Intermediate Accounting

13th Canadian Edition, Volume 2

Kieso ● Weygandt ● Warfield ● Wiecek ● McConomy

Chapter 19

Pensions And Other Post-Employment

Benefits
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Chapter 19: Pensions and Other Post-
Employment Benefits (LO 1 to LO 4)
After studying this chapter, you should be able to:
1. Understand the importance of pensions from a business
perspective.
2. Identify and account for a defined contribution plan and
distinguish between defined contribution and defined benefit
plans.
3. 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.
4. Identify transactions and events that change benefit plan assets
and a benefit plan surplus or deficit and calculate the balance
of the plan assets and the plan surplus or deficit.
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Chapter 19: Pensions and Other Post-
Employment Benefits (LO 5 to LO 8)
After studying this chapter, you should be able to:
5. Identify the components of defined benefit cost, and account
for a defined benefit pension plan under IFRS and ASPE.
6. Account for defined benefit plans with benefits that vest or
accumulate other than pension plans.
7. 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.
8. Identify differences in accounting between IFRS and ASPE, and
what changes are expected in the near future.

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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 with benefits provided after
employment but before retirement (e.g., severance benefits
and long-term disability benefits; continuation of health
care and life insurance)
3. Accumulating and vested compensated absences (e.g.,
parental leaves, unrestricted sabbatical leaves, accumulated
sick days)

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Overview of Pension Plans
• A pension plan, together with post-retirement health
care, is often part of an employee’s overall compensation
package
• The size of these plans often make costs very large relative
to a company’s financial position
• Accounting for pension plans can be complicated: affected
by market performance, changes in interest rates, interest
rate assumptions
• Many organizations are taking advantage of data analytics
tools to help predict the impact of members’ options and
lifestyle risks
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Nature of Pension Plans
• An arrangement where an employee receives benefits
(payments) after retirement for services provided while
working
• Contributory plans: employees pay part of the cost or
volunteer additional payments to increase benefits
• Non-contributory plans: employer bears the full cost
• Pension plans generally designed in accordance with
federal income tax laws
• Tax laws permit deductions of contributions, offer tax-free
status for earnings on the plan assets; however, benefits
are taxable to the pensioner
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Structure of Pension Plans
• The fund is a separate legal entity—receives the
contributions, administers the assets, makes payments
• Assets that are transferred become the assets of the fund;
they are not company assets
• Fund is a separate reporting entity—maintains separate
books, and issues its own financial statements

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Types of Pension Plans: Defined
Contribution Plan
• Employer contributions defined; employee benefits are not
o Once required contributions are made, no further obligation
on the part of the employer
o Amounts paid in are attributed to individuals
o Contributions may be a fixed sum or based on salary
• Employee assumes economic risk—payment depends on
o Amounts that have been contributed
o Income that has accumulated
o Treatment of forfeitures by terminations
o Investment alternatives available on retirement

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Accounting for a Defined Contribution
Plan
• Employer’s obligation is dictated by amounts contributed
o SFP liability if contributions have not been made in full
o SFP asset if more than required has been contributed
• Annual current service cost: amount company is obligated
to pay to the plan in exchange for employee services
provided in current period
o Includes PV of future contributions for employee services
provided in current period
o Annual cost is known with certainty
• Obligation and associated cost is accrued as an expense as
employee provides the service
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Other Components of a Defined
Contribution Plan
• Past service cost
o Contributions for services provided before start of the plan
or due to a plan amendment
o Generally recognized immediately in expense (IFRS, ASPE)
• Accrued contributions
o If the company has accrued contributions required to be
made in future periods for current or prior service, interest
should be recognized on the accrued amounts
• Unallocated plan surplus
o Interest earned from conversion surpluses should be
deducted from cost
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Types of Pension Plans: Defined
Benefit Plan
• Specifies either the benefits to be received by an
employee, or the method of determining the benefits
• Most complex type plan provides benefits that vest based
on the employee’s length of service
o Entitlement to benefit increases with length of service
• Accounting for these plans requires
o Expense and liability to be recognized over the accounting
periods the services are provided
o Employer’s obligation and cost to be accrued as an expense
as employee provides the service
• Remeasurements to net income (ASPE) and OCI (IFRS)
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Requirements of a Defined Benefit
Plan
• To ensure benefits available at retirement, there is usually
a requirement that funds be set aside during service life
• Employer assumes the economic risk with benefit plan
o Cost is uncertain
o Trust invests assets to build the fund so it can meet
retirement obligations
o Trust is a separate entity, but in substance assets and
liabilities belong to the employer
o Employer is responsible for paying benefits, no matter what
happens in the trust
• Sometimes employer can recapture excess trust assets
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Accounting for a Defined Benefit Plan
• Not easy to measure pension cost and liability
• Cost is affected by a wide range of uncertain future
variables
• Important to establish a funding pattern—there should be
enough money at retirement to meet the benefits defined
by the plan
• Employers rely heavily on information from actuaries for
help in developing, implementing, and determining the
funding of pension plans
• For many years defined benefit plans were underfunded;
more companies moving to defined contribution plans
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Defined Benefit Obligation
• Post-employment benefit accounting is based on two
foundations
1. The employer’s obligation to pay out benefits in the
future for the employees’ services up to the date of
the statement of financial position—estimated by the
actuary
2. Setting aside plan assets to fund this obligation

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The Employer’s Obligation
• Different ways of measuring employer’s pension
obligation
• Deciding which to use—critical choice as it affects the
amount of pension liability and defined benefit expense
• Generally, the estimated future benefits to be paid are
discounted to their present value (means the actuarial
present value)

Expense to be recognized each period

is not the same as the employer’s cash
funding contribution

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Different Methods of Measuring the
Pension Obligation
• Vested benefit: actuaries calculate vested benefit
obligation using vested benefits only; current salary levels
• Accumulated benefit: calculated on all years of service—
both vested and non-vested—using current salary levels
o Allowed under ASPE where future salary levels/costs do not
affect employee future benefits
• Projected benefit: uses both vested and non-vested
service; future salaries projected to retirement
o Results in largest measure of pension obligation
o Best measure for accounting purposes (ASPE and IFRS)

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Accounting for Defined Benefit Pension
Plans: The Employer’s Obligation (3 of 3)
• Defined benefit obligation (DBO) for accounting purposes:
present value of vested and non-vested benefits earned to
the date of the SFP with benefits measured using
employees’ future salary levels
• Defined benefit obligation (DBO) for funding purposes:
available as an option to be used under ASPE; tends to
focus more on current salary levels and often uses a
different discount rate

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Changes in the Defined Benefit
Obligation
• Increases as employees provide further services and earn
additional benefits (current service cost)
• Increases as interest is added to the outstanding
discounted liability (interest cost)
• Decreases as benefit payments are made to retirees
(benefits paid to retirees)
• Increases or decreases as plans are amended (past service
costs)
• Increases or decreases as the actuarial assumptions
change (actuarial gains and losses)
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Defined Benefit Obligation: Current
Service Cost
• Cost of benefits that are provided in the future in
exchange for services employees provide currently
• Annual expense is based on the total estimated benefit
being attributed evenly over the years of service of the
employee (prorated on service)
o The projected unit credit method
o ASPE calls it the projected benefit method prorated on
services
• Attribution period: between the date of hire and the date
when employee becomes eligible for full benefits

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Defined Benefit Obligation: Interest
Cost
• Future benefit plans are deferred compensation
arrangements—need to consider the time value of money
• Interest accrues on the DBO that is outstanding during the
period to retirement
• Both IFRS and ASPE require the use of a current market
rate and require the discount rate for the DBO and the
plan assets be the same rate
• ASPE allows a current settlement (insurance) rate
• IFRS uses the rate at the end of the reporting period, and
reassesses it at each reporting date

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Defined Benefit Obligation: Benefits
Paid to Retirees
• The pension fund trustee is responsible for making
payments of the pension benefits to the former
employees
• Similar to all liabilities, as obligations are met, the balance
of the remaining obligation is reduced

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Defined Benefit Obligation: Past
Service Cost
• Past service cost is the cost of retroactive benefits; arises
when a plan is initiated or amended
• Represents a credit for prior services
• Under both IFRS and ASPE, past service cost is included in
pension benefit cost in the income statement
• Sometimes companies negotiate reductions in plan
benefits—resulting in a decrease in the DBO that relates
to past services: creates a past service benefit

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Defined Benefit Obligation: Actuarial
Gains and Losses
• Can result from either
o A change in actuarial assumptions: where assumptions
used by the actuary in calculating the DBO are revised
o Experienced gains or losses: unexpected gain or loss that
changes the DBO due to short-term experience varying
from what has been assumed
• Other factors that influence the amount of the defined
benefit obligation—requires remeasurement
o Plan settlement: substantially settle or discharge all, or part
of, the benefit obligation
o Curtailment: reduces the expected years of future service
for active employees
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Plan Assets
• Assets set aside in a trust or separate legal entity separate
from the company
o Restricted: can be used only for related DBO
o Holdings are mainly cash, investments in debt and equity
securities that are minimum risk but earn a reasonable
return
o Also, real estate investment property (in larger plans)
• Plan assets change as a result of
o (+) Contributions from employer (and employee)
o (+) Return on investment of plan assets
o (-) Payments to retirees
• Remeasurement gain or loss recognized—included in net
income (ASPE); OCI (IFRS)
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Plan Asset Contributions
• Contributions have a direct effect on the plan’s ability to
pay the defined benefit obligation
• Contributions come from
o The employer
o The employee (if the plan is contributory)
• Canada Revenue Agency
o Stipulates the amount of contributions that are tax
deductible
o Sets out the conditions on payment of benefits
• Federal and provincial laws dictate fund requirements

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Return on Plan Assets
• Income generated on the assets less the cost of
administering the fund
• Actual return on plan assets
o Dividends, interest, gains and losses on investments, profits
from real estate investments
o Assets measured at fair value—both realized and
unrealized gains and losses are also included
• Net interest on the net defined benefit liability or asset—
interest cost on the DBO combined with the expected
interest on the plan assets
o Charged to net income under IFRS
o Similar under ASPE but net interest on the DBO is called
finance cost
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Calculation of Surplus or Deficit
• Determined by the measures of the DBO and plan assets
o Standards specify they should be measured as at the date
of the annual financial statements
• Difference between the defined benefit obligation and the
fair value of plan assets = surplus or deficit
• Relative to benefits promised, indicates if there is a
o Net obligation, DBO > plan assets (underfunded)
o Surplus, plan assets > DBO (overfunded)
• All items that change the DBO and plan assets (except
payments to retirees) affect the surplus or deficit

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Defined Benefit Cost Components
• Terminology: defined benefit cost (IFRS); total cost of a
defined benefit plan (ASPE)
• Consists of all items affecting the pension surplus or
deficit except contributions to the plan assets
• Under IFRS—components recognized in net income and
other comprehensive income
o current and past service cost and net interest are
recognized in net income;
o gains and losses from remeasurements are recognized in
OCI
• Under ASPE—all cost recorded in net income as benefits
are earned by employees
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Benefit Cost Components—Current
Service Cost
• Service cost for benefits earned by employees during
the current period
• Recognized and included in defined benefit expense
under both IFRS and ASPE

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Accounting Treatment—Net Interest
(IFRS) and Finance Cost (ASPE)
Net Interest (IFRS) Finance Cost (ASPE)
Same discount rate is used for interest cost Same discount rate is used for interest cost
on the DBO and for expected interest on on the DBO and for expected interest on
plan assets plan assets
Net interest is recognized in net income Finance cost is recognized in net income
Remeasurement is recognized in OCI Remeasurements included in net income
but disclosed separately
Remeasurement is based on the return on Remeasurement is based on difference
plan assets other than net interest between actual and expected return on
on net defined benefit liability/asset plan assets

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Accounting Treatment—Past Service
Cost, Curtailments, and Settlements
• Past service cost, curtailments, and settlements: plan
amendments instantly change employer’s obligation
IFRS ASPE
Past service cost (or benefit) recognized Past service cost (or benefit) recognized
immediately in net income immediately in net income
Gains/losses relating to curtailments Gains/losses relating to curtailments
and/or settlements included in net income and/or settlements included in net income
Past service costs and settlements are These items are considered part of
grouped together for recognition in net “remeasurements and other items” which
income; curtailments are included under must be separately disclosed
definition of past service costs

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Accounting Treatment—Actuarial
Gains and Losses
• Actuarial gains and losses: changes in actuarial
assumptions and experience adjustments that increase or
decrease the present value of the DBO

IFRS ASPE
Recognized in OCI each period Recognized in pension expense (net
income) each period as part of
“remeasurements and other items” which
are separately disclosed

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Illustration of Pension Accounting
• Preamble
o Neither the DBO nor the fund assets are recognized
directly in the sponsoring company’s accounts; they are
both off-balance sheet or memo accounts
o This illustration assumes that the DBO based on actuarial
valuation used for funding purposes under ASPE is equal
to the DBO that would be calculated for accounting
purposes under IFRS and ASPE
o The pension worksheet is 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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Illustration of Pension Accounting—
Facts and Circumstances
• Zarle Corporation Pension Plan, 2022 - 2024

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Illustration of Pension Accounting 2022
• Year begins with a zero balance in the Net Defined
Benefit Liability/Asset account
(a) Records service cost
component—
increases DBO
(b) Accrues net
interest/finance cost
(& expected return)*
(c) Reflects the
corporation’s
contribution
(d) Benefits made to
retirees
*Expected return =
General ledger shows $100,000 (Weighted
these balances Average) × 10%

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Journal Entries 2022 (IFRS and ASPE)
• Defined benefit expense increases Net Defined Benefit
Liability/Asset

• Payment to fund decreases Net Defined Benefit

Liability/Asset

Net change to Net Defined Benefit Liability/Asset account is

$1,000 Cr. representing the excess of accumulated defined
benefit expense over the accumulated contribution

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Illustration of Pension Accounting 2023
• The impact of past service costs

(e) Granting of prior

service benefits, Jan 1
(expensed
immediately)
(f) Annual service cost
(g) Accrues net
interest/finance cost
(& expected return)*
(h) Annual contribution
(i) Benefits paid

*Actual return on Plan Assets = $11,100

Interest on DBO: ($112,000 + $80,000) x 10% = $19,200
Expected return on Plan Assets: $111,000 x 10% = $11,100

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Journal Entries 2023 (IFRS and ASPE)
• Defined benefit expense increases Net Defined Benefit
Liability/Asset; under ASPE, past service cost disclosed
separately

• Payment to the fund decreases Net Defined Benefit

Liability/Asset

The balance in Net Defined Benefit Liability/Asset account is now $(78,600):

DBO of $(212,700) plus $134,100 (Plan Assets);
Or [−$1,000 − $97,600 + $20,000]

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Illustration of Pension Accounting 2024
• Impact of actuarial losses, ASPE

(k) Accrues net

interest/finance cost
(& expected
return)**
(l) Remeasurement*--
adjust interest to
actual ($14,610 -
$12,000)
(o) Change in actuarial
assumptions

*Actual return on plan assets = $12,000

Interest on DBO: $212,700 × 10% = $21,270
**Expected return on plan assets = [$134,100 + ($24,000 × 6/12)] × 10% = $14,610
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Journal Entries for 2024 (ASPE)
• Expense includes actuarial loss from remeasurement-
must be disclosed separately

• Payment to the fund decreases Net Defined Benefit

Liability

Balance in Net Defined Benefit Liability/Asset account is now $(105,400):

DBO of $(265,000) plus $159,600 (Plan Assets)
Or [− $78,600 − $50,800 + $24,000]

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Illustration of Pension Accounting 2024
under IFRS
• IFRS uses other comprehensive income to minimize
the impact of actuarial gains and losses on net income
and earnings per share

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Journal Entries for 2024 (IFRS)
• Actuarial loss and remeasurement loss are recorded in
other comprehensive income

• Payment to fund decreases Net Defined Benefit Liability

Balance in Net Defined Benefit Liability/Asset account is now $(105,400):

DBO of $(265,000) plus $159,600 (Plan Assets)
Or [− $78,600 − $50,800 + $24,000]

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Valuation of Net Defined Benefit Asset
• If plan assets exceed the defined benefit obligation, net
defined benefit assets will be reported on the statement
of financial position
• Accounting standards provide for an asset ceiling test
• Under IFRS and ASPE, if the fair value of plan assets is
greater than the future benefits the company expects to
receive from them, the asset ceiling is used as the
maximum amount of the net defined benefit asset
• Under ASPE, a valuation allowance is used to reduce the
asset’s reported amount
• Change in valuation is recognized as a component of the
defined benefit expense in income
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Post-Employment and Long-Term
Employee Benefit Plans that Vest
• In addition to pension plans, companies provide their
employees with other post-employment benefits as part of
their compensation package
o Examples: Health care, prescription drugs, life insurance, long-
term disability, dental and eye care, legal and tax services, tuition
assistance, or free or subsidized travel
• The Canadian standard requires companies to account for all
defined benefit plans that vest on the same basis as they
account for defined benefit pension plans
• Under IFRS, short-term benefits that vest are recognized
(without discounting) at the amount expected to be paid for
the services provided
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Differences between Pensions and
Post-Employment Health Care Benefits
Item Pensions Health-Care
Funding Generally funded Generally not funded
Benefit Well-defined and level dollar Generally uncapped and very
amount variable
Beneficiary Retiree (option for some benefit Retiree, spouse, and other
to surviving spouse) dependents
Benefit payable Monthly As needed and used
Predictability Variables are reasonably Utilization difficult to predict;
predictable level of cost varies geographically
and fluctuates over time

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Other Employee Benefit Plans with
Benefits That Do Not Accumulate
• Both IFRS and ASPE make no attempt to accrue the
benefit costs and liabilities of employee benefits that do
not accumulate with additional service such as parental
leave
• The total cost and liability are recognized when the event
occurs
• This is called an “event accrual” method of accounting for
benefits

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Presentation: Statement of Financial
Position
• Employers with two or more defined benefit plans are
required to separately measure the benefit cost, DBO, and
plan assets for each funded benefit plan
• If all result in a defined benefit liability or defined benefit
asset, the plans can be reported together; net liabilities of
one plan cannot be combined with net assets from
another
• Neither standards include guidance on long-term vs.
short-term
• Most are found under the long-term classifications

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Presentation: Income Statement
• No guidance from IFRS or ASPE on reporting current
service cost and net interest/finance cost
• Three options:
1. Report as separate components
2. As part of similar expenses
3. In total as a single benefit cost
• Most companies use the third option

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Disclosure Requirements—ASPE
• ASPE requires
o a description of the plans
o major changes made in the plans
o dates of the actuarial valuations for funding purposes
o the fair value of the plan assets and DBO and end of year
surplus/deficit
o difference between surplus/deficit on the balance sheet
and the surplus/deficit of the plan
• ASPE also requires that, if not shown separately on the
income statement, “remeasurements and other items” be
disclosed in the notes
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Disclosure Requirements—IFRS
• IFRS requires additional information, such as
o Characteristics and risks associated with the plan
o Details of amounts included in net income
o How the plan affects cash flows of future benefits
o Reconciliation of opening and closing balances: PV of the
net defined benefit liability/asset and PV of the DBO
o Amounts included in periodic net income; amounts
included in OCI (such as actuarial gains and losses from
changes in assumptions)
o Sensitivity information for each significant actuarial
assumptions
o Many other disclosures such as funding arrangements
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Analysis
• DBO and defined benefit expense are based on estimates;
changes in estimates can significantly change the amounts
• Most important elements are
o Assumptions that underlie calculations
o Surplus or deficit
o Future cash requirements
• Key variables include
o the choice of discount rate used to measure the DBO
o Current service cost
o Interest cost
• Actual cash flow differs from pension costs reported

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A Comparison of IFRS and ASPE
• Both ASPE and IFRS agree on the objective—to recognize
a liability and a cost in the reporting period in which an
employee has provided the service that gives rise to the
benefits
• There are only minor differences in how defined benefit
expense recognition is applied under ASPE and IFRS
• Details are provided in Illustration 19.11

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Looking Ahead and Recent Changes
• The most significant updates to IAS 19 and CPA Canada
Handbook, Part II, Section 3462 were completed several
years ago
• However, several narrow-scope amendments were issued
for IAS 19 effective January 1, 2019
• Overall, no other significant further changes are expected
in the near future

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Copyright
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Copyright ©2022 John Wiley & Sons, Canada, Ltd. 54