19

INTERMEDIATE
ACCOUNTING
TENTH CANADIAN EDITION
Kieso Weygandt Warfield Young Wiecek McConomy
CHAPTER 19
Pensions and
Other Employee
Future Benefits
Prepared by:
Lisa Harvey, CPA, CA

Rotman School of Management,
University of Toronto
CHAPTE
19
R
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 employers 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 plans 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.
Copyright John Wiley & Sons Canada,
Ltd.
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 employers
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

Ltd.
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
Benefit Plans
Three examples of benefit plans:
1. Pension and other post-retirement plans (e.g.
health care and life insurance)
2. Post-employment benefit plans (e.g.
severance benefits and long-term disability
benefits)
3. Compensated absences (e.g. parental leaves,
unrestricted sabbatical leaves)

Ltd.
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
Ltd.
Pension Fund Stream

PENSION
FUND
EMPLOYER
Cash paid to pension

plan (contributions)
$
Fund
Assets
Pension recipients (benefits)

Ltd.
Pension Terminology
Funded
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

Ltd.
Pension Plans
The two most common types of pension plans
are:
1. Defined contribution (DC) plans
2. Defined benefit (DB) plans

Ltd.
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
Ltd.

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

Ltd.
10
10

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

Ltd.
11
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 trusts main goal is to ensure there will be enough pension assets
to pay the employers 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)
Ltd.
12
12

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

Ltd.
13
13

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 employers
obligation
Plan assets
Funded status
components and the
approach
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
14
14

Plans
Three methods of measuring the pension
obligation valuation
1. Vested benefit method
Based on current salary levels
Includes only vested benefits
2. Accumulated benefit method

Based on current salary levels
Includes both vested and non-vested service
3. Projected benefit method

Based on future salary levels
Includes both vested and non-vested service
Ltd.
15
15

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.
Ltd.
16
16
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
Ltd.
17
17
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

Ltd.
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18
Interest Cost
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
Ltd.
19
19
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

Ltd.
20
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
Ltd.
21
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

Ltd.
22
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
Ltd.
23
23
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
Ltd.
24
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

Ltd.
25
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

Ltd.
26
26
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
Allowed under ASPE

Ltd.
27
27
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

Ltd.
28
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
Ltd.
29
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

Ltd.
30
30
Approach Example (2013)
General Journal Entries
Items
Annual
Pension
Expense
Cash
Bal. Jan 1 2013
Net
Defined
Benefit
Liability/
Asset
0
Memo Record
Defined
Benefit
Obligation
100,000 Cr.
a) Service cost
9,000 Dr.
9,000 Cr.
b) Interest cost
10,000 Dr
10,000 Cr.
c) Actual return
10,000 Cr.
d) Contributions
8,000 Cr.
8,000 Dr.
7,000 Dr.
9,000 Dr.
100,000 Dr.
10,000 Dr.
e) Benefits paid
Expense entry, 2013
Contribution entry,
2013
Plan Assets
7,000 Cr.
9,000 Cr.

8,000Ltd.
Cr. 8,000 Cr.
31
31
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
Ltd.
32
32
Items
Annual
Pension
Expense
Cash
Bal. Dec. 31 2013
f) Past service cost
Memo Record
Net Defined Defined Benefit

Benefit
Obligation
Liability/
Asset
1,000 Cr.
112,000 Cr.
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.
j) Contributions
20,000 Cr.
20,000 Dr.
Contribution entry, 2014
8,000 Dr.
97,600 Dr.
111,000 Dr.
11,100 Dr.
k) Benefits paid
Expense entry, 2014
Plan Assets
8,000 Cr.
97,600 Cr.

Ltd. 20,000 Cr.
20,000 Cr.
33
33
To record expense:
Pension Expense
97,600
97,600
Cash
20,000

Ltd.
34
34
Approach Example (2015:
ASPE)
Items
Annual
Pension
Expense
Cash
Bal. Dec. 31 2014
Memo Record

Benefit
Obligation
Liability/
Asset
78,600 Cr.
212,700 Cr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Actual return
12,000 Cr.
o) Contributions
24,000 Dr.
p) Benefits paid
10,500 Dr.
28,530 Dr.
Expense entry, 2015
50,800 Dr.
Contribution entry, 2015
134,100 Dr.
12,000 Dr.
24,000 Cr.
q) Actuarial loss
Plan Assets
10,500 Cr.
28,530 Cr.
50,800 Cr.

Ltd. 24,000 Cr.
24,000 Cr.
35
ASPE)
To record expense:
Pension Expense
50,800
50,800
Cash
24,000

Ltd.
36
36
IFRS)
Items
Remeasurement (Gain)
Loss OCI
Annual
Pension
Expense
Cash
Bal. Dec. 31 2014
Memo Record

Benefit
Obligation
Liability/
Asset
78,600 Cr.
212,700 Cr.
l) Service cost
13,000 Dr.
13,000 Cr.
m) Interest cost
21,270 Dr
21,270 Cr.
n) Expected return
14,610 Cr.
o) Remeasurement loss
Plan Assets
134,100 Dr.
14,610 Dr.
2,610 Dr.
2,610 Cr.
p) Contributions
24,000 Cr.
q) Benefits paid
24,000 Dr.
10,500 Dr.
r) Liability loss
28,530 Dr.
Expense entry, 2015
Copyright
John
Canada,
31,140 Dr.
19,660
Dr. Wiley & Sons50,800
Cr.
Ltd.
10,500 Cr.
28,530 Cr.
37
IFRS)
To record expense:
Pension Expense
19,660
Remeasurement Loss (OCI) 31,140
50,800
Cash
24,000
Ltd.
38
38
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
Ltd.
39
39
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
Ltd.
40
40
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
Ltd.
41
41

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 employers
obligation
Plan assets
Funded status
components and the
approach
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
42
42
Presentation
Defined benefit assets/liabilities
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

Ltd.
43
43
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
Ltd.
44
44
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 years
expected funding contributions
Ltd.
45
45
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
Ltd.
46
46

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 employers
obligation
Plan assets
Funded status
components and the
approach
plans
Presentation,
Disclosure,
and Analysis
Presentation
Disclosure
Analysis

Ltd.
IFRS/ASPE
Comparison
Comparison of
IFRS and
ASPE
Looking ahead
47
47
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

Ltd.
48
48
COPYRIGHT
Copyright 2013 John Wiley & Sons Canada, Ltd. All
rights reserved. Reproduction or translation of this
work beyond that permitted by Access Copyright (The
Canadian Copyright Licensing Agency) is unlawful.
Requests for further information should be addressed
to the Permissions Department, John Wiley & Sons
Canada, Ltd. The purchaser may make back-up copies
for his or her own use only and not for distribution or
resale. The author and the publisher assume no
responsibility for errors, omissions, or damages
caused by the use of these programs or from the use
of the information contained herein.

Ltd.
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INTERMEDIATE

Lisa Harvey, CPA, CA

PENSIONS AND OTHER EMPLOYEE FUTURE BENEFITS

Pensions and Other Employee

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Nature of Pension Plans

The pension plan receives the contributions,

Pension Fund Stream

Cash paid to pension

Pension recipients (benefits)

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Defined Contribution Plans

Employee assumes the economic risk

Cost of the plan in the current year is known with

Defined Contribution Plans

Copyright John Wiley & Sons Canada,

Defined Contribution Plans

Copyright John Wiley & Sons Canada,

Defined Benefit Pension

The employer assumes the economic risk

Cost of plan not known with certainty, as it depends on

Defined Benefit Pension

Accounting for defined benefit plans is not easy to

Copyright John Wiley & Sons Canada,

Pensions and Other Employee

Copyright John Wiley & Sons Canada,

Defined Benefit Pension

2. Accumulated benefit method

3. Projected benefit method

Defined Benefit Pension

Defined Benefit Obligation

Current Service Cost

Copyright John Wiley & Sons Canada,

Current market rate

Benefits Paid to Retirees

Copyright John Wiley & Sons Canada,

Past Service Costs

Note that companies can also amend

Actuarial Gains and Losses

Experience gains or losses

Copyright John Wiley & Sons Canada,

Federal and provincial law dictate the

Return on Plan Assets

Under IFRS, rate used must be the same as

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Accounting for Pensions

A form of this approach is required by IFRS

Deferral and amortization approach

Allowed under ASPE

Copyright John Wiley & Sons Canada,

Copyright John Wiley & Sons Canada,

Past service cost

The Pension Worksheet

Copyright John Wiley & Sons Canada,

Bal. Jan 1 2013

Copyright John Wiley & Sons Canada,

Bal. Dec. 31 2013

f) Past service cost

Net Defined Defined Benefit

Contribution entry, 2014