
Accounting is straightforward:
Liability reported if contributions for the period have not been made in full
Asset reported if the amount contributed is more than required for the period
The benefit cost (pension expense) is the amount the company is required to contribute to the plan
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11. Defined Contribution Plans
When plan is first established or when there is an amendment to the plan, the employer may be obligated to make contributions for previous employee services
Called prior or past service cost
Under IFRS, these costs are generally recognized immediately as an expense
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12. Defined Benefit Pension Plans
Pension benefits received by employee after retiring are specified (i.e. defined)
Pension benefits are based on a formula with key variables such as years of service and expected salary level at retirement
The trust’s main goal is to ensure there will be enough pension assets to pay the employer’s obligation to employees when they retire
The employer assumes the economic risk
Assets are legally owned by the trust but in substance belong to the employer (the beneficiary of the trust)
The employer is responsible for making the defined benefit payments no matter what happens in the trust
Cost of plan not known with certainty, as it depends on uncertain future variables (e.g. employee turnover, mortality, inflation)
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13. Defined Benefit Pension Plans
Can be vesting or non-vesting
Vested amounts plan become the legal property of the employee
Employees are entitled to receive vested benefits even after leaving the employ of the corporation
Accounting for defined benefit plans is not easy to measure:
The pension expense is not same as cash funding contribution
Actuarial assumptions must be used extensively
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14. Pensions and Other Employee Future Benefits
Introduction and Benefit Plan Basics
Overview of pensions and their importance from a business perspective
Defined contribution plans
Defined benefit plans
Defined Benefit Pension Plans
The employer’s obligation
Plan assets
Funded status
Defined benefit cost components and the immediate recognition approach
Other defined benefit plans
Presentation, Disclosure, and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

15. Defined Benefit Pension Plans
Three methods of measuring the pension obligation valuation
Vested benefit method
Based on current salary levels
Includes only vested benefits
Accumulated benefit method
Includes both vested and non-vested service
Projected benefit method
Based on future salary levels
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16. Defined Benefit Pension Plans
Projected benefit method is considered the best measure for accounting purposes
Present value of vested and non-vested benefits earned as at the reporting date (using future salary levels) is called defined benefit obligation (DBO)
Under ASPE, the DBO is known as the accrued benefit obligation (ABO)
ASPE also allows the accrued benefit obligation (ABO) for funding purposes which is based on different variables.
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17. Defined Benefit Obligation (DBO)
Defined benefit obligation, beginning
+ Current service cost
+ Interest cost
Benefits paid to retirees
+/- Past service costs of plan amendments during period
+/- Actuarial gains (-) or losses (+)
= Defined benefit obligation, end of period
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18. Current Service Cost
The cost of benefits that will be provided in the future in exchange for current services
These costs are prorated on service:
Annual expense is based on the total estimated benefit being allocated evenly over the years of service of the employee
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19. Interest Cost Current market rate Settlement rate
Interest accrues on the DBO as time passes
Similar to discounted debt
Current market rate
Determined by reference to current yield on high-quality debt instrument (e.g. corporate bonds)
Required by IFRS and ASPE
Settlement rate
Implied rate on insurance contract that would effectively settle pension obligation
Allowed under ASPE
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20. Benefits Paid to Retirees
Pension benefits are paid to retirees (former employees)
Like all liabilities, the amount owing is decreased as these payments are made
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21. Past Service Costs
Similar to DC plans, when a plan is started or amended, credit is often given for past years of service
This amount is included in the pension benefit cost on the income statement in the year it is incurred
Note that companies can also amend plans to reduce the benefits received
Results in a decreased DBO and a past service benefit
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22. Actuarial Gains and Losses
These gains and losses can occur because of:
Changes in actuarial assumptions
A change in assumptions about future events
Experience gains or losses
Difference between what actually happened and the actuarial assumption that was made
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23. Plan Assets Plan assets, fair value at beginning + Contributions
+/- Actual return
- Benefits paid to retirees
= Plan assets, fair value at end of period
* Actual return = Expected return + remeasurement gain on assets or – remeasurement actuarial loss on assets
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24. Contributions Contributions are made each year by:
The employer
The employees (if applicable)
Federal and provincial law dictate the funding requirements
The Canadian Revenue Agency (CRA) also dictates regulations as well as what contributions are tax deductible
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25. Return on Plan Assets
The income generated on the assets less administration costs
Due to year over year volatility, a long-term rate of return is estimated
This is referred to as the expected return
Under IFRS, rate used must be the same as the discount rate used to calculate interest cost
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26. Funded Status Defined Benefit Obligation (DBO)
- Fair Value of plan assets
= Funded status
DBO > Plan assets = underfunded = funded status liability
DBO < Plan assets = overfunded = funded status asset
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27. Accounting for Pensions
Pension cost should be accrued and recognized in accounting periods that benefit from employees’ service
Two approaches to accounting for pension expense
Immediate recognition approach
A form of this approach is required by IFRS
Allowed under ASPE
Deferral and amortization approach
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28. Immediate Recognition Approach
Statement of Financial Position Presentation
DBO and fund assets are off-balance sheet or memo accounts
Under IFRS, the net employee benefit or liability is reported
Under ASPE, the net employee benefit or liability is reported based on the funded status of the plan
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29. Immediate Recognition Approach
Income Statement Presentation
Pension expense is made up of:
Current service cost
Interest cost
Actual return on plan assets
Under IFRS, this amount is allocated between net income (interest amounts) and OCI (remeasurements)
Past service cost
Actuarial gains and losses
Under IFRS, these are included in OCI
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30. The Pension Worksheet
Used to accumulate information needed for the formal journal entries and to keep track of the relevant pension plan items and components reported off-balance sheet
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31. Immediate Recognition Approach – Example (2013)
General Journal Entries
Memo Record
Items
Annual Pension Expense
Cash
Net Defined Benefit Liability/ Asset
Defined Benefit Obligation
Plan Assets
Bal. Jan
100,000 Cr.
100,000 Dr.
a) Service cost
9,000 Dr.
9,000 Cr.
b) Interest cost
10,000 Dr
10,000 Cr.
c) Actual return
10,000 Dr.
d) Contributions
8,000 Cr.
8,000 Dr.
e) Benefits paid
7,000 Dr.
7,000 Cr.
Expense entry, 2013
Contribution entry, 2013
Balance Dec. 31, 2013
1,000 Cr.
112,000 Cr.
111,000 Dr.
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32. Immediate Recognition Approach – Example (2013)
To record expense: Pension Expense 9,000 Net Defined Benefit Liability/Asset 9,000 To record contribution: Net Defined Benefit Liability/Asset 8,000 Cash 8,000
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33. Immediate Recognition Approach – Example (2014)
General Journal Entries
Memo Record
Items
Annual Pension Expense
Cash
Net Defined Benefit Liability/ Asset
Defined Benefit Obligation
Plan Assets
Bal. Dec
1,000 Cr.
112,000 Cr.
111,000 Dr.
f) Past service cost
80,000 Dr.
80,000 Cr.
g) Service cost
9,500 Dr.
9,500 Cr.
h) Interest cost
19,200 Dr
19,200 Cr.
i) Actual return
11,100 Cr.
11,100 Dr.
j) Contributions
20,000 Cr.
20,000 Dr.
k) Benefits paid
8,000 Dr.
8,000 Cr.
Expense entry, 2014
97,600 Dr.
97,600 Cr.
Contribution entry, 2014
Balance Dec. 31, 2014
78,600 Cr.
212,700 Cr.
134,100 Dr.
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34. Immediate Recognition Approach – Example (2014)
To record expense: Pension Expense 97,600 Net Defined Benefit Liability/Asset 97,600 To record contribution: Net Defined Benefit Liability/Asset 20,000 Cash 20,000
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35. Immediate Recognition Approach – Example (2015: ASPE)
General Journal Entries
Memo Record
Items
Annual Pension Expense
Cash
Net Defined Benefit Liability/ Asset
Defined Benefit Obligation
Plan Assets
Bal. Dec
78,600 Cr.
212,700 Cr.
134,100 Dr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Actual return
12,000 Cr.
12,000 Dr.
o) Contributions
24,000 Cr.
24,000 Dr.
p) Benefits paid
10,500 Dr.
10,500 Cr.
q) Actuarial loss
28,530 Dr.
28,530 Cr.
Expense entry, 2015
50,800 Dr.
50,800 Cr.
Contribution entry, 2015
Balance Dec. 31, 2015
105,400 Cr.
265,000 Cr.
159,600 Dr.
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36. Immediate Recognition Approach – Example (2015: ASPE)
To record expense: Pension Expense 50,800 Net Defined Benefit Liability/Asset 50,800 To record contribution: Net Defined Benefit Liability/Asset 24,000 Cash 24,000
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37. Immediate Recognition Approach – Example (2015: IFRS)
General Journal Entries
Memo Record
Items
Remeasure- ment (Gain) Loss OCI
Annual Pension Expense
Cash
Net Defined Benefit Liability/ Asset
Defined Benefit Obligation
Plan Assets
Bal. Dec
78,600 Cr.
212,700 Cr.
134,100 Dr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Expected return
14,610 Cr.
14,610 Dr.
o) Remeasurement loss
2,610 Dr.
2,610 Cr.
p) Contributions
24,000 Cr.
24,000 Dr.
q) Benefits paid
10,500 Dr.
10,500 Cr.
r) Liability loss
28,530 Dr. .
28,530 Cr.
Expense entry, 2015
31,140 Dr.
19,660 Dr.
50,800 Cr.
Contribution entry, 2015
Balance Dec. 31, 2015
105,400 Cr.
265,000 Cr.
159,600 Dr.
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38. Immediate Recognition Approach – Example (2015: IFRS)
To record expense: Pension Expense 19,660 Remeasurement Loss (OCI) 31,140 Net Defined Benefit Liability/Asset 50,800 To record contribution: Net Defined Benefit Liability/Asset 24,000 Cash 24,000
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39. Valuation of Accrued Benefit Asset
Accrued benefit asset cannot exceed expected future benefits (valuation allowance may be necessary to reduce the value on statement of financial position)
Referred to as the asset ceiling test
Change in valuation allowance is generally recognized through pension expense in net income
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40. Other Defined Benefit Plans with Benefits that Vest or Accumulate
Accrual accounting is appropriate for post-retirement benefits, post-employment benefits and long-term compensated absences
Example: post-retirement health care benefits
Since the right to the benefit is earned by rendering service, the cost and related liability are accrued as employee provides service
IFRS generally follows the same approach as for pension plans, except that actuarial gains/losses and past service costs are reflected in OCI
Under ASPE, defined benefit plans where benefits vest or accumulate based on service are accounted for in same way as defined benefit pension plans
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41. Defined Benefit Plans with Benefits that Do Not Vest or Accumulate
E.g. parental leave plans (in excess of what government provides), long-term disability plans
Use “event accrual” method to accrue full cost
When event occurs that obligates entity:
Benefit Expense xx
Benefit Liability xx
When the compensated absence is taken:
Benefit Liability xx
Cash xx
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42. Pensions and Other Employee Future Benefits
Introduction and Benefit Plan Basics
Overview of pensions and their importance from a business perspective
Defined contribution plans
Defined benefit plans
Defined Benefit Pension Plans
The employer’s obligation
Plan assets
Funded status
Defined benefit cost components and the immediate recognition approach
Other defined benefit plans
Presentation, Disclosure, and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

43. Presentation Defined benefit assets/liabilities Benefit costs
Generally reported separately for each benefit plan (unless all plans result in asset or liability)
Generally classified as long-term
Benefit costs
Components of benefit costs may be reported together or separately on the income statement
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44. Disclosure Requirements
Disclosures under ASPE include:
Description of each plan and any major changes in terms during the year
Information on most recent actuarial valuation for funding purposes
Funded status at year end (including FV of plan assets and ABO)
Explanation of differences between funded status and amounts recorded on balance sheet
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45. Disclosure Requirements
Additional disclosure requirements under IFRS include:
Characteristics of defined benefit plans and related risks
Amounts included in statements from the plans
How the plans help with cash flow management
Reconciliations of beginning to ending balances of PV of the net defined benefit liability/asset, plan assets and DBO
Amounts included in periodic net income and OCI
Underlying assumptions and sensitivity information
Many others such as the estimate of following year’s expected funding contributions
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46. Analysis
Analysis generally focuses on predicting future cash flow obligations
It is very important to validate the major assumptions underlying the fund status and future cash requirements, especially
Discount rate used to measure DBO
Current service cost
Interest cost
Small changes in key variables can have a very significant impact
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47. Pensions and Other Employee Future Benefits
Introduction and Benefit Plan Basics
Overview of pensions and their importance from a business perspective
Defined contribution plans
Defined benefit plans
Defined Benefit Pension Plans
The employer’s obligation
Plan assets
Funded status
Defined benefit cost components and the immediate recognition approach
Other defined benefit plans
Presentation, Disclosure, and Analysis
Presentation
Disclosure
Analysis
IFRS/ASPE Comparison
Comparison of IFRS and ASPE
Looking ahead

48. Looking Ahead
Recent changes to IFRS has created additional differences between IFRS and ASPE
Expected replacement of the ASPE pension section is expected to take these differences into account
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49. COPYRIGHT
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