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IAS 19 - Pensions and other employee benefits

IAS 19 - Pensions and other employee benefits. Executive summary. The concept, characteristics and accounting for defined contribution plans are similar under IFRS and US GAAP.

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IAS 19 - Pensions and other employee benefits

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  1. IAS 19 - Pensions and other employee benefits

  2. Executive summary • The concept, characteristics and accounting for defined contribution plans are similar under IFRS and US GAAP. • IFRS recognizes a liability equal to the present value of the defined benefit obligation, plus or minus any unrecognized actuarial gains and losses, minus unrecognized prior service costs, minus the fair value of any plan assets. • Under US GAAP, the liability equals the present value of the defined benefit obligation minus the fair value of any plan assets. • If actuarial gains and losses are recognized as they occur, US GAAP requires the effect to be presented in the income statement, while IFRS allows the option to present the effect in either the income statement or in other comprehensive income. • The OPEB liability under US GAAP is based on the accumulated postretirement benefit obligation (APBO), whereas IFRS measures the liability based on the present value of the defined projected benefit obligation (PVDBO). The difference is that the PVDBO considers future compensation levels and the APBO does not.

  3. Progress on convergence The Boards have agreed to a long-term convergence project to comprehensively challenge the accounting for postretirement benefits. The IASB issued an ED in April 2010, Defined Benefit Plans, with comments due September 6, 2010. The ED suggests only targeted improvement to expense recognition (e.g., the corridor approach would not be allowed), presentation and disclosure. A more comprehensive review of employee benefit accounting might be conducted after mid-2011. The FASB is currently monitoring the work of the IASB to determine its next steps.

  4. Defined contribution plans US GAAP IFRS The concept and characteristics of a defined contribution plan are similar.

  5. Defined benefit plans US GAAP IFRS The concept and characteristics of a defined benefit plan are similar.

  6. Accounting for defined benefit plansMeasurement of pension liability US GAAP IFRS Liabilities and costs for employee benefits generally are recognized in the period when the service is rendered. Similar Measurement of a defined benefit obligation generally includes, when applicable, estimated salary increases. The defined benefit obligation is the present value of benefits that have accrued to employees through services rendered to date, based on actuarial methods of calculation. US GAAP refers to this as the accrued projected benefit obligation (APBO). Similar, although the defined benefit obligation is referred to as the PVDBO.

  7. Accounting for defined benefit plansMeasurement of pension liability US GAAP IFRS For final-pay and career-average-pay plans, the projected-unit-credit method is used to calculate pension liabilities, which considers future compensation levels. Similar, although this method is used for all plans.

  8. Accounting for defined benefit plansRecognition of net funded status US GAAP IFRS The recognition of the overfunded (asset) or underfunded (liability) status on the balance sheet is required. Similar

  9. Accounting for defined benefit plansRecognition of net funded status US GAAP • The over/underfunded status of the plan is calculated as the difference between the fair value of the plan assets and the APBO. • Any unrecognized actuarial gains/losses and past service costs must be recognized in OCI. IFRS • The over/underfunded status of the plan is calculated as follows: • If underfunded, a liability must be recognized equal to the PVBO plus or minus any unrecognized actuarial gains and losses, minus unrecognized prior service costs, minus the fair value of any plan assets. • If overfunded, the asset is subject to a ceiling test and IFRIC 14.

  10. Example 1 The Kissel Trucking Company, Inc. (Kissel), based in Phoenix, has a defined benefit plan for its employees. At December 31, 2010, the following information is available regarding Kissel’s plan: Fair value of plan assets $12,000,000 Present value of defined benefit obligation 15,000,000 Interest costs 575,000 Net unrecognized actuarial gains 240,000 Recognized actuarial gains 180,000 Unrecognized past service costs – nonvested 175,000 Over/underfunded plan status calculation – pension plan example • Determine what Kissel will record on the balance sheet as of December 31, 2010 for this plan under both US GAAP and IFRS.

  11. Example 1 solution: Over/underfunded plan status calculation – pension example

  12. Accounting for defined benefit plansPension expense components – service costs US GAAP IFRS Service cost is included in pension expense and is due to the services rendered during the current period. Similar

  13. Accounting for defined benefit plansPension expense components – interest costs US GAAP IFRS Interest costs are included in pension expense and are based on an interest charge on the pension liability. Similar

  14. Accounting for defined benefit plansPension expense components – actual return on plant assets US GAAP IFRS The expected return on plan assets in included as a reduction of the pension expense. Note that US GAAP refers to the actual return on plan assets as the amount that is used to adjust the pension expense. However, the expected return on plan assets is the amount actually used to compute pension expense as an adjustment is recorded for the difference between the actual return on expected return as an “unexpected loss or gain.” Similar

  15. Accounting for defined benefit plansPension expense components – prior service costs US GAAP IFRS The amortization of prior service costs is included in pension expense. Similar

  16. Accounting for defined benefit plansPension expense components – prior service costs US GAAP • Prior service costs are initially deferred and recorded in OCI. • The amortization is recorded under a years-of-service approach although the straight-line method is an alternative. The amortization period is dependent upon the employee group: IFRS • Prior service costs for vested benefits may not be deferred and must be recognized in pension expense immediately. However, prior service costs for unvested benefits are deferred and amortized on a straight-line basis over the average remaining vesting period. • For active employees, the amortization period is over average remaining service lives of these employees. • For inactive or retired employees, the amortization period is over the average remaining life expectancy of these employees.

  17. Example 2 On January 1, 2010, the Banks Company, Inc. (BCI), based in Seattle, made amendments to its defined benefit plan, resulting in $150,000 of prior service costs. The plan has 100 active employees of which 60 are vested and the remaining 40 will be vested in three years. The majority of the employees are active. BCI’s accounting policy is to amortize prior service costs over the average remaining service period using a straight-line basis for US GAAP. BCI has determined the following information regarding the prior service costs: Amortization period for prior service costs example Unrecognized prior service costs applicable to: Vested employees $ 90,000 Unvested employees 60,000 Total unrecognized prior service costs $150,000 Future service years of employees expected to receive benefits: 650 years • Determine the amortization of the prior service costs under US GAAP and IFRS.

  18. Example 2 solution: US GAAP: (1) Annual amortization — 650 years/100 employees = 6.5 years; $150,000/6.5 = $23,077 Prior service costs are recognized on a straight line basis over the average remaining service period. Amortization period for prior service costs example

  19. IFRS: (2) Prior service costs for vested employees are recognized immediately and for unvested employees, amortization is recognized over the three years until vested. Amortization period for prior service costs example

  20. Accounting for defined benefit plansPension expense components – actuarial gain or loss US GAAP IFRS For active employees, actuarial gains and losses may be recognized as they occur or deferred through OCI. Similar If deferred, using a corridor approach, the excess of the net accumulated unrecognized actuarial gains and losses over a corridor amount (calculated as 10% of the larger of the APBO (under US GAAP) or PVDBO (under IFRS) or the fair value of the plan assets determined at the beginning of the year) may be recognized immediately in income or amortized into income. Similar, except the term PVDBO is used instead of APBO.

  21. Accounting for defined benefit plansPension expense components – actuarial gain or loss US GAAP • Actuarial gains and losses for inactive or retired employees may be recognized as they occur or deferred through OCI under the corridor approach. • If actuarial gains and losses are recognized as they occur, the effect must be presented in the statement of income. IFRS • Actuarial gains and losses for inactive or retired employees must be recognized as they occur. • If actuarial gains and losses are recognized as they occur, the effect may be presented in either the statement of income or in OCI.

  22. Accounting for defined benefit plansPension expense components – actuarial gain or loss US GAAP • If the entity chooses to amortize amounts in excess of the corridor: • Amortization is recorded under a years-of-service approach although the straight-line method is an alternative. The amortization period is dependent upon the employee group: IFRS • If the entity chooses to amortize amounts in excess of the corridor: • Amortization is recorded on a straight-line basis over the average remaining service lives of these employees. • For active employees, the amortization period is over average remaining service lives of these employees. • For inactive or retired employees, the amortization period is over the average remaining life expectancy of these employees.

  23. Example 3 Wiecek Company, Ltd (Wiecek) has a defined benefit plan and uses US GAAP to prepare its financial statements. Pension expense has historically been recognized in cost of sales and the net actuarial gain/loss component of expense is recognized as incurred. Wiecek’s chief financial officer has asked the controller if there are any options available in accounting for actuarial gains/losses when the company switches to preparing its financial statements using IFRS. Information about the benefit plan and Wiecek’s statement of comprehensive income are found on the next slide. Actuarial gains and losses recognized as occurred presentation example • Ignoring income tax effects, record the appropriate adjustments to revise Wiecek’s statement of comprehensive income to allow an alternative presentation under IFRS.

  24. Actuarial gains and losses recognized as occurred presentation example Example 3 (continued):

  25. Actuarial gains and losses recognized as occurred presentation example Example 3 solution: IFRS allows the option to present the effect of actuarial gains and losses that are recognized as they occur in either the statement of income or OCI, while US GAAP does not allow this option.

  26. Example 4 The Peter Company (Peter), based in Boston, has a defined benefit pension plan. Peter’s actuary has determined that a loss has occurred at the beginning of 2010 caused by demographic changes related to the composition of its workforce and revisions to life expectancy calculations. Peter uses the corridor approach to amortize unrecognized gains and losses. The following information relates to the actuarial loss: Actuarial loss related to active employees $315,000 Actuarial loss related to inactive/retired employees $85,000 Total actuarial loss $400,000 Average remaining services lives of active employees 20 years Average life expectancy of inactive/retired employees 15 years Actuarial gain or loss calculation example • Calculate the pension expense related to the actuarial loss for 2010, using US GAAP and IFRS, and compare the differences. Assume that the total actuarial loss of $400,000 is outside the corridor range.

  27. Actuarial gain or loss calculation example Solution: US GAAP: IFRS:

  28. OtherCurtailments US GAAP IFRS A curtailment results from an event that significantly reduces the expected years of future service of present employees or eliminates, for a significant number of employees, the accrual of defined benefits for some or all of their future services. Similar

  29. OtherCurtailments US GAAP • Curtailment losses are recognized when they are probable of occurring and to the extent they exceed any net gains in OCI. Curtailment gains are recognized at the curtailment date and only to the extent they exceed any net losses in OCI. IFRS • Gains and losses from curtailments are recognized when they occur. • The gain or loss includes a proportionate share of previously unrecognized past service cost and actuarial gains and losses where the proportionate share is determined on the basis of the present value of the obligations before and after the curtailment or settlement.

  30. Example 6 The Glazerman Automotive Company closed one of its dealership locations in New Jersey and terminated 150 employees. These employees had vested benefits of $760,000 and nonvested benefits of $180,000. Other pertinent information regarding the defined benefit plan at the curtailment date is as follows: Projected benefit obligation for vested employees $3,500,000 Projected benefit obligation for nonvested employees 1,200,000 Plan assets at fair value 3,200,000 Unrecognized prior service cost – nonvested 328,000 Unrecognized actuarial loss 280,000 Recognition of curtailment gains and losses example • Based on the information provided, determine the curtailment gain or loss and journal entry by completing the template on the next slide using the accounting standards under US GAAP and IFRS.

  31. Recognition of curtailment gains and losses example

  32. Recognition of curtailment gains and losses example Example 6 solution – US GAAP:

  33. Recognition of curtailment gains and losses example Example 6 solution – US GAAP (continued): The terminated employees’ share of vested and unvested benefits represents 20% of the total projected benefit obligation ($940,000/$4.7 million). Therefore, 20% of the unrecognized prior service cost (nonvested) is eliminated ($66,000). The gain of $940,000 is offset by the unrecognized net actuarial loss of $280,000. Journal entry: Accrued benefit cost $594,000 Gain from curtailment $594,000

  34. Recognition of curtailment gains and losses example Example 6 solution – IFRS:

  35. Recognition of curtailment gains and losses example Example 6 solution – IFRS (continued): The terminated employees’ share of vested and unvested benefits represents 20% of the total projected benefit obligation ($940,000/$4.7 million). Therefore, 20% of the unrecognized prior service cost (nonvested)($66,000) and 20% of the unrecognized actuarial loss ($56,000) are eliminated. Journal entry: Accrued benefit cost $818,000 Gain from curtailment $818,000

  36. Standard-setting update Under the IASB ED, the corridor approach would be eliminated and all changes in the value of long-term employee benefits will be recognized as they occur. Service costs and interest costs will be recorded into income. Remeasurements (actuarial gains and losses) will be recorded in OCI.

  37. OPEBsMeasurement of the liability US GAAP IFRS The liability for other long-term employee benefits is accrued during the service period. Similar

  38. OPEBsMeasurement of the liability US GAAP • Has specific guidance to account for OPEBs (ASC715-10 and ASC 715-20). • The OPEB liability is based on the accumulated postretirement benefit obligation (APBO). IFRS • Applies a single set of principles (IAS 19) to pension plans and plans for OPEBs. • Measures the liability based on the PVDBO. • The difference is that the PVDBO considers future compensation levels and the APBO does not.

  39. OPEBsRecognition of net funded status US GAAP IFRS The recognition of the overfunded (asset) or underfunded (liability) status on the balance sheet is required. Similar

  40. OPEBsRecognition of net funded status US GAAP • The over/underfunded status of the plan is calculated as the difference between the fair value of the plan assets and the APBO. • Any unrecognized actuarial gains/losses and past service costs must be recognized in OCI. IFRS • The over/underfunded status of the plan is calculated as follows: • If underfunded, a liability must be recognized equal to the PVDBO, plus or minus any unrecognized actuarial gains and losses, minus unrecognized prior service costs, minus the fair value of any plan assets. • If overfunded, the asset is subject to a ceiling test and IFRIC 14.

  41. Example 7 The Campbell Company (Campbell), based in New York, has a postretirement healthcare benefit plan for its employees. Campbell adopted ASC 715-10 and ASC 715-20 in prior years. At the beginning of the year, Campbell amended the plan to provide additional benefit accruals, which are included in the January 1, 2010 obligation. The facts on the next slide apply to the plan for the year ended December 31, 2010. Over/underfunded plan status calculation – employee benefit plan example • Determine the postretirement benefit expense and journal entries for the year ended December 31, 2010, using accounting for US GAAP and for IFRS.

  42. Plan assets at fair value on January 1, 2010 $284,000 Plan assets at fair value on December 31, 2010 $314,000 APBO at January 1, 2010 $360,000 Projected benefit obligation at January 1, 2010 $398,000 Actual return on plan assets $ 18,000 Expected return on plan assets 10% Service cost $ 35,000 Employer contributions $ 45,000 Benefit payments $ 33,000 Unamortized prior service costs (active, nonvested) $ 42,000 Average remaining service to expected retirement 10 years Average remaining vesting period of nonvested prior service costs 5 years Discount rate 6% Other assumptions: There are no unamortized gains or losses at the beginning of the year. All benefits paid and employer contributions were made at December 31, 2010 There were no gains or losses related to the pension obligation in 2010. Campbell has elected, for US GAAP purposes, to use straight-line amortization over the average remaining service life of the employees for computing the amortization of PSC versus a years-of-service method. Over/underfunded plan status calculation – employee benefit plan example

  43. Example 7 solution – US GAAP: Over/underfunded plan status calculation – employee benefit plan example

  44. Example 7 solution – US GAAP (continued): Interest cost on APBO – $360,000 x 6% = $21,600 Loss on actual versus expected return Rollforward of liability Plan assets $284,000 Liability (beginning of year) $(76,000) Expected rate of return 10% Postretirement expense (32,400) Expected return $ 28,400 Contributions 45,000 Actual return (18,000) Change in gain (loss) – OCI (10,400) Excess of expected over actual $ 10,400 Change in PSC/other – OCI 4,200 Liability (end of year) $(69,600) Journal entries Postretirement expense $32,400 Other comprehensive income 6,200 Postretirement liability 6,400 Cash $45,000 Over/underfunded plan status calculation – employee benefit plan example

  45. Example 7 solution – US GAAP (continued): Liability, beginning of year PSC amortization in 2010 Plan assets (beginning of year) $284,000 Accumulated PSC at January 1, 2010 $42,000 APBO (beginning of year) (360,000) Average remaining service to retirement 10 years Liability (beginning of year) $ (76,000) 2010 amortization ($42,000/10 years) $ 4,200 Liability, end of year Plan assets (end of year) $314,000 APBO (end of year) (383,600) Liability (end of year) $ (69,600) Over/underfunded plan status calculation – employee benefit plan example

  46. Example 7 solution – IFRS: IFRS: Over/underfunded plan status calculation – employee benefit plan example

  47. Example 7 solution – IFRS (continued): Interest cost on PVDBO – $398,000 x 6% = $23,880 Expected return Rollforward of liability Plan assets $ 284,000 Liability (beginning of year) $(72,000) Expected rate of return 10% Postretirement expense (38,880) Expected return $ 28,400 Contributions 45,000 Liability (end of year) $(65,880) Journal entries Postretirement expense $38,880 Postretirement liability 6,120 Cash $45,000 Over/underfunded plan status calculation – employee benefit plan example

  48. Example 7 solution – IFRS (continued): PSC amortization in 2008 Accumulated PSC at January 1, 2010 $42,000 Average remaining vesting period 5 years Amount subject to amortization $ 8,400 Composition of balance sheet liability Beginning of year End of year Fair value of plan assets $284,000 $314,000 PVDBO (398,000) (423,880) Unrecognized PCS and gains/losses 42,000 44,000 Balance $ (72,000) $ (65,880) Over/underfunded plan status calculation – employee benefit plan example

  49. Example 7 solution – IFRS (continued): Unexpected gain (loss) Plan assets at FV at December 31 $314,000 Less: Plan assets at FV at January 1 (284,000) Contributions received (45,000) Add: Benefits paid 33,000 Actual return on plan assets $ 18,000 Less: Expected return on plan assets (28,400) Actuarial loss on plan assets $ (10,400) Over/underfunded plan status calculation – employee benefit plan example

  50. OPEBsOPEB expense components – service costs US GAAP IFRS Service cost is included in OPEB expense. Similar

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