Intermediate Accounting Seventeenth Edition Kieso Weygandt Warfield Chapter

Intermediate Accounting Seventeenth Edition Kieso ● Weygandt ● Warfield Chapter 20 Accounting For Pensions and Postretirement Benefits This slide deck contains animations. Please disable animations if they cause issues with your device.

Learning Objectives After studying this chapter, you should be able to: 1. Discuss the fundamentals of pension plan accounting. 2. Use a worksheet for employer’s pension plan entries. 3. Describe the accounting and amortization of prior service costs. 4. Explain the accounting and amortization for unexpected gains and losses. 5. Describe the requirements for reporting pension plans in financial statements. Copyright © 2019 John Wiley & Sons, Inc. 2

Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Fundamentals of Pension Plan Accounting • • • Defined contribution plan Defined benefit plan Role of actuaries Measures of the liability Components of pension expense Copyright © 2019 John Wiley & Sons, Inc. 3

Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Using a Pension Worksheet • 2020 entries and worksheet • Funded status Prior Service Cost (P S C) • Amortization • 2021 entries and worksheet Copyright © 2019 John Wiley & Sons, Inc. 4

Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Gains and Losses • • • Unexpected gains and losses (assets) Unexpected gains and losses (liabilities) Corridor amortization 2022 entries and worksheet 2023 entries and worksheet—a comprehensive example Copyright © 2019 John Wiley & Sons, Inc. 5

Preview of Chapter 20 Accounting for Pensions and Postretirement Benefits Reporting Pension Plans in Financial Statements • • • Assets and liabilities Net income Comprehensive income Note disclosure Special issues Copyright © 2019 John Wiley & Sons, Inc. 6

Learning Objective 1 Discuss the Fundamentals of Pension Plan Accounting LO 1 Copyright © 2019 John Wiley & Sons, Inc. 7

Pension Plan Accounting An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 8

Pension Plan Accounting Types of Plans Pension plans can be: • Contributory: employees voluntarily make payments to increase their benefits. • Noncontributory: employer bears the entire cost. • Qualified pension plans: offer tax benefits. Pension fund should be a separate legal and accounting entity. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 9

Pension Plan Accounting Pension Funds and Pension Expense Company ($ in millions) Size of Pension Fund 2020 Pension Expense (Income) Pension Expense as % of Pretax Income General Motors $74, 421 $(1, 173) Hewlett-Packard 10, 176 (132) − 4. 03 Deere & Company 11, 137 106 3. 36 Merck 17, 560 201 3. 08 The Coca-Cola Company 8, 371 368 5. 46 Molson Coors Brewing 5, 946 (68) -4. 91 − 9. 89% The two most common types of pension plans are defined contribution plans and defined benefit plans. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 10

Pension Plan Accounting Contribution versus Benefit Plans Defined-Contribution Plan • Employer contribution determined by plan (fixed) • Risk borne by employees • Benefits based on plan value LO 1 Defined-Benefit Plan • Benefit determined by plan • Employer contribution varies (determined by Actuaries) • Risk borne by employer Copyright © 2019 John Wiley & Sons, Inc. 11

The Role of Actuaries in Pension Accounting Actuaries make predictions (called actuarial assumptions) of mortality rates, employee turnover, interest and earnings rates, early retirement frequency, future salaries, and any other factors necessary to operate a pension plan. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 12

Measures of the Liability Two questions: 1. What is the pension obligation that a company should report in the financial statements? 2. What is the pension expense for the period? LO 1 Copyright © 2019 John Wiley & Sons, Inc. 13

Measures of the Liability Different Measures of the Pension Obligation LO 1 Copyright © 2019 John Wiley & Sons, Inc. 14

Measures of the Liability Recognition of the Net Funded Status of the Pension Plan • Companies must recognize on their balance sheet the full overfunded or underfunded status of their defined benefit pension plan. • The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 15

Components of Pension Expense LO 1 Copyright © 2019 John Wiley & Sons, Inc. 16

Components of Pension Expense Service Costs 1 Effect on Expense Service Costs + Actuarial present value of benefits attributed by the pension benefit formula to employee service during the period LO 1 Copyright © 2019 John Wiley & Sons, Inc. 17

Components of Pension Expense Interest on the Liability 2 Interest on the Liability Effect on Expense + Interest for the period on the projected benefit obligation outstanding during the period The interest rate use is referred to as the settlement rate. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 18

Components of Pension Expense Actual Return on Plan Assets 3 Actual Return on Plan Assets Effect on Expense +− Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair value of the plan assets. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 19

Components of Pension Expense Amortization of Prior Service Costs 4 Amortization of Prior Service Costs Effect on Expense + Plan amendments often include provisions to increase benefits for employee service provided in prior years. Company allocates the cost (prior service cost) of providing these retroactive benefits to pension expense in the future, specifically to the remaining service-years of the affected employees. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 20

Components of Pension Expense Gain or Loss 5. Effect on Expense Gain or Loss +− Volatility in pension expense can result from sudden and large changes in the fair value of plan assets and by changes in projected benefit obligation. LO 1 Copyright © 2019 John Wiley & Sons, Inc. 21

Learning Objective 2 Use a Worksheet for Employer’s Pension Plan Entries LO 2 Copyright © 2019 John Wiley & Sons, Inc. 22

Using a Pension Worksheet LO 2 Copyright © 2019 John Wiley & Sons, Inc. 23

Using a Pension Worksheet Illustration On January 1, 2020, Zarle Company provides the following information related to its pension plan for the year 2020. Plan assets, January 1, 2020, are $100, 000. Projected benefit obligation, January 1, 2020, is $100, 000. Annual service cost is $9, 000. Settlement rate is 10 percent. Actual return on plan assets is $10, 000. Funding contributions are $8, 000. Benefits paid to retirees during the year are $7, 000. LO 2 Copyright © 2019 John Wiley & Sons, Inc. 24

Using a Pension Worksheet Prepare a pension worksheet for 2020 LO 2 Copyright © 2019 John Wiley & Sons, Inc. 25

Using a Pension Worksheet Journal Entry for 2020 Pension Expense Cash Pension Asset/Liability LO 2 9, 000 Copyright © 2019 John Wiley & Sons, Inc. 8, 000 1, 000 26

Learning Objective 3 Describe the Accounting and Amortization of Prior Service Costs LO 3 Copyright © 2019 John Wiley & Sons, Inc. 27

Prior Service Cost (PSC) Amortization Company should not recognize the retroactive benefits as pension expense in the year of amendment. Employer should recognize the pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan. Amortization Method: • Board prefers a years-of-service method. • Employers may use straight-line amortization over the average remaining service life of the employees. LO 3 Copyright © 2019 John Wiley & Sons, Inc. 28

Years-of-Service Method Illustration: Assume that Zarle Company’s defined benefit pension plan covers 170 employees. In its negotiations with the employees, Zarle Company amends its pension plan on January 1, 2021, and grants $80, 000 of prior service costs to its employees. The employees are grouped according to expected years of retirement, as follows. LO 3 Group Number of Employees A B C D E 40 20 40 50 20 170 Copyright © 2019 John Wiley & Sons, Inc. Expected Retirement on Dec. 31 2022 2023 2024 2025 29

Years-of-Service Method Computation of Service-Years Illustration 20 -10 shows computation of the service-years per year and the total service-years. Service-Years LO 3 Year A B C D E Total 2021 40 20 40 50 20 170 2022 Blank 20 40 50 20 130 2023 Blank 40 50 20 110 2024 Blank 50 20 70 2025 Blank 20 20 Blank 40 40 120 200 100 500 Copyright © 2019 John Wiley & Sons, Inc. 30

Years-of-Service Method Computation of Annual Prior Service Cost Amortization Computed on the basis of a prior service cost of $80, 000 and a total of 500 service-years for all years, the cost per serviceyear is $160 ($80, 000 ÷ 500). The annual amount of amortization based on a $160 cost per service-year is computed as follows. LO 3 Copyright © 2019 John Wiley & Sons, Inc. 31

Using a Pension Worksheet E 20 -7: The following defined pension data of Rydell Corp. apply to the year 2020. Projected benefit obligation, 1/1/20 (before amendment) Plan assets, 1/1/20 Pension liability On January 1, 2020, Rydell Corp. , through plan amendment, grants prior service benefits having a present value of Settlement rate Service cost Contributions (funding) Actual (expected) return on plan assets Benefits paid to retirees Prior service cost amortization for 2020 LO 3 Copyright © 2019 John Wiley & Sons, Inc. $560, 000 546, 200 13, 800 120, 000 9% 58, 000 65, 000 52, 280 40, 000 17, 000 32

Using a Pension Worksheet Instructions For 2020, prepare a pension work sheet for Rydell Corp. that shows the journal entry for pension expense. LO 3 Copyright © 2019 John Wiley & Sons, Inc. 33

E 20 -7 Pension Worksheet 2020 LO 3 Copyright © 2019 John Wiley & Sons, Inc. 34

E 20 -7 Pension Worksheet 2020 Pension Journal Entry for 2020 Dec. 31 Pension Expense 83, 920 Other Comprehensive Income (PSC) 103, 000 Pension Asset/Liability Cash LO 3 121, 920 65, 000 Copyright © 2019 John Wiley & Sons, Inc. 35

Learning Objective 4 Explain the Accounting and Amortization for Unexpected Gains and Losses LO 4 Copyright © 2019 John Wiley & Sons, Inc. 36

Gains and Losses Unexpected swings in pension expense can result from: 1. Sudden and large changes in the fair value of plan assets, and 2. Changes in actuarial assumptions that affect the amount of the projected benefit obligation. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 37

Gains and Losses Question What is the potential negative impact on net income of these unexpected swings? Volatility The profession decided to reduce the volatility with smoothing techniques. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 38

Gains and Losses Smoothing Unexpected Gains and Losses on Plan Assets • Companies include the expected return on the plan assets as a component of pension expense, not the actual return in a given year. • Companies record asset gains and asset losses in an account, Other Comprehensive Income (G/L), combining them with gains and losses accumulated in prior years. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 39

Gains and Losses Smoothing Unexpected Gains and Losses on Plan the Pension Liability • Companies report liability gains and liability losses in Other Comprehensive Income (G/L). • Companies combine the liability gains and losses in the same Other Comprehensive Income (G/L) account. • They accumulate the asset and liability gains and losses in Accumulated Other Comprehensive Income and report on the balance sheet in the stockholders’ equity section. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 40

Gains and Losses Corridor Amortization • FASB invented the corridor approach for amortizing the accumulated net gain or loss balance when it gets too large. How large is too large? • 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. • Any Accumulated OCI net gain or loss balance above the 10% must be amortized. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 41

Gains and Losses Illustration Data for Callaway Co. ’s projected benefit obligation and plan assets over a period of six years. Beginning-of-the. Year Balances Projected Benefit Obligation Market-Related Asset Value Corridor* +/− 10% 2019 $1, 000 $ 900, 000 $100, 000 2020 1, 200, 000 1, 100, 000 120, 000 2021 1, 300, 000 1, 700, 000 170, 000 2022 1, 500, 000 2, 250, 000 225, 000 2023 1, 700, 000 1, 750, 000 175, 000 2024 1, 800, 000 1, 700, 000 180, 000 *The corridor becomes 10% of the larger (in red type) of the projected benefit obligation or the market-related plan asset value. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 42

Gains and Losses Graphic Illustration of the Corridor LO 4 Copyright © 2019 John Wiley & Sons, Inc. 43

Gains and Losses BE 20 -7 Shin Corporation had a projected benefit obligation of $3, 100, 000 and plan assets of $3, 300, 000 at January 1, 2020. Shin also had a net actuarial loss of $465, 000 in accumulated OCI at January 1, 2020. The average remaining service period of Shin’s employees is 7. 5 years. Instructions: Compute Shin’s minimum amortization of the actuarial loss. LO 4 Copyright © 2019 John Wiley & Sons, Inc. 44

Gains and Losses Compute Shin’s Amortization of the Loss Amortization Projected benefit obligation Plan assets $ (3, 100, 000) 3, 300, 000 $ 3, 300, 000 Corridor percentage 10% Corridor amount 330, 000 Accumulated loss 465, 000 Excess loss subject to amortization 135, 000 Average remaining service ÷ Amortized to pension expense LO 4 Copyright © 2019 John Wiley & Sons, Inc. 7. 5 $ 18, 000 45

Pension Worksheet P 20 -2 Jackson Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2019, with the following beginning balances: plan assets $200, 000; projected benefit obligation $250, 000. Other data are as follows. Blank Annual service cost Settlement rate and expected rate of return Actual return on plan assets Annual funding (contributions) Benefits paid Prior service cost (plan amended, 1/1/20) Amortization of prior service cost Change in actuarial assumptions, Dec. 31 PBO LO 4 2019 2020 2021 $16, 000 $19, 000 $26, 000 10% 10% 18, 000 22, 000 24, 000 16, 000 40, 000 48, 000 14, 000 16, 400 21, 000 Blank 160, 000 Blank 54, 400 41, 600 Blank 520, 000 Copyright © 2019 John Wiley & Sons, Inc. 46

P 20 -2 Pension Worksheet 2019 LO 4 Copyright © 2019 John Wiley & Sons, Inc. 47

Pension Worksheet Journal Entry 2019 Dec. 31 Pension Expense 21, 000 OCI – Gain/Loss 2, 000 Pension Asset/Liability Cash LO 4 7, 000 16, 000 Copyright © 2019 John Wiley & Sons, Inc. 48

P 20 -2 Pension Worksheet 2020 LO 4 Copyright © 2019 John Wiley & Sons, Inc. 49

Pension Worksheet Journal Entry 2020 Dec. 31 Pension Expense 95, 100 Other Comprehensive Income (PSC) Pension Asset/Liability Cash LO 4 105, 600 160, 700 40, 000 Copyright © 2019 John Wiley & Sons, Inc. 50

P 20 -2 Pension Worksheet 2021 LO 4 Copyright © 2019 John Wiley & Sons, Inc. 51

Pension Worksheet Journal Entry 2021 Dec. 31 Pension Expense Pension Asset/Liability 89, 370 14, 300 Other Comprehensive Income (G/L) Other Comprehensive Income (PSC) Cash LO 4 Copyright © 2019 John Wiley & Sons, Inc. 14, 070 41, 600 48, 000 52

Learning Objective 5 Describe the Requirements for Reporting Pension Plans in Financial Statements LO 5 Copyright © 2019 John Wiley & Sons, Inc. 53

Reporting Pension Plans in Financial Statements Four categories • • LO 5 Assets and liabilities Net Income Comprehensive Income Notes to the financial statement Copyright © 2019 John Wiley & Sons, Inc. 54

Reporting Pension Plans in Financial Statements Assets and Liabilities • Companies must recognize on their balance sheet the overfunded (pension asset) or under-funded (pension liability) status of their defined benefit pension plan. • If fair value exceeds the projected benefit obligation, companies will report a net pension asset. • No portion of the pension asset is reported as a current asset LO 5 Copyright © 2019 John Wiley & Sons, Inc. 55

Reporting Pension Plans in Financial Statements Net Income • Pension expense includes multiple components (service cost, interest cost, return on assets, and amortization) • The FASB requires presentation of the components of pension expense as follows. 1. Service cost component is reported as pension expense in income from operations. 2. Other components of pension expense are generally reported as one net amount in the “Other expenses and losses” section below income from operations. LO 5 Copyright © 2019 John Wiley & Sons, Inc. 56

Reporting Pension Plans in Financial Statements Comprehensive Income • Companies are required to recognize actuarial gains and losses and prior service costs that originate in the current period in other comprehensive income. • Actuarial gains and losses not recognized as part of pension expense. • The Board requires that the prior service cost arising in the year of the amendment be recognized by an offsetting debit to other comprehensive income. LO 5 Copyright © 2019 John Wiley & Sons, Inc. 57

Reporting Pension Plans in Financial Statements Within the Financial Statements • • LO 5 Recognition of the Net Funded Status of the Plan Classification of Pension Asset or Pension Liability Aggregation of Pension Plans Actuarial Gains and Losses/Prior Service Cost Copyright © 2019 John Wiley & Sons, Inc. 58

Reporting Pension Plans in Financial Statements Within the Notes to the Financial Statements 1. Major components of pension expense. 2. Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed. 3. A disclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plan assets, rate of compensation). LO 5 Copyright © 2019 John Wiley & Sons, Inc. 59

Within the Notes to the Financial Statements 4. A table indicating the allocation of pension plan assets by category (equity securities, debt securities, real estate, and other assets), and showing the percentage of the fair value to total plan assets. 5. The expected benefit payments to be paid to current plan participants for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter. Also required is disclosure of a company’s best estimate of expected contributions to be paid to the plan during the next year. LO 5 Copyright © 2019 John Wiley & Sons, Inc. 60

Within the Notes to the Financial Statements (continued) 6. The nature and amount of changes in plan assets and benefit obligations recognized in net income and in other comprehensive income of each period. 7. The accumulated amount of changes in plan assets and benefit obligations that have been recognized in other comprehensive income and that will be recycled into net income in future periods. LO 5 Copyright © 2019 John Wiley & Sons, Inc. 61

Reporting Pension Plans in Financial Statements Special Issues • The Pension Reform Act of 1974 • Pension Terminations LO 5 Copyright © 2019 John Wiley & Sons, Inc. 62

Learning Objective 6 Identify the Differences Between Pensions and Postretirement Healthcare Benefits LO 6 Copyright © 2019 John Wiley & Sons, Inc. 63

Appendix 20 A: Accounting for Postretirement Benefits Accounting Guidance In December 1990, the FASB issued rules on “Employers’ Accounting for Postretirement Benefits Other Than Pensions. ” These rules cover for healthcare and other “welfare benefits” provided to retirees, their spouses, dependents, and beneficiaries. Other welfare benefits include life insurance offered outside a pension plan; medical, dental, and eye care; legal and tax services; tuition assistance; day care; and housing assistance. LO 6 Copyright © 2019 John Wiley & Sons, Inc. 64

Appendix 20 A: Accounting for Postretirement Benefits Differences Between Pension Benefits and Healthcare Benefits Item Pensions Healthcare Benefits Funding Generally funded. Generally NOT funded. Benefit Well-defined and level dollar amount. Generally uncapped and great variability. Beneficiary Retiree (maybe some benefit to surviving spouse). Retiree, spouse, and other dependents. Benefit payable Monthly. As needed and used. Predictability Variables are reasonably predictable. Utilization difficult to predict. Level of cost varies geographically and fluctuates over time. LO 6 Copyright © 2019 John Wiley & Sons, Inc. 65

Differences Between Pension Benefits and Healthcare Benefits Measuring the future payments for healthcare benefit plans is so much more difficult than for pension plans. 1. Many postretirement plans do NOT set a limit on healthcare benefits. 2. The levels of healthcare benefit use and healthcare costs are difficult to predict. Increased longevity, unexpected illnesses (e. g. , AIDS, SARS, and avian flu), along with new medical technologies and cures, cause changes in healthcare utilization. LO 6 Copyright © 2019 John Wiley & Sons, Inc. 66

Postretirement Benefits Accounting Provisions Attribution Period - period of time over which the postretirement benefit cost accrue. LO 6 Copyright © 2019 John Wiley & Sons, Inc. 67

Obligations Under Postretirement Benefits • Expected postretirement benefit obligation (E PBO) is the actuarial present value as of a particular date of all benefits a company expects to pay after retirement to employees and their dependents. • Accumulated postretirement benefit obligation (A PBO) is the actuarial present value of future benefits attributed to employees’ services rendered to a particular date. LO 6 Copyright © 2019 John Wiley & Sons, Inc. 68

Accounting for Postretirement Benefits Postretirement Expense 1. 2. 3. 4. 5. LO 6 Service Cost Interest Cost Actual Return on Plan Assets Amortization of Prior Service Costs Gains and Losses Copyright © 2019 John Wiley & Sons, Inc. 69

Learning Objective 7 Contrast Accounting for Pensions to Accounting for Other Postretirement Benefits LO 7 Copyright © 2019 John Wiley & Sons, Inc. 70

Accounting for Postretirement Benefits Illustrative Accounting Entries 2020 Entries and Worksheet Illustration: The use of a worksheet in accounting for a postretirement benefits plan, assume that on January 1, 2020, Quest Company adopts a healthcare benefit plan. The following facts apply to the postretirement benefits plan for the year 2020. • Plan assets at fair value on January 1, 2020, are zero. • Actual and expected returns on plan assets are zero. • Accumulated postretirement benefit obligation (APBO), January 1, 2020, is zero. • Service cost is $54, 000. • No prior service cost exists. • Interest cost on the A P B O is zero. • Funding contributions during the year are $38, 000. • Benefit payments to employees from plan are $28, 000. LO 7 Copyright © 2019 John Wiley & Sons, Inc. 71

Accounting for Postretirement Benefits Postretirement Worksheet— 2020 Journal Entry LO 7 Postretirement Expense 54, 000 Cash Postretirement Asset/Liability Copyright © 2019 John Wiley & Sons, Inc. 38, 000 85, 000 72

Accounting for Postretirement Benefits Recognition of Gains and Losses Gains and losses represent changes in the APBO or the value of plan assets. Gains and losses are recorded in other comprehensive income. • The Corridor Approach • Amortization Methods LO 7 Copyright © 2019 John Wiley & Sons, Inc. 73

Accounting for Postretirement Benefits 2021 Entries and Worksheet Illustration: The following facts apply to the postretirement benefits plan for Quest Company for the year 2021. • Actual return on plan assets is $600. • Expected return on plan assets is $800. • Discount rate is 8 percent. • Increase in APBO due to change in actuarial assumptions is $60, 000. • Service cost is $26, 000. • Funding contributions during the year are $18, 000. • Benefit payments to employees during the year are $5, 000. • Average remaining service to expected retirement: 25 years. LO 7 Copyright © 2019 John Wiley & Sons, Inc. 74

Accounting for Postretirement Benefits Postretirement Worksheet— 2021 Journal Entry LO 7 Postretirement Expense 27, 280 Other Comprehensive Income (G/L) 60, 200 Cash Postretirement Asset/Liability Copyright © 2019 John Wiley & Sons, Inc. 18, 000 69, 408 75

Accounting for Postretirement Benefits Amortization of Net Gain or Loss in 2022 LO 7 Copyright © 2019 John Wiley & Sons, Inc. 76

Learning Objective 8 Compare the Accounting for Pensions Under GAAP and IFRS LO 8 Copyright © 2019 John Wiley & Sons, Inc. 77

IFRS Insights Relevant Facts - Similarities • IFRS and GAAP separate pension plans into defined contribution plans and defined benefit plans. The accounting for defined contribution plans is similar. • IFRS and GAAP recognize a pension asset or liability as the funded status of the plan (i. e. , defined benefit obligation minus the fair value of plan assets). (Note that defined benefit obligation is referred to as the projected benefit obligation in GAAP. ) • IFRS and GAAP compute unrecognized past service cost (P SC) (referred to as prior service cost in GAAP) in the same manner. However, IFRS recognizes past service cost as a component of pension expense in income immediately. GAAP amortizes PSC over the remaining service lives of employees. LO 8 Copyright © 2019 John Wiley & Sons, Inc. 78

IFRS Insights Relevant Facts - Differences • IFRS and GAAP include interest expense on the liability in pension expense. Regarding asset returns, IFRS reduces pension expense by the amount of interest revenue (based on the discount rate times the beginning value of pension assets). GAAP includes an asset return component based on the expected return on plan assets. • Under IFRS, companies recognize both liability and asset gains and losses (referred to as remeasurements) in other comprehensive income. These gains and losses are not “recycled” into income in subsequent periods. G AAP recognizes liability and asset gains and losses in “Accumulated other comprehensive income” and amortizes these amounts to income over remaining service lives, using the “corridor approach. ” • The accounting for pensions and other postretirement benefit plans is the same under IFRS. GAAP has separate standards for these types of benefits, and significant differences exist in the accounting. Copyright © 2019 John Wiley & Sons, Inc. 79

IFRS Insights On The Horizon The IASB and the FASB have been working collaboratively on a postretirement benefit project. The recent amendments issued by the IASB moves IFRS closer to GAAP with respect to recognition of the funded status on the statement of financial position. However, as illustrated in the About the Numbers section above, significant differences remain in the components of pension expense. While the FASB may consider the recent IASB amendments, which could lead to a converged standard, the FASB does not have a pension project on its technical agenda. LO 8 Copyright © 2019 John Wiley & Sons, Inc. 80

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