CH-17 Pensions and Other Postretirement Benefits – Intermediate Accounting : Book Guide

Chapter 17 Pensions and Other Postretirement Benefits 1 Chapter 17 Pensions and Other Postretirement Benefits QUESTIONS FOR REVIEW OF KEY TOPICS Question 17-1 Pension plans are arrangements designed to provide income to individuals during their retirement years. Funds are set aside during an employee’s working years so that the accumulated funds plus earnings from investing those funds are available to replace wages at retirement. An individual has a pension fund when she or he periodically invests in stocks, bonds, CDs, or other securities for the purpose of saving for retirement. When an employer establishes a pension plan, the employer provides some or all of the periodic contributions to the retirement fund. The motivation for corporations to establish pension plans comes from several sources. Pension plans provide employees with a degree of retirement security. They may fulfill a moral obligation many employers feel toward employees. Pension plans often enhance productivity, reduce turnover, satisfy union demands, and allow employers to compete in the labor market. Question 17-2 A qualified pension plan gains important tax advantages. The employer is permitted an immediate tax deduction for amounts paid into the pension fund. Conversely, the benefits to employees are not taxed until retirement benefits are received. Also, earnings on the funds set aside by the employer accumulate tax-free. For a pension plan to be qualified for special tax treatment, these general requirements must be met: 1. It must cover at least 70% of employees. 2. It cannot discriminate in favor of highly compensated employees. 3. It must be funded in advance of retirement through contributions to an irrevocable trust fund. 4. Benefits must “vest” after a specified period of service, commonly five years. 5. It complies with specific restrictions on the timing and amount of contributions and benefits. Question 17-3 This is a noncontributory plan because the corporation makes all contributions. When employees make contributions to the plan in addition to employer contributions, it’s called a “contributory” plan. This is a defined contribution plan because it promises fixed annual contributions to a pension fund, without further commitment regarding benefit amounts at retirement. Question 17-4 The vested benefit obligation is the pension benefit obligation that is not contingent upon an employee's continuing service. 2 Question 17-5 The accumulated benefit obligation is the discounted present value of retirement benefits calculated by applying the pension formula with no attempt to forecast what salaries will be when the formula actually is applied. The projected benefit obligation is the present value of those benefits when the actuary includes projected salaries in the pension formula. 3 Answers to Questions (continued) Question 17-6 The projected benefit obligation can change due to periodic service cost, accrued interest, revised estimates, plan amendments, and the payment of benefits. Question 17-7 The balance of the plan assets can change due to investment returns, employer contributions, and the payment of benefits. Question 17-8 The pension expense reported on the income statement is a composite of periodic changes that occur in both the pension obligation and the plan assets. These include service cost, interest cost, return on the plan assets, and the amortization of prior service cost and of net gains or losses. Question 17-9 The service cost in connection with a pension plan is the present value of benefits attributed by the pension formula to employee service during the period, projecting future salary levels (i.e., the projected benefits approach). Question 17-10 The interest cost is the projected benefit obligation outstanding at the beginning of the period multiplied by the actuary's interest (discount) rate. This is the “interest expense” that accrues on the PBO and is included as a component of pension expense rather than being separately reported. Question 17-11 SFAS 87 specifies that the actual return be included in the determination of pension expense. However, the actual return is adjusted for any difference between actual and expected return, meaning that the expected return is really the amount reflected in the calculation of pension expense. This “investment revenue” is deducted as a component of pension expense rather than being separately reported. The difference between actual and expected return on plan assets is combined with gains and losses from other sources for possible future amortization to pension expense. Question 17-12 Prior service cost is the obligation (present value of benefits) due to giving credit to employees for years of service provided before either the date of an amendment to (or initiation of) a pension plan. Prior service cost is not formally recognized as a separate account in the company’s records. The cost is allocated to pension expense over the service period of affected employees. The straight-line method allocates an equal amount of the prior service cost to each year. The service method recognizes the cost each year in proportion to the fraction of the total remaining “service years” worked in each of these years. 4 Answers to Questions (continued) Question 17-13 Gains or losses related to pension plan assets represent the difference between the return on investments and what the return had been expected to be. They should be deferred until total net gains or losses exceed a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The minimum amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Gains or losses related to the pension obligation are treated the same way. In fact, gains and losses from both sources are combined to determine the net gains or net losses referred to above. Question 17-14 The PBO, plan assets, unrecognized prior service cost, and the unrecognized net loss (or gain) represent “memorandum” accounts not formally recognized as separate accounts in the company’s records. Their balances are monitored in the informal records, though, because they are reported in disclosure notes, and changes in their balances affect amounts that are formally recognized. Question 17-15 The two components of pension expense that may reduce pension expense are the return on plan assets (always) and the amortization of a net gain (amortizing a net loss increases the expense). Question 17-16 The components of pension expense that involve delayed recognition are the prior service cost and gains and losses. Question 17-17 The excess of the actual return on plan assets over the expected return is considered a gain. It may, in fact, decrease the employer’s pension cost, but not immediately. It is grouped with other gains and losses and is amortized as a component of pension expense only if the net gain or net loss exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. Question 17-18 The difference between the pension expense and the cash contribution is debited or credited, depending on the situation, to a single account: prepaid (accrued) pension cost. Consistent with other situations when an expense is overpaid, the excess payment represents an asset – prepaid pension cost. Quite often, the cash payment is less than the expense. In those instances, the underpayment represents a liability. 5 Answers to Questions (continued) Question 17-19 Conceptually, the pension liability is best measured by the PBO. This apparently was the majority view of the FASB. The PBO also is specified for determining the service cost and interest cost components of the pension expense. However, the balance sheet reports either an accrued pension cost as a liability or a prepaid pension cost as an asset, depending on whether the prepaid (accrued) pension cost account has a credit or a debit balance. This amount is supplemented to provide a minimum reported liability equal to excess of the accumulated benefit obligation over the plan assets when the ABO is underfunded. Also, SFAS 87 requires offsetting despite a theoretical preference by the Board for recognizing the pension liability and plan assets as separate elements of the balance sheet. In fact, the FASB acknowledged that this requirement is made “even though the liability has not been settled, the assets may still be largely controlled, and substantial risks and rewards associated with both of those amounts are clearly borne by the employer.” Question 17-20 The difference between the employer’s obligation (PBO) and the resources available to satisfy that obligation (plan assets) is the funded status of the pension plan. If all the changes in the PBO and plan assets were immediately recognized in pension expense, the balance in the prepaid (accrued) pension cost would report the funded status. This is because that balance would be the cumulative difference between the cash contributions and what’s been expensed. However, not all the changes in the PBO and plan assets are immediately recognized in pension expense (recognition is delayed for both gains and losses and the prior service cost). Therefore, the unrecognized portions of each of these are reflected in the funded status, but not yet in the prepaid (accrued) pension cost. This means the difference between the funded status and the balance in prepaid (accrued) pension cost can be reconciled by the unrecognized prior service cost and the unrecognized net loss. In fact, this reconciliation must be disclosed in the financial statements. Question 17-21 A minimum liability must be reported to the extent that the accumulated benefit obligation exceeds the fair value of plan assets. So, if there is a zero balance in the prepaid (accrued) pension cost account, an “additional liability” account must be established for the entire excess. If the account has a credit balance of more than the minimum liability, no additional liability would be required. Reporting the balance as a pension liability would be sufficient. If the account has a credit balance of less than the minimum liability, an additional liability would be required for the difference. If the account has a debit balance, an “additional liability” account must be established to combine with the prepaid (accrued) pension cost account balance to reflect the minimum liability. 6 Answers to Questions (concluded) Question 17-22 Usually the “substantive plan” is the written plan. However, sometimes a company’s consistent practice of providing benefits a certain way is a better indication of the employer’s real plan for postretirement benefits than the written plan. In those cases, the “substantive plan” should override the written plan in determining the basis for accounting for postretirement benefits. Anticipated changes in cost-sharing arrangements (before the plan actually is amended) should be considered when measuring the obligation and expense when the company (a) can demonstrate the intent and ability to make the change and (b) has communicated the intended change to plan participants. Question 17-23 The expected postretirement benefit obligation (EPBO) is the actuary's estimate of the total postretirement benefits (at their discounted present value) expected to be received by plan participants. When a plan is pay-related, future compensation levels are implicitly assumed. The accumulated postretirement benefit obligation (APBO) measures the obligation existing at a particular date, rather than the total amount expected to be earned by plan participants. The APBO is conceptually similar to a pension plan’s projected benefit obligation. The EPBO has no counterpart in pension accounting. Question 17-24 The cost of benefits is “attributed” to the years during which those benefits are assumed to be earned by employees. The attribution period spans each year of service from the employee’s date of hire to the employee’s “full eligibility date,” which is the date the employee has performed all the service necessary to have earned all the retiree benefits estimated to be received by that employee. The approach assigns an equal fraction of the EPBO to each of those years. The attribution period does not include any years of service beyond the full eligibility date, even if the employee is expected to work after that date. Question 17-25 The transition obligation could be recognized as part of the compensation expense by either of two methods. An employer could choose to recognize the entire transition obligation immediately or on a straight-line basis over the plan participants' future service periods (or optionally over a 20-year period if that’s longer.) Question 17-26 The service cost for pensions reflects additional benefits employees earn from an additional year’s service, whereas the service cost for retiree health care plans is simply an allocation to the current year of a portion of a fixed total cost. Question 17-27 The attribution period spans each year of service from the employee’s date of hire to the employee’s “full eligibility date,” 30 years in this case. The APBO is $10,000 which represents the portion of the EPBO earned after 15 years of the 30-year attribution period: $20,000 x 15/30 = $10,000. 7 BRIEF EXERCISES Brief Exercise 17-1 ($ in millions) Beginning of the year $80 Service cost 10 Interest cost 4 x (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (6) End of the year $88 Brief Exercise 17-2 ($ in millions) Beginning of the year $80 Service cost ? Interest cost 4 x (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (6) End of the year $85 Service cost = $85 – 80 – 4 + 6 = $7 million Brief Exercise 17-3 ($ in millions) Beginning of the year $80 Service cost 10 Interest cost 4 x (5% x $80) Loss (gain) on PBO 0 Less: Retiree benefits (?) End of the year $85 Retiree benefits = $85 – 80 – 4 – 10 = – $9 million 8 Brief Exercise 17-4 ($ in millions) Beginning of the year $80 Service cost 10 Interest cost 4 x (5% x $80) Loss (gain) on PBO ? Less: Retiree benefits (6) End of the year $85 Gain = $85 – 80 – 10 – 4 + 6 = – $3 million Brief Exercise 17-5 ($ in millions) Plan assets Beginning of the year $80 Actual return 4 x (5% x $80) Cash contributions 7 Less: Retiree benefits (6) End of the year $85 Brief Exercise 17-6 ($ in millions) Plan assets Beginning of the year $80 Actual return 4 x (5% x $80) Cash contributions 7 Less: Retiree benefits (?) End of the year $83 Retiree benefits = $83 – 80 – 4 – 7 = – $8 million 9 Brief Exercise 17-7 ($ in millions) Plan assets Beginning of the year $100 Actual return ? x (? % x $100) Cash contributions 7 Less: Retiree benefits (6) End of the year $104 Return on assets = $104 – 100 – 7 + 6 = $3 million Rate of return on assets = $3 million ÷ $100 million = 3% Brief Exercise 17-8 ($ in millions) Service cost $10 Interest cost (5% x $80) 4 Actual return on the plan assets ($5) adjusted for: $1 gain* on the plan assets (4) Amortization of prior service cost 0 Amortization of net loss (gain) 0 Pension expense $10 * $5 - 4 Brief Exercise 17-9 ($ in millions) Service cost $10 Interest cost 4 Actual return on the plan assets ($4) adjusted for: $2 loss* on the plan assets (6) Amortization of prior service cost 2** Amortization of net loss (gain) 0 Pension expense $10 * $6 - 4 ** $20 ÷ 10 years = $2 10 Brief Exercise 17-10 Gains or losses should be deferred until total net gains or losses exceed a defined threshold. Specifically, a portion of the excess is included in pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. The minimum amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. Amortization of net gains is deducted from pension expense; amortization of net losses is added to pension expense. Pension expense in this instance is decreased by a $2 million amortization of the net gain: ($ in millions) Unamortized net gain $30 Less: 10% corridor (threshold)* (10) Excess $20 Service period ÷ 10 Amortization $ 2 * 10% times either the PBO ($80) or plan assets ($100), whichever is larger Brief Exercise 17-11 ($ in millions) ABO $30 Plan assets 25 Minimum liability $ 5 The accrued pension cost ($2 million) is insufficient to meet the minimum liability requirement, so an additional liability of $3 million is needed. 11 Brief Exercise 17-12 APBO Service Cost 2006 $50,000 x 6/30 = $10,000 $50,000 x 1 /30 = $1,667 2007 $54,000 x 7/30 = $12,600 $54,000 x 1 /30 = $1,800 30 year attribution period (age 26-55) Brief Exercise 17-13 ($ in millions) Beginning of 2006 $25 Service cost 7 Interest cost 2 (8% x $25) Gain on APBO (1) Less: Retiree benefits (3) End of 2006 $30 12 EXERCISES Exercise 17-1 Events I 1. Interest cost. N 2. Amortization of prior service cost. D 3. A decrease in the average life expectancy of employees. I 4. An increase in the average life expectancy of employees. I 5. A plan amendment that increases benefits is made retroactive to prior years. D 6. An increase in the actuary’s assumed discount rate. N 7. Cash contributions to the pension fund by the employer. D 8. Benefits are paid to retired employees. I 9. Service cost. N 10. Return on plan assets during the year lower than expected. N 11. Return on plan assets during the year higher than expected. Exercise 17-2 ($ in millions) Beginning of 2006 $30 Service cost 12 Interest cost 3 x (10% x $30) Loss (gain) on PBO 0 Less: Retiree benefits (4) End of 2006 $41 13 Exercise 17-3 Events I 1. Interest cost. I 2. Amortization of prior service cost. N 3. Excess of the expected return on plan assets over the actual return. D 4. Expected return on plan assets. N 5. A plan amendment that increases benefits is made retroactive to prior years. N 6. Actuary’s estimate of the PBO is increased. N 7. Cash contributions to the pension fund by the employer. N 8. Benefits are paid to retired employees. I 9. Service cost. N 10. Excess of the actual return on plan assets over the expected return. I 11. Amortization of unrecognized net loss. D 12. Amortization of unrecognized net gain. 14 Exercise 17-4 Requirement 1 ($ in millions) Pension expense 14 Cash 14 Requirement 2 Pension expense (given) 14 Prepaid (accrued) pension cost (difference) 3 Cash (given) 11 Requirement 3 Pension expense (given) 14 Prepaid (accrued) pension cost (difference) 2 Cash (given) 16 Exercise 17-5 ($ in millions) Plan assets Beginning of 2006 $600 Actual return 48 Cash contributions 100 Less: Retiree benefits (11) End of 2006 $737 15 Exercise 17-6 ($ in millions) PBO: Beginning of 2006 $360 Service cost ? Interest cost 36 x (10% x $360) Loss (gain) on PBO 0 Less: Retiree benefits (54) End of 2006 $465 Service cost = $465 - 360 - 36 + 54 = $123 million Exercise 17-7 ($ in millions) Plan assets Beginning of 2006 $700 Actual return 77 x (11% x $700) Cash contributions ? Less: Retiree benefits (66) End of 2006 $750 Cash contributions = $750 - 700 - 77 + 66 = $39 million Exercise 17-8 ($ in 000s) Service cost $112 Interest cost (6% x $850) 51 Actual return on the plan assets (11% x $900 = $99) adjusted for: $9 gain* on the plan assets (90) Amortization of prior service cost 8 Amortization of net loss 1 Pension expense $82 * (11% x $900) – (10% x $900) 16 Exercise 17-9 Requirement 1 ($ in millions) Service cost $20 Interest cost 12 Actual return on the plan assets, $9 million adjusted for $1 million gain on the plan assets (8) Pension expense $24 Requirement 2 Pension expense (calculated above) 24 Prepaid (accrued) pension cost (difference) 4 Cash (given) 20 Exercise 17-10 Requirement 1 ($ in 000s) Service cost $310 Interest cost (7% x $2,300) 161 Actual return on the plan assets (9% x $2,400 = $216) adjusted for: $24 loss* on the plan assets (240) Amortization of prior service cost 25 Amortization of net gain (6) Pension expense $250 * (10% x $2,400) – (9% x $2,400) Requirement 2 Pension expense (calculated above) 250 Prepaid (accrued) pension cost (difference) 5 Cash (given) 245 17 Exercise 17-11 Requirement 1 1.2% x service years x final year’s salary = 1.2% x 20 x $270,000 = $64,800 Requirement 2 The present value of the retirement annuity at the end of 2031 is $64,800 x 9.10791* = $590,193 * present value of an ordinary annuity of $1: n=15, i=7% Requirement 3 The PBO is the present value of the retirement benefits at the end of 2006: $590,193 x .18425* = $108,743 * present value of $1: n=25, i=7% Requirement 4 1.2% x 20 x $80,000 = $19,200 $19,200 x 9.10791* = $174,872 $174,872 x .18425** = $32,220 * present value of an ordinary annuity of $1: n=15, i=7% ** present value of $1: n=25, i=7% Requirement 5 1.2% x 21 x $270,000 = $68,040 $68,040 x 9.10791* = $619,702 $619,702 x .19715** = $122,174 * present value of an ordinary annuity of $1: n=15, i=7% ** present value of $1: n=24, i=7% 18 Exercise 17-11 (concluded) Requirement 6 PBO at the end of 2007 $122,174 PBO at the end of 2006 (108,743) Change in PBO $ 13,431 Less: Interest cost: $108,743 x 7% (7,612) Service cost: $ 5,819 The change due to service cost can be verified as follows ($1 difference due to rounding): (1.2% x 1yr. x $270,000) x 9.10791 x .19715 = $5,818 annual retirement benefits to discount to discount from 2007 service to 2031 * to 2007 ** * present value of an ordinary annuity of $1: n=15, i=7% ** present value of $1: n=24, i=7% 19 Exercise 17-12 Requirement 1 ($ in 000s) Case 1 Case 2 Case 3 Unamortized net loss or gain $320 $330 $260 Less: 10% corridor (threshold)* (331) (270) (170) Excess none $ 60 $ 90 Service period ÷ 12 15 10 Amortization none $ 4 $ 9 * 10% times either the PBO or plan assets (beginning of the year), whichever is larger Requirement 2 ($ in 000s) Case 1 Case 2 Case 3 January 1, 2006 $320 $(330) $260 2006 loss (gain) on plan assets (11) (8) 2 2006 amortization 0 4 (9) 2006 loss (gain) on PBO (23) 16 (265) January 1, 2007 $286 $(318) $ (12) Note: Remember, the balance in this memorandum “account” is not recognized in the financial statements. 20 Exercise 17-13 Informal Records Formal Records ( )s indicate credits; debits otherwise ($ in thousands) PBO Plan Assets Prior Service Cost Net (gain) loss Pension Expense Cash Prepaid (Accrued) Cost Balance, Jan. 1, 2006 (800) 600 114 80 (6) Service cost (84) 84 Interest cost, 5% (40) 40 Actual return on assets 42 (42) Loss on assets 6 (6) Amortization of: Prior service cost (6) 6 Net loss Gain on PBO 12 (12) Contributions to fund 48 (48) Retiree benefits paid 50 (50) 2006 journal entry 82 (48) (34) Balance, Dec. 31, 2006 (862) 640 108 74 (40) 21 Exercise 17-14 Requirement 1 ($ in millions) ABO $(22) Plan assets 20 Minimum liability $ (2) Because the accrued pension cost ($3 million) is sufficient, no additional liability is needed. Requirement 2 ($ in millions) Intangible pension asset 5 Additional liability ($3 million + 2 million) 5 This adjustment achieves the objective of providing for a minimum liability of $2 million: Additional liability – credit balance $(5) Prepaid pension cost – debit balance 3 Pension liability (reported as a single amount on the balance sheet) $(2) 22 Exercise 17-15 ($ in millions) ABO $(117) Plan assets 105 Minimum liability $ (12) Less: prepaid pension cost – debit balance 6* Additional liability needed $ (18) * Pension expense (given) ...................................... 40 Prepaid (accrued) pension cost (difference) ..... 2 Cash (given) ...................................................... 38 Prepaid (accrued) pension cost: Beginning of the year ........................................... $8 Reduction from entry above.............................. 2 End of year ............................................................ $6 ($ in millions) Intangible pension asset 18* Additional liability (calculated above) 18** * The entire $18 million can be added to the intangible asset because its balance will not exceed the unrecognized prior service cost ($30 million) ** Data indicates no previous balance in the “additional liability” account This adjustment achieves the objective of providing for a minimum liability of $12 million: Additional liability – credit balance $(18) Prepaid (accrued) pension cost – debit balance 6 Pension liability (reported as a single amount on the balance sheet) $(12) 23 Exercise 17-16 List A List B d_ 1. Future compensation levels estimated. a. Additional minimum liability f_ 2. All funding provided by the employer. b. Prepaid pension cost b_ 3. Cumulative employer's contributions c. Vested benefit obligation in excess of recognized pension. d. Projected benefit obligation l_ 4. Retirement benefits specified e. Choice between PBO and ABO by formula. f. Noncontributory pension plan e_ 5. Trade-off between relevance g. Accumulated benefit obligation and reliability. h. Plan assets a_ 6. Causes a debit to an intangible asset. i. Interest cost g_ 7. Current pay levels implicitly assumed. j. Delayed recognition i_ 8. Created by the passage of time. k. Defined contribution plan c_ 9. Not contingent on future employment. l. Defined benefit plan k_ 10. Risk borne by employee. m. Prior service cost h_ 11. Increased by employer contributions. n. Amortize unrecognized net loss m_ 12. Caused by plan amendment. j_ 13. Gain on plan assets. n_ 14. Excess over 10% of plan assets or PBO. 24 Exercise 17-17 Requirement 1 ($ in millions) Pension expense (calculated below) 67* Prepaid (accrued) pension cost (difference) 3 Cash (given) 70 * Service cost $ 82 Interest cost 24 Actual return on the plan assets ($40) Adjusted for: $5 loss on the plan assets (45) Amortization of prior service cost 8 Amortization of net gain (2) Pension expense $ 67 Computation of net gain amortization: Net gain ( previous gains exceeded previous losses) $ 80 10% of $500 plan assets (greater than $480 PBO) (50) Amount to be amortized $ 30 ÷ 15 years Amortization $ 2 Requirement 2 none required because the ABO ($490) does not exceed plan assets ($570) Requirement 3 Minimum liability $ (15) Less: accrued pension cost ($12 – 3) (9) Additional liability needed $ (6) ($ in millions) Intangible pension asset 6* Additional liability (calculated above) 6 * The entire $6 million can be added to the intangible asset because its balance will not exceed the unrecognized prior service cost ($48 million - 8 million = $40 million) 25 Exercise 17-18 Requirement 1 ($ in 000) 2006 2007 2008 ABO $900 $1,050 $1,200 Plan Assets (800) (975) (1,100) Minimum liability $100 $ 75 $ 100 (Accrued) prepaid pension cost (30) (25) 5 Additional liability $ 70 $ 50 $ 105 Requirement 2 2006 ($ in 000) Intangible pension asset * .................................................. 40 Unrealized pension cost (to balance) ................................... 30 Additional liability (calculated above) ............................. 70 2007 Additional liability ($50 - 70) .............................................. 20 Intangible pension asset ($32* - 40) ............................... 8 Unrealized pension cost (to balance) .............................. 12 2008 Unrealized pension cost (to balance) .................................... 63 Intangible pension asset ($24* - 32) ............................... 8 Additional liability ($105 - 50) ....................................... 55 *Intangible pension asset limited to unamortized prior service cost: 2006 $40 2007 $40 - 8 = $32 2008 $40 - 8 - 8 = $24 26 Exercise 17-19 1. d 2. c 3. d 4. b Exercise 17-20 B 1. Change in actuarial assumptions for a defined benefit pension plan. C 2. Determination that the accumulated benefits obligation under a pension plan exceeded the fair value of plan assets at the end of the previous year by $17,000. The only pension-related amount on the balance sheet was prepaid pension costs of $30,000. B 3. Pension plan assets for a defined benefit pension plan achieving a rate of return in excess of the amount anticipated. D 4. Instituting a pension plan for the first time and adopting Statement of Financial Accounting Standards No. 87, Employers’ Accounting for Pensions. 27 Exercise 17-21 Requirement 1 $72,000 EPBO 2006 Requirement 2 $72,000 x 2/[2+28] = $4,800 EPBO fraction APBO 2006 earned 2006 Requirement 3 $72,000 x 1.06 = $76,320 EPBO to accrue EPBO 2006 interest 2007 Requirement 4 $76,320 x 3/30 = $7,632 EPBO fraction APBO 2007 earned 2007 28 Exercise 17-22 Requirement 1 $50,000 x 3/25 = $6,000 EPBO fraction APBO earned Requirement 2 $6,000 (beginning APBO) x 6% = $360 Requirement 3 $53,000 x 1/25 = $2,120 EPBO attributed service 2006 to 2006 cost Requirement 4 Postretirement benefit expense ($360 + 2,120) ....... 2,480 Accrued postretirement benefit cost .............. 2,480 29 Exercise 17-23 Requirement 1 22 years Requirement 2 $44,000 Requirement 3 $44,000 x ?/22 = $20,000 EPBO fraction APBO earned $44,000 x 10/22 = $20,000 EPBO fraction APBO earned 10 years before 2006: beginning of 1997 (or end of 1996) Requirement 4 $? x 1.10 = $44,000 EPBO interest EPBO beg. multiple end $40,000 x 1.10 = $44,000 EPBO interest EPBO beg. multiple end or, alternatively: $? x 9/22 = $16,364 EPBO fraction APBO earned $40,000 x 9/22 = $16,364 EPBO fraction APBO earned 30 Exercise 17-24 Requirement 1 ($ in 000s) Service cost $124 Interest cost (7% x $700) 49 Return on the plan assets (10% x $50) (5) Amortization of prior service cost 0 Amortization of net gain (1) Amortization of transition obligation 2 Postretirement benefit expense $169 Requirement 2 ($ in 000s) Postretirement benefit expense (calculated above) ........................ 169 Prepaid (accrued) postretirement benefit cost (difference) .......... 16 Cash (contributions to fund) ....................................................... 185 31 Exercise 17-25 Requirement 1 ($ in 000s) Net loss (previous losses exceeded previous gains) $336 10% of $2,800 ($2,800 is greater than $500) 280 Excess at the beginning of the year $ 56 Average remaining service years ÷ 14 Amount amortized to 2006 expense $ 4 Requirement 2 ($ in 000s) Postretirement benefit expense exclusive of net loss amortization $212 Amortization of net loss 4 Postretirement benefit expense $216 Requirement 3 ($ in 000s) Unamortized net loss, beginning of 2006 $336 2006 gain on plan assets ([10% - 9%] x $500) (5) 2006 amortization (4) 2006 loss on PBO 39 Unamortized net loss, end of 2006 $366 32 Exercise 17-26 ($ in millions) Service cost $34 Interest cost 12 (8% x [$130 + 20]) Return on plan assets (0) Amortization of: transition obligation 2 ƒ($50 ÷ 25 yrs) prior service cost 1 ƒ($20 ÷ 20 yrs) Postretirement benefit expense $49 33 Exercise 17-27 Requirement 1 The “negative” prior service cost must be offset against any existing prior service cost before it can be amortized. ($ in 000s) Unrecognized prior service cost $ 50 Reduction for amendment (80) Negative prior service cost $(30) Service period to full eligibility ÷ 15 years Amortization $ 2 Requirement 2 Service cost $114 Interest cost 36 (8% x [$530 – 80]) Return on plan assets (0) Amortization of prior service cost (2) ƒ¬([$50 - 80] ÷ 15 yrs) Postretirement benefit expense $148 Requirement 3 If unrecognized transition obligation exists, any “negative” prior service cost remaining after being offset against existing prior service cost must be offset against the transition obligation before it can be amortized. Unrecognized prior service cost $ 50 Reduction for amendment (80) Excess $(30) Unrecognized transition obligation 120 Unrecognized transition obligation after amendment $ 90 Amortization of prior service cost none Exercise 17-28 a 34 Exercise 17-29 1. a. SFAS 87 defines the PBO as the actuarial present value of all future benefits attributable to past employee service at a moment in time. It is based on assumptions as to future compensation if the pension plan formula is based on future compensation. 2. c. Under SFAS 87, a minimum liability must be recognized when the ABO exceeds the fair value of plan assets. Because the ABO exceeds the fair value of plan assets, the minimum liability to be recognized is $517,500 ($825,000 ABO - $307,500 FVPA). 3. b. Unrecognized prior service cost arises from the awarding of retroactive benefits resulting from plan initiation or amendments. Prior service cost is assigned to the future service periods of active employees using either a straight-line or another acceptable method of allocation. Given that the average remaining service life of the firm’s employees is 10 years, the annual charge is $19,000 ($190,000 / 10). 35 Exercise 17-30 Requirement 1 ($ in 000s) Number of Fraction of Prior Year Employees Total Service Service Amount Still Employed Years Cost Amortized 2007 100 100/550 x $110 = $ 20 2008 90 90/550 x 110 = 18 2009 80 80/550 x 110 = 16 2010 70 70/550 x 110 = 14 2011 60 60/550 x 110 = 12 2012 50 50/550 x 110 = 10 2013 40 40/550 x 110 = 8 2014 30 30/550 x 110 = 6 2015 20 20/550 x 110 = 4 2016 10 10/550 x 110 = 2 ______ __________ _____ Totals 550* 550/550 $110 Total Number Total Amount of Service Years Amortized Requirement 2 $110,000 ÷ 5.5 years* = $20,000/year * The average service life is the total estimated service years divided by the total number of employees in the group: 550 years ÷ 100 = 5.5 years total number total number average of service years of employees service years 36 PROBLEMS Problem 17-1 Requirement 1 measurement date ⇓ 1992 2006 2026 2044 ___________________________________________________ 15 years 20 years 18 years Service period Retirement Requirement 2 1.6% x 15 x $90,000 = $21,600 Requirement 3 The present value of the retirement annuity as of the retirement date (end of 2026) is: $21,600 x 10.05909* = $217,276 * present value of an ordinary annuity of $1: n=18, i=7% The ABO is the present value of the retirement benefits at the end of 2006: $217,276 x .25842* = $56,148 * present value of $1: n=20, i=7% Requirement 4 1.6% x 18 x $100,000 = $28,800 $28,800 x 10.05909* = $289,702 $289,702 x .31657** = $91,711 * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=17, i=7% 37 Problem 17-2 Requirement 1 measurement date ↓ 1992 2006 2026 2044 ___________________________________________________ 15 years 20 years 18 years Service period Retirement Requirement 2 1.6% x 15 x $240,000 = $57,600 Requirement 3 The present value of the retirement annuity as of the retirement date (end of 2026) is: $57,600 x 10.05909* = $579,404 [This is the lump-sum equivalent of the retirement annuity as of the retirement date] * present value of an ordinary annuity of $1: n=18, i=7% The PBO is the present value of the retirement benefits at the end of 2006: $579,404 x .25842* = $149,730 * present value of $1: n=20, i=7% Requirement 4 1.6% x 18 x $240,000 = $69,120 $69,120 x 10.05909* = $695,284 $695,284 x .31657** = $220,106 * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=17, i=7% 38 Problem 17-3 Requirement 1 1.6% x 14 x $240,000 = $53,760 $53,760 x 10.05909* = $540,777 $540,777 x .24151** = $130,603 * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=21, i=7% Requirement 2 1.6% x 1 x $240,000 = $3,840 Requirement 3 $3,840 x 10.05909* = $38,627 $38,627 x .25842** = $9,982 * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=20, i=7% Requirement 4 $130,603 x 7% = $9,142 Requirement 5 PBO at the beginning of 2006 (end of 2005) $130,603 Service cost: 9,982 Interest cost: $130,603 x 7% 9,142 PBO at the end of 2006 $149,727 Note: In requirement 3 of the previous problem this same amount is calculated without separately determining the service cost and interest elements (allowing for a $3 rounding adjustment) 39 Problem 17-4 Requirement 1 PBO Without Amendment PBO With Amendment 1.6% x 15 yrs. x $240,000 = $57,600 1.75% x 15 yrs. x $240,000 = $63,000 $57,600 x 10.05909* = $579,404 $63,000 x 10.05909* = $633,723 $579,404 x .25842** = $149,730 $633,723 x .25842** = $163,767 Ì Ë $14,037 Prior service cost * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=20, i=7% Alternative calculation: 1.75 - 1.6 = 0.15% x 15 yrs x $240,000 = $5,400 $5,400 x 10.05909* = $54,319 $54,319 x .25842** = $14,037 Requirement 2 $14,037 ÷ 20 years (expected remaining service) = $702 Requirement 3 1.75% x 1 x $240,000 = $4,200 $4,200 x 10.05909* = $42,248 $42,248 x .27651** = $11,682 * present value of an ordinary annuity of $1: n=18, i=7% ** present value of $1: n=19, i=7% Requirement 4 $163,767 x 7% = $11,464 Requirement 5 Service cost (from req. 3) $11,682 Interest cost (from req. 4) 11,464 Return on the plan assets (10% x $150,000 ) (15,000) Amortization of prior service cost (from req. 2) 702 Pension expense $8,848 40 Problem 17-5 PBO With Previous Rate PBO With Revised Rate 1.6% x 15 yrs x $240,000 = $57,600 1.6% x 15 yrs x $240,000 = $57,600 $57,600 x 10.059091 = $579,404 $57,600 x 9.371893 = $539,821 $579,404 x .258422 = $149,730 $539,821 x .214554 = $115,819 Ì Ë $33,911 Gain on PBO 1 present value of an ordinary annuity of $1: n=18, i=7% 2 present value of $1: n=20, i=7% 3 present value of an ordinary annuity of $1: n=18, i=8% 4 present value of $1: n=20, i=8% 41 Problem 17-6 1. Projected Benefit Obligation ($ in 000s) Balance, January 1, 2006 $ 0 Service cost 150 Interest cost (6% x $0) 0 Benefits paid (0) Balance, December 31, 2006 $150 Service cost 200 Interest cost (6% x $150) 9 Benefits paid (0) Balance, December 31, 2007 $359 2. Plan Assets Balance, January 1, 2006 $ 0 Actual return on plan assets (10% x $0) 0 Contributions, 2006 160 Benefits paid (0) Balance, December 31, 2006 $160 Actual return on plan assets (10% x $160) 16 Contributions, 2007 170 Benefits paid (0) Balance, December 31, 2007 $346 3. Pension expense – 2006 Service cost $150 Interest cost (6% x $0) 0 Return on the plan assets (10% x $0) 0 Pension expense $150 Pension expense – 2007 Service cost $200 Interest cost (6% x $150) 9 Return on the plan assets (10% x $160) (16) Pension expense $193 4. Prepaid (accrued) pension cost Balance, January 1, 2006 $ 0 2006 debit ($150,000 – 160,000) 10 Balance, December 31, 2006 $ 10 2007 credit ($193,000 – 170,000) (23) Balance, December 31, 2007 - credit $(13) 42 Problem 17-7 Requirement 1 ($ in 000s) Net gain (previous gains exceeded previous losses) $170 10% of $1,400 ($1,400 is greater than $1,100) 140 Excess at the beginning of the year $ 30 Average remaining service period years ÷ 15 Amount amortized to 2006 pension expense $ 2 Requirement 2 Pension expense exclusive of net gain amortization $325 Amortization of net gain (2) Pension expense $323 Requirement 3 Unamortized net gain, beginning of 2006 $(170) 2006 loss on plan assets ([10% – 9%] x $1,100) 11 2006 amortization 2 2006 gain on PBO (23) Unamortized net gain, end of 2006 (beg. of 2007) $(180) Note: Remember, the balance in this memorandum “account” is not recognized in the financial statements. 43 Problem 17-8 Requirement 1 Informal Records Formal Records ( )s indicate credits; debits otherwise ($ in millions) PBO Plan Assets Prior Service Cost Net gain Pension Expense Cash Prepaid (Accrued) Cost Jan. 1, 2006 (600) 800 26 (95) 131 Service cost (65) 65 Interest cost, 7% (42) 42 Actual return on assets 72 (72) Gain on assets (8) 8 Amortization of: Prior service cost (2) 2 Net gain 1 (1) Loss on PBO (4) 4 Contributions to fund 30 (30) Retiree benefits paid 52 (52) 2006 journal entry 44 (30) (14) Dec. 31, 2006 (659) 850 24 (98) 117 44 Problem 17-8 (concluded) Requirement 2 ($ in millions) Pension expense (calculated above) ......................................... 44 Prepaid (accrued) pension cost (difference) ........................ 14 Cash (contribution to fund) .................................................... 30 Requirement 3 ($ in millions) Projected benefit obligation $(659) Plan assets 850 Funded status $ 191 Unamortized prior service cost 24 Unamortized net gain (98) Prepaid pension cost $ 117 45 Problem 17-9 Note: It’s important to realize that the relationship given: plan assets - PBO = prepaid (accrued) pension cost, exists only when there are no unrecognized pension costs (prior service cost, net loss or gain). This also means pension expense contains no components for the amortization of such amounts. 1. Pension expense ($ in 000s) Service cost $60 Interest cost (5% x $320) 16 Return on the plan assets (9% x $400 ) (36) Amortization of prior service cost 0 Amortization of net loss or gain 0 Pension expense $40 2. Prepaid (accrued) pension cost Balance, January 1 $ 80 2006 debit ($120,000 – 40,000) 80 Balance, December 31 $160 3. Projected Benefit Obligation Balance, January 1 $320 Service cost 60 Interest cost 16 Benefits paid (44) Balance, December 31 $352 4. Plan Assets Balance, January 1 $400 Actual return on plan assets 36 Contributions 2006 120 Benefits paid (44) Balance, December 31 $512 46 Problem 17-10 Requirement 1 ($ in millions) 2006 2007 Service cost (given) $520 $570 Interest on PBO (2006: 10% x $2,200*; 2007: 10% x $2,540*) 220 254 Expected return (2006: 12% x $1,600; 2007: 12% x $1,920**) (192) (230.4) Amortization of prior service costs ($400 ÷ 10 years) 40 40 Amortization of unrecognized net gain*** (5) none Pension expense $583 $633.6 *PBO **Plan Assets Balance, 1-1-06 $1,800 Balance, 1-1-06 $1,600 Prior service cost 400 Balance, 1-2-06 $2,200 Interest 10% 220 2006 contribution 540 Service cost 520 2006 actual return 180 Payments (400) Payments (400) Balance, 12-31-06 $2,540 Balance, 12-31-06 $1,920 Interest 10% 254 2007 contribution 590 Service cost 570 2007 actual return 210 Payments (450) Payments (450) Balance, 12-31-07 $2,914 Balance, 12-31-07 $2,270 ***Unrecognized Net Gain 2006 Net gain at 1-1-06 $230 10% of $1,800 ($1,800 is greater than $1,600): (180) Excess at the beginning of the year $ 50 Average remaining service period ÷ 10 years Amount amortized to 2006 pension expense $ 5 2007 Net gain at 1-1-06 $230 Loss in 2006 (actual return: $180 - expected return: $192) (12) Amortization in 2006 (calculated above) (5) Net gain at 1-1-07 $213 10% of $2,540 ($2,540 is greater than $1,920): (254) No excess at the beginning of the year none No amortization for 2007 47 Problem 17-10 (concluded) Requirement 2 2006 Pension expense (calculated above) .................................. 583 Accrued (prepaid) pension cost (to balance)................ 43 Cash (given) ................................................................ 540 2007 Pension expense (calculated above) .................................. 633.6 Accrued (prepaid) pension cost (to balance)................ 43.6 Cash (given) ............................................................... 590.0 48 Problem 17-11 Projected Benefit Pension Obligation Plan Assets Expense Balance at Jan. 1 $ 0 $ 0 Prior service cost 2,000,000 2,000,000 Amortization of prior service cost ($2,000,000 ÷ 10 years) $200,000 Service cost 250,000 250,000 Interest cost ($2,000,000* x 9%) 180,000 180,000 Return on plan assets Actual ($2,000,000** x 11%) 220,000 Expected ($2,000,000** x 9%) (180,000) Retirement payments (16,000) (16,000) Cash contribution 250,000 Balance at Dec. 31 $2,414,000 $2,454,000 $450,000 Note: The $40,000 gain ($220,000 - 180,000) is not recognized yet; it is carried forward to be combined with future gains and losses, which will be recognized only if the net gain or net loss exceeds 10% of the higher of the PBO or plan assets. * Since the plan was adopted at the beginning of the year, the prior service cost increased the PBO at that time. ** Since the prior service cost was funded at the beginning of the year, the plan assets were increased at that time. 49 Problem 17-12 1. Actual return on plan assets ($ in 000s) Plan assets Beginning of 2006 $2,400 Actual return ? Cash contributions 245 Less: Retiree benefits (270) End of 2006 $2,591 Actual return = $2,591 - 2,400 - 245 + 270 = $216 2. Loss or gain on plan assets Expected return $240 x (10% x $2,400) Actual return (216) Loss on plan assets $24 3. Service cost PBO: Beginning of 2006 $2,300 Service cost ? Interest cost 161 x (7% x $2,300) Loss (gain) on PBO 0 Less: Retiree benefits (270) End of 2006 $2,501 Service cost = $2,501 - 2,300 - 161 + 270 = $310 50 Problem 17-12 (concluded) 4. Pension expense ($ in 000s) Service cost $310 Interest cost 161 x (7% x $2,300) Actual return $216 Plus: loss 24 (240) Amortization of: prior service cost 25 x ($325 - 300) net gain (6) x (330 - 300 - 24*) Pension expense $250 * 2006 loss on plan assets or, alternatively: Pension expense (to balance) ................................ 250 Prepaid (accrued) pension cost ($90 - 95) ....... 5 Cash (given) .................................................... 245 5. Average remaining service life of active employees Net gain, Jan. 1 $330 10% of $2,400 240 Excess $ 90 Amount amortized ÷ 6 Average service period 15 years 51 Problem 17-13 Requirement 1 ($ in 000's) Pension expense (calculated below) 517* Prepaid (accrued) pension cost (difference) 17 Cash (given) 500 * Service cost $410 Interest cost 200 Actual return on the plan assets, $150 Adjusted for: $15 gain on the plan assets (135) Amortization of prior service cost 40 Amortization of net loss (calculated below) 2 Pension expense $517 Computation of net loss amortization: Net loss ( previous losses exceeded previous gains) $230 10% of $2,000 (greater than $1,500) (200) Amount to be amortized $ 30 ÷ 15 Amortization $ 2 Requirement 2 Intangible pension asset 113* Additional liability (calculated below) 113 * The entire $113,000 can be added to the intangible asset because its balance will not exceed the unrecognized prior service cost ($240,000 - 40,000 = $200,000) Computation of additional liability: ABO $(2,100) Plan assets 1,940 Minimum liability $ (160) Less: accrued pension cost ($30 + 17) (47) Additional liability needed $ (113) 52 Problem 17-13 (concluded) Requirement 3 ($ in 000's) Minimum liability $ (170) Less: prepaid pension cost (debit balance) 10 Additional liability needed $ (180) Less: additional liability balance (from 2006) (113) To be added $ (67) Intangible pension asset ($67,000 - [180,000 - 160,000]) 47* Unrealized pension cost ($180,000 - 160,000) 20 Additional liability (calculated above) 67 * The entire $67,000 cannot be added to the intangible asset because its balance ($113,000 + 67,000 = $180,000) would exceed the unrecognized prior service cost ($200,000 - 40,000 = $160,000). 53 Problem 17-14 Informal Records Formal Records ( )s indicate credits; debits otherwise ($ in 000s) PBO Plan Assets Prior Service Cost Net loss Pen. Exp. Cash Prepaid Pension Cost Jan. 1, 2006 (4,100) 4,530 840 477 1,747 Service cost2 (332) 332 Interest cost, 7%1 (287) 287 Actual return 3 400 (400) Loss on assets4 53 (53) Amortization of: Prior service cost5 (70) 70 Net loss6 (2) 2 Gain on PBO 44 (44) Contributions to fund 340 (340) Retiree benefits paid 295 (295) 2006 journal entry 238 (340) 102 Dec. 31, 2006 (4,380) 4,975 770 484 1,849 1 7% x $4,100 = $287 2 $4,380 - 4,100 - 287 + 44 + 295 = $332 3 $4,975 - 4,530 - 340 + 295 = $400 4 10% x $4,530 = $453 (expected) - 400 = $53 5 $840 ÷ 12 = $70 6 ($477 - 453) ÷ 12 = $2 54 Problem 17-15 Requirement 1 Retirement Attribution Period Period 26 years 5 years age age age age 35 60 62 67 1984 1993 2009 2011 2016 (beg.) (beg.) (end) (end) (end.) ___________________________________________________________________ SFAS 106 retirement adopted Ç Ç date “full-eligibility” hired date Requirement 2 Year Expected PV of $1 Present Value End Net Cost n=1-5, i=6% at Jan. 1, 2012 2012 $4,000 x .94340 $ 3,774 2013 4,400 x .89000 3,916 2014 2,300 x .83962 1,931 2015 2,500 x .79209 1,980 2016 2,800 x .74726 2,092 $13,693 55 Problem 17-15 (concluded) Requirement 3 $13,693 x .33051* = $4,526 * present value of $1: n=19, i=6% Beg. of 1993 to end of 2011 Requirement 4 $4,526 x 9 yrs*/26 yrs** = $1,567 * 1984-1992 ** attribution period (1984-2009) Requirement 5 $1,567 The APBO existing when SFAS 106 was adopted is the transition obligation. Requirement 6 a. Immediate recognition? $1,567 b. Recognition over future service periods? $1,567 ÷ 19* = $82 * 1993-2011 c. Optional recognition over a 20-year period? $1,567 ÷ 20* = $78 * optional since longer than 16 years 56 Problem 17-16 Requirement 1 Year Expected PV of $1 Present Value End Net Cost n=1-5, i=6% at Jan. 1, 2012 2012 $4,000 x .94340 $ 3,774 2013 4,400 x .89000 3,916 2014 2,300 x .83962 1,931 2015 2,500 x .79209 1,980 2016 2,800 x .74726 2,092 $13,693 Requirement 2 $13,693 x .74726* = $10,232 *present value of $1: n=5, i=6% Requirement 3 $10,232 x 23 yrs*/26 yrs** = $9,051 * 1984-2006 ** attribution period (1984-2009) Requirement 4 $13,693 x .79209* = $10,846 (EPBO) * present value of $1: n=4, i=6% $10,846 x 24 yrs*/26 yrs** = $10,012 * 1984-2007 ** attribution period (1984-2009) 57 Problem 17-16 (concluded) Requirement 5 $13,693 x .79209* = $10,846 (EPBO) * present value of $1: n=4, i=6% $10,846 x 1 yr/26 yrs = $417 Requirement 6 $9,051 (beginning APBO) x 6% = $543 Requirement 7 APBO at the beginning of 2007 (from req. 3) $9,051 Service cost: (from req. 5) 417 Interest cost: (from req. 6) 543 APBO at the end of 2007 (agrees with req. 4*) $10,011 * $1 difference due to rounding 58 Problem 17-17 EPBO fraction earned APBO Service Cost Interest Cost Expense 10% 2006 $18,000 1/8 $ 2,250 $ 2,250 $ 0 $ 2,250 2007 19,800 1 2/8 4,950 2 2,475 3 225 4 2,700 5 2008 21,780 3/8 8,168 2,723 495 3,218 2009 23,958 4/8 11,979 2,995 817 3,812 2010 26,354 5/8 16,471 3,294 1,198 4,492 2011 28,989 6/8 21,742 3,624 1,647 5,271 2012 31,888 7/8 27,902 3,986 2,174 6,160 2013 35,077 8/8 35,077 4,385 2,790 7,175 Totals $25,732 $9,346 $35,078 1 $18,000 x 1.10 = $19,800 2 $19,800 x 2/8 = $4,950 3 $19,800 x 1/8 = $2,475 4 $2,250 (APBO) x 10% = $225 5 $2,475 + 225 = $2,700 59 Problem 17-18 Requirement 1 ($ in 000s) APBO: Beginning of 2006 $460 Service cost ? Interest cost 23 (5% x $460) Loss (gain) on APBO 0 Less: Retiree benefits (52) End of 2006 $485 Service cost = $485 - 460 - 23 + 52 = $54 Requirement 2 ($ in 000s) Service cost $54 Interest cost 23 (5% x $460) Return on plan assets (0) Amortization of: transition obligation 10 ($120 - 110) net gain (1) ($50 - 49) Postretirement benefit expense $86 60 Problem 17-19 Requirement 1 ($ in millions) APBO: Beginning $375 Service cost 23 Interest cost (8% x $375) 30 Loss on APBO 92 Benefit payments (20) Ending $500 Requirement 2 ($ in millions) Service cost $23 Interest cost 30 Amortization of transition obligation ($375/15) 25 Postretirement benefit expense $78 Requirement 3 ($ in millions) Postretirement benefit expense (determined above) 78 Accrued postretirement benefit cost (difference) 18 Cash (given) 60 Requirement 4 ($ in millions) APBO $500 Plan assets ($60 - 20) (40) Funded status $460 Unrecognized net loss (92) Unrecognized transition obligation ($375 - 25) (350) Accrued postretirement benefit cost $ 18 61 Problem 17-19 (continued) Requirement 5 APBO Plan Assets Balance, Jan. 1 $500 $40 Service cost 32 Interest cost ($500 x 8%) 40 Return on plan assets 5 Contributions 90 Benefit payments (55) (55) Balance, Dec. 31 $517 $80 Requirement 6 ($ in millions) Net loss (previous losses exceeded previous gains) $92 10% of $500 ($500 is greater than $40) (50) Excess at the beginning of the year $42 Average remaining service period ÷ 14 years Amount amortized to 1995 pension expense $ 3 Requirement 7 ($ in millions) Service cost $32 Interest cost 40 Return on plan assets $(5) Less: gain (12.5% x $40 – 10% x $40) 1* (4) Amortization of transition obligation ($375/15) 25 Amortization of net loss (determined above) 3 Postretirement benefit expense $96 62 Problem 17-19 (concluded) Requirement 8 ($ in millions) Postretirement benefit expense (determined above) 96 Accrued postretirement benefit cost (difference) 6 Cash (given) 90 Requirement 9 APBO (req. 5) $517 Plan assets (req. 5) (80) Funded status $437 Unrecognized net loss ($92 - 3 amortization -1 gain) (88) Unrecognized transition obligation ($375 - 25 - 25) (325) Accrued postretirement benefit cost $ 24* * Note: $18 [req.4] + 6 [req. 8] = $24 63 CASES Judgment Case 17-1 Requirement 1 Here is a graphical depiction of your estimated service and retirement periods: 2006 2045 2065 _____________________________________________ 40 years 20 years Service period Retirement Salary at retirement: $100,000 x 3.26204, or $100,000 x (1.03)40 = $326,204 1.5% x 40 x $326,204 = $195,722 The present value of the retirement annuity as of the retirement date (end of 2045) is: $195,722 x 11.46992* = $2,244,916 [This is the lump-sum equivalent of the retirement annuity as of the retirement date] * present value of an ordinary annuity of $1: n=20, i=6% 64 Case 17-1 (continued) Requirement 2 The value of your plan assets as of the anticipated retirement date is $1,985,360: A B C D Years to Future Value Retirement Salary Contribution at Retirement 40 100,000 8,000 82,286 39 103,000 8,240 79,957 38 106,090 8,487 77,694 37 109,273 8,742 75,495 36 112,551 9,004 73,358 35 115,927 9,274 71,282 34 119,405 9,552 69,265 33 122,987 9,839 67,305 32 126,677 10,134 65,400 31 130,477 10,438 63,549 30 134,392 10,751 61,750 29 138,423 11,074 60,003 28 142,576 11,406 58,304 27 146,853 11,748 56,654 26 151,259 12,101 55,051 25 155,797 12,464 53,493 24 160,471 12,838 51,979 23 165,285 13,223 50,508 22 170,243 13,619 49,078 21 175,351 14,028 47,689 20 180,611 14,449 46,340 19 186,029 14,882 45,028 18 191,610 15,329 43,754 17 197,359 15,789 42,515 16 203,279 16,262 41,312 15 209,378 16,750 40,143 14 215,659 17,253 39,007 13 222,129 17,770 37,903 12 228,793 18,303 36,830 11 235,657 18,853 35,788 10 242,726 19,418 34,775 9 250,008 20,001 33,791 8 257,508 20,601 32,834 7 265,234 21,219 31,905 6 273,191 21,855 31,002 5 281,386 22,511 30,125 4 289,828 23,186 29,272 3 298,523 23,882 28,444 2 307,478 24,598 27,639 1 316,703 25,336 26,856 Lump-sum equivalent of the retirement annuity as of the retirement date 1,985,360 65 Case 17-1 (concluded) Your annual retirement pay assuming continuing investment of assets at 6% will be: $1,985,360 ÷ 11.46992 = $173,093 * present value of an ordinary annuity of $1: n=20, i=6% Requirement 3 Based on the calculations alone, the State’s defined benefit plan offers the larger retirement annuity and, therefore, lump-sum equivalent of the retirement annuity. Be aware though that many other factors need to be considered. Plans vary in terms of the flexibility regarding how you can choose to receive distributions of your retirement assets. Very often defined benefit plans provide benefits only until you and/or your spouse dies with no benefits to other beneficiaries; whereas, assets accumulated under defined contribution plans can be bequeathed to other beneficiaries. Also, greater uncertainty is associated with defined contribution plans, in general. The employee bears the risk of uncertain investment returns and, potentially, might settle for far less at retirement than at first expected. On the other hand, results may exceed expectations as well. Risk is reversed in a defined benefit plan. Because specific benefits are promised at retirement, the employer is responsible for making up the difference when investment performance is less than expected. Relatedly, uncertainty regarding mortality significantly affects the equation. Defined benefit plans pay benefits from retirement to death. Assets accumulated under defined contribution plans, however, are a fixed amount. How well that 66 amount provides for retirement income depends on how many years you live after retirement. 67 Communication Case 17-2 Suggested Grading Concepts and Grading Scheme: Content (80% ) 25 The net periodic pension expense measures this compensation and consists of the following five elements which can vary differently from changes in employment.(5 each; maximum of 25 for this part) The service cost component is the present value of the benefits earned by the employees during the current period. The interest cost component is the increase in the projected benefit obligation due to the passage of time. The return on plan assets reduces the pension expense. The actual return on plan assets component is the difference between the fair value of the plan assets at the beginning and the end of the period, adjusted for contributions and benefit payments. This amount is adjusted for any gain or loss, so it is the expected return that actually affects the calculation. Prior service cost is created when a pension plan is amended and credit is given for employee service rendered in prior years. This retroactive credit is not recognized as pension expense entirely in the year the plan is amended, but is recognized in pension expense over the time that the employees who benefited from this credit work for the company. Gains and losses arise from changes in estimates concerning the amount of the projected benefit obligation or the return on the plan assets being different from expected. These are not recognized as they occur. 20 Gains and losses occur when the PBO or the return on plan assets turns out to be different than expected. (10 each; maximum of 20 for this part) A net gain or a net loss affects pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. When the corridor is exceeded, the excess is not charged to pension expense all at once. Instead, the amount that should be included is the excess divided by the average remaining service period of active employees expected to receive benefits under the plan. 68 Case 17-2 (concluded) 20 PBO and ABO compared (10 each; maximum of 20 for this part) Both the accumulated benefit obligation and the projected benefit obligation represent the present value of the benefits attributed by the pension benefit formula to employee service rendered prior to a specific date. The accumulated benefit obligation is based on present salary levels and the projected benefit obligation is based on estimated future salary levels. 15 An additional minimum liability must be recognized when: the accumulated benefit obligation exceeds the fair value of the plan assets (10 points) and there is not already a credit balance in the accrued pension cost account at least equal to the excess. (5 points) 80 points Writing (20%) 5 Terminology and tone appropriate to the audience of assistant controllers. 6 Organization permits ease of understanding. introduction that states purpose. paragraphs separate main points. 9 English word selection. spelling. grammar. 20 points 69 Judgment Case 17-3 Requirement 1 Yes, it’s true that the pension expense is calculated as if the balance sheet contained certain amounts it doesn’t report, specifically the projected benefit obligation, the pension assets, and other unrecognized amounts. The balance sheet reflects only the extent to which the pension expense has been higher or lower than cash contributions to the pension fund plus a so-called “minimum liability” to the extent the ABO exceeds the pension assets. Actually, even the pension expense falls short of reflecting all changes in the PBO and plan assets due to methods invented by the FASB to defer the effect of gains, losses, prior service cost, and effects of changing to the new standard. Requirement 2 A small liability would be reported under GAAP. This is the accrued pension cost: $171,000 in 2006 and $149,000 in 2005. (The account has a credit balance; a debit balance would be an asset.) Also, no minimum liability is required if the ABO does not exceed the pension assets. This appears to be the case because no minimum liability is explicitly reported and, although the ABO is not separately reported, it would be considerably less than the PBO, and the PBO is only slightly more than plan assets. 70 Case 17-3 (concluded) Requirement 3 No asset would be reported in the balance sheet. If the accrued pension cost had shown a debit balance, it would be an asset (prepaid pension cost). Requirement 4 None of the other amounts reported in the disclosure note are reported on the balance sheet. The plan assets, projected benefit obligation, unrecognized gain, and prior service cost each has a balance that is maintained informally only. Requirement 5 Gains and losses occur when either the PBO or the return on plan assets turns out to be different than expected. LGD’s unrecognized net gain indicates that cumulative previous gains of either type have exceeded cumulative previous losses of either type. The loss in 2006 indicates the PBO is higher than previously expected due to some unspecified change in an actuarial assumption. A net gain or a net loss affects pension expense only if it exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher. That appears to be the case with LGD and the amortized portion of the net gain is one component of the pension expense. Requirement 6 As mentioned in the previous part, the amortized portion of the net gain is one component of the pension expense. A second component is an amortized portion of the prior service cost. A company is required to report separately the components of pension expense. 71 Communication Case 17-4 First, this case has no right or wrong answer. The process of developing the proposed solutions will likely be more beneficial than the solutions themselves. Students should benefit from participating in the process, interacting first with other group members, then with the class as a whole. Solutions should take into account the facts brought out in the solution to the previous case on which this one is based. Also, it is likely that some of the suggestions will be variations of the following alternatives: 1. The FASB compromise approach as described in the text. 2. Full recognition of the projected benefit obligation and the plan assets with no “smoothing” – deferral of gains, losses, or prior service cost. 3. Recognition of the accumulated benefit obligation rather than the projected benefit obligation. 4. Alternatives 2 or 3, but with netting of the obligation and plan assets. It is important that each student actively participate in the process. Domination by one or two individuals should be discouraged. Students should be encouraged to contribute to the group discussion by (a) offering information on relevant issues, (b) clarifying or modifying ideas already expressed, or (c) suggesting an alternative direction. 72 International Case 17-5 The report should indicate similarities and differences between the United States and the chosen country focusing on the following issues: a. Depending on the country chosen, the financial statement effect may be minimal. In many countries, including many South American and West European countries, pension benefits are uncommon. b. In the United States, accrual of these benefits in the service periods is required. This is the objective also in many other countries such as Canada and the United Kingdom; however, significant variations exist in how that objective is accomplished. In other countries where pension benefits are commonly provided, little official guidance is offered. For instance, pension costs are not covered by accounting standards in Australia, Belgium, Denmark, and Switzerland, to name a few. The report might also comment whether cultural differences are likely contributors to the differences observed. Ethics Case 17-6 Mr. Maxwell’s apparent motivation for the change in the way contributions are handled is to have the company benefit from the earning power of the contributed funds for up to three months, prior to the funds being deposited for the benefit of the employees. Temporarily diverting 401(k) funds this way benefits the company at the expense of the employee. There is some question as to whether the practice described is illegal. In practice, such cases are rarely prosecuted. Regardless of the legality, though, there is the ethical question of whether the employer should earn dividends, interest, etc. on funds deducted from employees’ paychecks, prior to the funds being deposited to the employees’ accounts. 73 Research Case 17-7 Results will vary depending on companies chosen. Wal-Mart provided the following disclosures in its annual report for the year ending January 31, 2004: 10 Retirement-Related Benefits (in part) The Company maintains profit sharing plans under which most full-time and many part-time associates become participants following one year of employment and 401(k) plans to which associates may elect to contribute a percentage of their earnings. During fiscal 2004 participants could contribute up to 15% of their pretax earnings, but not more than statutory limits. Annual Company contributions are made at the sole discretion of the Company, and were $662 million, $574 million and $479 million in 2004, 2003 and 2002, respectively. 74 Case 17-7 (continued) United Airlines reported the following information about its benefit plans: (12) Retirement and Postretirement Plans (in part) We have various retirement plans, both defined benefit (qualified and non- qualified) and defined contribution, which cover substantially all employees. The following table sets forth the reconciliation of the beginning and ending balances of the benefit obligation and plan assets, the funded status and the amounts recognized in the Statements of Consolidated Financial Position for the defined benefit and other postretirement plans as of December 31 (utilizing a measurement date of December 31): (In millions) Change in Benefit Obligation Pension Benefits Other Benefits 2003 2002 2003 2002 Benefit obligation at beginning of year $ 12,673 $10,095 $ 3,965 $ 2,359 Service cost 295 399 86 100 Interest cost 815 809 225 211 Plan participants' contributions 2 2 23 11 Amendments (66) 544 (1,382) 217 Actuarial (gain) loss 279 1,442 583 1,218 Curtailments (81) - (113) - Foreign currency exchange rate changes 19 17 - - Special termination benefits 10 - 4 - Benefits paid (829) (635) (205) (151) Benefit obligation at end of year $13,117 $12,673 $ 3,186 $ 3,965 Change in Plan Assets 2003 2002 2003 2002 Fair value of plan assets at beginning of year $ 6,298 $ 7,575 $ 119 $ 118 Actual return on plan assets 1,400 (704) 6 6 Employer contributions 86 53 175 135 Plan participants' contributions 2 2 23 11 Foreign currency exchange rate changes 4 7 - - Benefits paid (829) (635) (205) (151) Fair value of plan assets at end of year $ 6,961 $ 6,298 $ 118 $ 119 75 Case 17-7 (continued) Funded status $ (6,156) $ (6,377) $(3,069) $(3,846) Unrecognized actuarial (gains) losses 3,903 4,456 2,048 1,677 Unrecognized prior service costs 870 1,150 (1,128) 209 Unrecognized net transition obligation 11 13 - - Net amount recognized $ (1,372) $ (758) $(2,149) $(1,960) Amounts recognized in the statement of financial position consist of: 2003 2002 2003 2002 Prepaid (accrued) benefit cost $ (1,372) $ (758) $(2,149) $(1,960) Accrued benefit liability (4,327) (3,956) - - Intangible asset 904 1,162 - - Accumulated other comprehensive income 3,423 2,794 - - Net amount recognized $ (1,372) $ (758) $(2,149) $(1,960) Increase in minimum liability included in other comprehensive income $ 630 $2,364 na na The following information relates to all pension plans with an accumulated benefit obligation in excess of plan assets: December 31 (In millions) 2003 2002 Projected benefit obligation $ 13,117 $ 12,673 Accumulated benefit obligation 12,653 11,009 Fair value of plan assets 6,961 6,298 76 Case 17-7 (continued) The net periodic benefit [pension] cost included the following components: (In millions) Pension Benefits 2003 2002 2001 Service cost $ 295 $ 399 $ 352 Interest cost 815 809 722 Expected return on plan assets (718) (822) (805) Amortization of prior service cost including transition obligation/(asset) 93 89 73 Curtailment charge 125 - 74 Special termination benefit 10 - - Recognized actuarial (gain)/loss 73 26 16 Net periodic benefit costs $ 693 $ 501 $ 432 The weighted-average assumptions used for the [pension] plans were as follows: Pension Benefits 2003 2002 Weighted-average assumptions used to determine benefit obligations at December 31 Discount rate 6.25% 6.75% Rate of compensation increase 3.44% 4.30% Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 Discount rate 6.51% 7.50% Expected long-term rate of return on plan assets 9.00% 9.75% Rate of compensation increase 3.24% 4.20% The expected return on plan assets is based on an evaluation of the historical behavior of the broad financial markets and the Company's investment portfolio, taking into consideration input from the plans' investment consultant and actuary regarding expected long-term market conditions and investment management performance. 77 Case 17-7 (concluded) The weighted-average asset allocations for our pension plans at December 31, 2003 and 2002, by asset category are as follows: Plan Assets at December 31 Asset Category 2003 2002 Equity securities 60% 58% Fixed income 35 37 Other 5 5 Total 100% 100% Our targeted allocation of assets to the following fund types: 60% equities, 35% fixed income and 5% other, with expected long-term rates of return of 10%, 7.5% and 15%, respectively. We believe that the long-term asset allocation on average will approximate the targeted allocation and regularly review the actual asset allocation to periodically rebalance the investments to the targeted allocation when appropriate. Pension expense is reduced by the expected return on plan assets, which is measured by assuming the market-related value of plan assets increases at the expected rate of return. The market-related value is a calculated value that phases in differences between the expected rate of return and the actual return over a period of five years. We expect to contribute approximately $1.1 billion to our defined benefit pension plan trusts and approximately $200 million to our other benefit plans in 2004. In addition, the following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from the trusts: Pension Other Benefits Benefits 2004 $ 795 $ 225 2005 809 235 2006 826 230 2007 845 235 2008 854 235 Years 2009 - 2013 4,446 1,152 78 Real World Case 17-8 Requirement 1 A pension plan is underfunded when the obligation (PBO) exceeds the resources available to satisfy that obligation (plan assets) and overfunded when the opposite is the case. FedEx’s plans are underfunded. The PBO exceeds plan assets in both years reported. Note that when the obligation is measured as the Accumulated Benefit Obligation (ABO), plan assets exceed the obligation in 2004. Requirement 2 Neither the PBO nor the plan assets is reported in the balance sheets. The difference between the pension expense and the cash contribution each period is debited or credited, depending on the situation, to a single account: prepaid (accrued) pension cost. When the account has a debit balance it represents a cumulative overpayment and is reported as an asset – “prepaid pension cost.” When it has a credit balance it represents a cumulative underpayment and is reported as a liability – “accrued pension cost.” As indicated in Note 12, FedEx reports an asset (apparently among “other assets”) of $907,000,000 in 2004 and $1,071,000,000 in 2003, both amounts far less than either the PBO or plan assets. Requirement 3 FedEx reports three actuarial assumptions used in its pension calculations: Pension Plans 2004 2003 Discount rate 6.78% 6.99% Rate of increase in future compensation levels 3.15% 3.15% Expected long-term rate of return on assets 9.10% 10.10% • The reported decrease in the discount rate from 2003 to 2004 increased FedEx’s projected benefit obligation. The lower the discount rate in a present value calculation, the higher the present value. • There was no change in FedEx’s rate of increase in future compensation from 2003 to 2004. However, if FedEx had reported decrease in the rate of increase in future compensation levels it would have decreased FedEx’s PBO. Lower compensation estimates in the pension formula result in lower estimates of retirement benefits and thus in the PV of those benefits. 79 • The expected long-term rate of return on assets will not directly affect FedEx’s projected benefit obligation. It affects instead the plan assets and pension expense. 80 Real World Case 17-9 Requirement 1 The increase in a company’s PBO attributable to making a plan amendment retroactive is referred to as the prior service cost. Prior service cost adds to the cost of having a pension plan. Amending a pension plan typically is done with the idea that future operations will benefit from having done so. Thus, the cost is not recognized as pension expense entirely in the year the plan is amended, but is recognized as pension expense over the time that the employees who benefited from the retroactive amendment will work for the company in the future. In GM’s case, that may be a relatively short time. Apparently, a motive for GM’s amendment was the expectation that employees would retire early and take advantage of the limited time offer. Requirement 2 The amendment increased GM’s pension obligation. GM’s pension expense will be higher each year for as long as the prior service cost is amortized. Presumably, in this instance, GM expects the bulk, if not all, of the cost to be expensed in the first year. 81 Research Case 17-10 Requirement 1 Normally, a company’s net periodic pension cost represents an expense and therefore decreases earnings. Often, though, circumstances cause this element of the income statement to actually increase reported earnings. This occurs when the “expected return on assets,” a negative component of pension expense, is higher than the combined total of the other components. Requirement 2 Qwest’s 2003 income statement does not specifically report the effect of the pension plan. Any effect apparently is included in another item. Requirement 3 The note on employee benefits indicates that the pension plan contributed $158 million to reported earnings in 2003. Service cost $ 170 Interest cost 601 Expected return on plan assets. (858) Amortization of transition asset* (71) Net (credit) cost $(158) The major contributor to this effect is the Expected return on plan assets of over a billion dollars. * A transition amount created when companies initially adopted SFAS 87 was amortized to earnings. For most companies, this effect will end in 2007. 82 Case 17-10 (concluded) Requirement 4 Companies must report the actuarial assumptions used to make estimates concerning pension plans. Qwest reported these assumptions at the beginning of years: 2003 2002 Discount rate 6.75% 7.25% Average rate of compensation increase 4.65% 4.65% Expected long-term rate of return on plan assets 9.00% 9.40% The two changes reported by Quest do impact the effect of the pension plan on reported earnings. • The reported decrease in the discount rate from 2002 to 2003 increased the projected benefit obligation. The lower the discount rate in a present value calculation, the higher the present value. This will increase the service cost and interest cost components of the net pension cost (credit). • The rate of increase in future compensation levels did not change. • The reported decrease in the expected long-term rate of return on assets directly affects the net pension cost (credit). The lower the rate, the lower the “expected return on assets,” a negative component of the net pension cost (credit). 83 Integrating Case 17-11 Requirement 1 ($ in millions) Service cost $43 Interest cost 32 Actual return on the plan assets (none) Adjusted for: gain or loss on the plan assets none Amortization of prior service cost none Amortization of net loss or net gain none Amortization of transition liability ($275 ÷ 25 yrs) 11 Postretirement benefit expense $86 Requirement 2 ($ in millions) Postretirement benefit expense (determined above) ................ 86 Accrued postretirement benefit cost (difference) ............... 76 Cash (retiree benefits paid) ................................................... 10 Requirement 3 Income tax expense (to balance) ............................................ 129.6 Deferred tax asset ([$86 – 10] x 40%) ..................................... 30.4 Income tax payable ($400 x 40%) ...................................... 160 Requirement 4 ($ in millions) Postretirement benefit expense: Postretirement benefit expense ($43 + 32 + 275) .................... 350 Accrued postretirement benefit cost (difference) ............... 340 Cash (retiree benefits paid) ................................................... 10 Tax expense: Income tax expense (to balance) ............................................ 24 Deferred tax asset ([$350 – 10] x 40%) ................................... 136 Income tax payable ($400 x 40%) ...................................... 160 84 85 International Case 17-12 The report should indicate similarities and differences between the United States and the chosen country focusing on the following issues: a. Depending on the country chosen, the financial statement effect may be minimal. In many countries, postretirement benefits other than pensions are uncommon. For example, in Japan the profusion of government- sponsored plans means most Japanese companies choose not to provide separate benefits. b. In the United States, accrual of these benefits in a manner similar to pensions is required. Benefits are commonly provided in Canada, but three accounting treatments are permitted: (1) accrual, (2) pay-as-you-go, and (3) accrual only when employees retire. The method used must be disclosed. Accounting for these benefits in the United Kingdom is similar to the United States. Little official guidance is offered in most other countries. The report might also comment whether cultural differences are likely contributors to the differences observed. 86 Research Case 17-13 The specification of postretirement benefit coverage in the Content Specification Outline will depend on the date the website is accessed. The examination structure comprises four separately scored sections: • Auditing & Attestation • Business Environment & Concepts • Financial Accounting & Reporting (business enterprises, not-for-profit organizations, and governmental entities) • Regulation (professional responsibilities, business law, and taxation) Postretirement benefits are not specifically mentioned by name. However, the content specification outline indicates testing of standards for presentation and disclosure in the balance sheet and of comprehensive income and, more specifically, employee benefits are tested in the Financial Accounting & Reporting section. The education requirements to sit for the CPA exam vary somewhat from state to state. In Tennessee, examination candidates must have a minimum of 150 semester (225 quarter) hours which includes; • a baccalaureate or higher degree from a Board recognized academic institution, • 24 semester hours in accounting, and • 24 semester hours in general business subjects. Educational requirements must be met within 120 days following the examination or grades will be voided. 87 Analysis Case 17-14 Note 12: Employee Benefit Plans (in part) Certain of our subsidiaries offer medical, dental and vision coverage to eligible U.S. retirees and their eligible dependents. U.S. employees covered by the principal plan become eligible for these benefits at age 55 and older, if they have permanent, continuous service of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35 if hired on or after January 1, 1988. 1. Note 12 above tells us that FedEx provides its retirees medical and dental coverage to eligible U.S. domestic retirees and their eligible dependents. Employees become eligible for these benefits at age 55 and older, if they have permanent, continuous service with the Company of at least 10 years after attainment of age 45 if hired prior to January 1, 1988, or at least 20 years after attainment of age 35, if hired on or after January 1, 1988. 2. When Federal Express adopted SFAS 106, it chose to expense the transition cost immediately. We know that because there is no unrecognized transition cost reported and no amortization of this amount in the calculation of postretirement benefit cost and because there is zero unrecognized transition amount indicated for postretirement benefits. 3. The postretirement benefit plan is not funded. No plan assets are reported and no return on plan assets is included in the calculation of postretirement benefit cost. Solution Manual for Intermediate Accounting David J. Spiceland, James F. Sepe, Lawrence A. Tomassini 9780072994025, 9780072524482