EXERCISE 19.

10

a. Calculation of pension expense under IFRS:

Service cost $65,000
Net interest/finance cost:
($500,000 - $400,000) X 8% 8,000
Pension expense for 2020 $73,000

Remeasurement loss on assets:

(8% X $400,000) - $17,000 actual return = $15,000

Pension Expense............................................. 73,000

Remeasurement loss (OCI)............................ 15,000
Net Defined Benefit Liability/Asset......... 88,000
To record pension expense and remeasurement loss

Net Defined Benefit Liability/Asset................ 95,000

Cash.......................................................... 95,000
To record contributions to the pension fund

b. Calculation of pension expense under ASPE:

Service cost $ 65,000
Net interest/finance cost:
($500,000 - $400,000) X 8% 8,000
Remeasurement loss on assets:
Using discount rate: 8% X $400,000 = $32,000
Actual return ( 17,000) 15,000
Pension expense for 2020 $ 88,000

Pension Expense............................................. 88,000

Net Defined Benefit Liability/Asset......... 88,000
To record pension expense

Net Defined Benefit Liability/Asset................ 95,000

Cash.......................................................... 95,000
To record contributions to the pension fund
LO 5,8 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 19.11

a. Pension expense, 2020:

Current service cost $ 63,000
Net interest/finance cost:
($255,000 + $140,400 - $297,000) X 10% 9,840
Asset remeasurement loss:
At 10% discount rate (10% X $297,000) $(29,700)
Actual return (8% X $297,000) 23,760
Asset remeasurement loss 5,940
Past service cost 140,400
$219,180

Pension Expense............................................. 219,180

Net Defined Benefit Liability/Asset......... 219,180
To record pension expense

Net Defined Benefit Liability/Asset................ 79,200

Cash.......................................................... 79,200
To record contributions to the pension
fund

b. Net defined benefit asset, Jan. 1, 2020

Plan surplus ($297,000 plan assets
less DBO of $255,000) $ 42,000 Dr.
2020 pension expense recognized 219,180 Cr.
Funding contributions, 2020 79,200 Dr.
Net defined benefit liability, Dec. 31, 2020 $ 97,980 Cr.
EXERCISE 19.11 (CONTINUED)
c.
Antoine Corporation
Pension Work Sheet—2020

General Journal Entries Memo Record Entries

Annual Net Def. Benefit Defined

Pension Liability/ Benefit Plan
Items Expense Cash Asset Obligation Assets

Balance, Jan. 1, 2020 42,000 Dr. 255,000 Cr. 297,000 Dr.

(a) Past service cost 140,400 Dr.   140,400 Cr.
(b) Current service cost 63,000 Dr.   63,000 Cr.
(c) Net interest/finance cost 9,840 Dr. 39,540 Cr.   29,700 Dr.
(d) Asset remeasurement loss 5,940 Dr. 5,940 Cr.
(e) Contributions 79,200 Cr. 79,200 Dr.
(f) Benefits paid 43,200 Dr. 43,200 Cr.
219,18021
Expense entry—2020 219,180 Dr. 000 Dr. 219,180 Cr.
Contributions entry—2020 79,200 Cr. 79,200 Dr. 0,000______ Cr. 0,00 ___ Cr.
Balance, Dec. 31, 2020 97,980 Cr. 454,740 Cr. 356,760 Dr.

(c) $9,840 = ($255,000 + $140,400 - $297,000) X 10%; $39,540 = ($255,000 + $140,400) X 10%; $29,700 = $297,000 X 10%
(d) $5,940 = $29,700 – ($297,000 X 8%)
EXERCISE 19.11 (CONTINUED)

d. Defined benefit obligation, Jan. 1/20 $255,000

Past service cost, Jan. 1/20 140,400
395,400
Interest cost ($395,400 x 10%) 39,540
Current service cost 63,000
Benefits paid (43,200)
DBO, Dec. 31/20 (or see worksheet) $454,740

Plan assets, Jan. 1/20 $297,000

Actual return on plan assets ($297,000 x 8%) 23,760
Contributions 79,200
Benefits paid (43,200)
Plan assets, Dec. 31/20 (or see worksheet) $356,760

Plan deficit, Dec. 31/20 (net obligation) $ 97,980

Net defined benefit liability – part (b) $ 97,980 Cr.

e. The plan surplus/deficit and the balance sheet account should be the same amount because
the same items and amounts that affect the DBO and plan assets also affect the pension
expense and contribution journal entries to the net defined benefit liability/asset account. The
exception to this statement is the amount of benefits paid, but this affects neither the net
amount of the plan surplus/deficit, nor the balance sheet account.
If you review all the other items that affect the DBO and the plan assets and identify them as
debits and credits, you will see that the two entries made to the net defined benefit
liability/asset contain the same debits and credits.
EXERCISE 19.11 (CONTINUED)

f. The only difference if Antoine Corp. reported under IFRS instead of ASPE is that the
remeasurement loss would be reported in OCI instead of being included in pension expense
on the income statement. That is, its total pension expense would be $219,180 - $5,940 =
$213,240, and it would have a loss of $5,940 reported in OCI. Comprehensive income would
remain the same, as the remeasurement loss is still included, but as a component of OCI
instead of net income. Under ASPE, the past service cost would be considered a
remeasurement that must be presented separately on the income statement. Aside from the
corresponding changes in retained earnings and accumulated other comprehensive income,
everything else would remain the same on the balance sheet.
LO 3,4,5,6,8 BT: AP Difficulty: M Time: 35 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 19.12

a. Pension expense for 2020:

Current service cost $ 56,000
Net interest/finance cost:
($1,000,000 - $600,000) X 9% 36,000
Asset remeasurement loss:
Actual return on plan assets:
Return based on discount rate above:
(9% X 600,000) (54,000)
Actual return on assets 53,000 1,000
Pension expense for 2020 $ 93,000

b. Pension Expense............................................. 93,000

Net Defined Benefit Liability/Asset......... 93,000
To record pension expense

Net Defined Benefit Liability/Asset................ 145,000

Cash.......................................................... 145,000
To record contribution to the pension fund

c. Defined benefit obligation, Jan. 1/20 $(1,000,000)

Plan assets, Jan. 1/20 600,000
Plan deficit (net obligation), Jan. 1/20 and
balance in the Net Defined Benefit Liability __________
 account at Jan. 1/20 $ (400,000)

Defined benefit obligation, Dec. 31/201 $(1,146,000)

Plan assets at fair value, Dec. 31/202 798,000
Plan deficit, Dec. 31/20 $  (348,000)
1
Defined benefit obligation 31/12/20: $1,000,000 + $56,000 + ($1,000,000 X 9% = $90,000) =
$1,146,000
2
Plan assets 31/12/20: $600,000 + $53,000 + $145,000 = $798,000
EXERCISE 19.12 (CONTINUED)

c. (continued)

Net defined benefit liability, Jan. 1/20 $400,000 Cr.

From 2020 pension expense entry 93,000 Cr.
From 2020 contribution/funding entry 145,000 Dr.
Net defined benefit liability, Dec. 31/20 $348,000 Cr.

d. Income Statement:
Pension expense $93,000

Balance Sheet:
Long-term liabilities
Net defined benefit liability $348,000

Note X: The company sponsors a defined benefit pension plan covering the following group
of employees and providing the following benefits.

For the year ended December 31, 2020, the net expense recognized for the company’s
pension plan is $93,000. This includes an asset remeasurement loss of $1,000. The present
value of the defined benefit obligation at December 31, 2020, is $1,146,000 and the market
value of the fund assets is $798,000. This results in a plan deficit of $348,000. The effective
date of the most recently completed actuarial valuation of the defined benefit obligation was
____.
EXERCISE 19.12 (CONTINUED)

e. If Griseta Limited also had an actuarial valuation of its plan prepared for funding purposes,
and had chosen instead to use a funding valuation accounting policy for reporting
purposes, this would have affected the pension results as follows:

 Pension expense in parts (a) and (b) would have been reduced because the net
interest/finance cost would have been reduced by 9% of ($1,000,000 - $875,000) or
$11,250. Pension expense would have been $93,000 – $11,250 = $81,750.

 In part (c), the plan deficit at January 1, 2020 and the net defined benefit liability at the
same date also would have been reduced by $125,000 to $275,000 because the DBO was
only $875,000, not $1 million. The DBO, the plan deficit, and the net defined benefit
liability would also be reduced at December 31, 2020 because of the lower opening
balance and reduced interest cost recognized in expense.

 In part (d), the pension expense on the income statement, as indicated above, would be
reduced to $81,750 and the balance sheet liability account would also be reduced by the
total of the $125,000 lower opening balance and the $11,250 reduced pension expense
recognized in the year.

 In part (d), an accounting policy note would be required to explain that the company has
chosen to measure its defined benefit plan obligation using a funding basis valuation.
LO 3,4,5,7 BT: AP Difficulty: M Time: 30 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 19.13

a. IFRS

Pension expense (benefit) 2020 – to net income:

Current service cost $ 13,000
Past service cost (benefit)
(34,000)
Net interest/finance cost:
10% of ($239,000 - $34,000 - $155,000) 5,000
Pension (benefit) $(16,000)

(Note: excludes remeasurement loss that would be charged to OCI)

b. ASPE

Pension expense (benefit) 2020 – to net income:

Current service cost $ 13,000
Past service cost (benefit)
(34,000)
Net interest/finance cost:
10% of ($239,000 - $34,000 - $155,000) 5,000
Asset remeasurement loss:
(10% X $155,000) – $7,750 7,750
Pension (benefit) $( 8,250)
 Under ASPE, the past service cost/(benefit) of ($34,000) as well as the asset remeasurement
loss of $7,750 would be considered remeasurements that must be presented separately on the
income statement.

LO 5,8 BT: AP Difficulty: S Time: 15 min. AACSB: None CPA: cpa-t001 CM: Reporting
EXERCISE 19.14

a. Current service cost $ 57,000

Net interest/finance cost:
10% X ($110,000 - $42,000) 6,800

Post-retirement benefit expense 2020 $63,800

b. Remeasurement loss on assets:

(10% X $42,000) - $3,000 $1,200
Actuarial loss on obligation 31,000
Post-retirement benefit remeasurement
loss (OCI) $32,200

c. Plan assets, 1/1/20 $42,000

Actual return on plan assets 3,000
Contributions 22,000
Benefits paid out (6,000 )
Plan assets, 12/31/20 $61,000

Defined post-retirement benefit obligation, 1/1/20 $110,000

Interest cost ($110,000 x 10%) 11,000
Current service cost 57,000
Actuarial loss 31,000
Benefits paid (6,000)
Defined post-retirement benefit obligation,12/31/20 $203,000

Defined post-retirement benefit obligation $(203,000)

Plan assets at fair value 61,000
Plan deficit, 12/31/20 $(142,000 )
EXERCISE 19.14 (CONTINUED)

d. Net post-retirement benefit liability, 1/1/201 $ 68,000

Post-retirement benefit expense 2020 63,800
Remeasurement loss (OCI) 32,200
Contributions (funding) during 2020 (22,000 )
Net post-retirement benefit liability,12/31/20 $142,000
1
$110,000 - $42,000 = $68,000

e. There is no need to reconcile – these two have the same balance because the inputs that
affect the balance of each are identical.
 PROBLEM 19.3

a. IFRS – 2020 General Journal Entries Memo Record

Remst
Gain/ Net Defined
Loss Pension Benefit
(OCI) Expense Cash Liab./Asset DBO Plan Assets
Opening balance 0 460,000 Cr. 460,000 Dr.

Service cost 36,800 Dr. 36,800 Cr.

Net Int./Fin. Cost1 0 Dr. 46,000 Cr. 46,000 Dr.
Asset Remsmt. 6,900 Dr. 6,900 Cr.
Loss2
Contributions 36,800 Cr. 36,800 Dr.
Benefits paid 32,200 Dr. 32,200 Cr.
Expense entry 6,900 Dr. 36,800 Dr. 43,700 Cr.
Funding entry 36,800 Cr. 36,800 Dr.

Total 6,900 Cr. 510,600 Cr. 503,700 Dr.

1
$0 = ($460,000 - $460,000) X 10%; $46,000 = $460,000 X 10%; $46,000 = $460,000 X 10%
2
$6,900 = ($460,000 X 10%) - $39,100
Although not required, work sheets are provided for 2021 and 2022 below.
 PROBLEM 19.3 (CONTINUED)
a. (continued)
IFRS – 2021 General Journal Entries Memo Record
Remst
Gain/ Net Defined
Loss Pension Benefit
(OCI) Expense Cash Liab/Asset DBO Plan Assets
Opening balance 6,900 Cr. 510,600 Cr. 503,700 Dr.
Past service cost 368,000Dr 368,000 Cr.
1/1/21
Service cost 43,700 Dr. 43,700 Cr.
Net Int./Fin. Cost1 37,490 Dr. 87,860 Cr. 50,370 Dr.
Asset Remeasurement 0 Dr. 0 Cr.
Loss2
Contributions3 112,700Cr 112,700 Dr.
Benefits paid 37,720 Dr. 37,720 Cr.
Expense entry 0 Dr. 449,190Dr 449,190 Cr.
Funding entry 112,700Cr 112,700 Dr.

Total 343,390 Cr. 972,440 Cr. 629,050 Dr.

1
$37,490 = ($510,600 + $368,000 - $503,700) X 10%; $87,860 = $(510,600 + $368,000) X 10%; $50,370 = $503,700 X
10%
2
$0 = ($503,700 X 10%) - $50,370
3
$112,700 = $43,700 + $69,000
 PROBLEM 19.3 (CONTINUED)
a. (continued)
IFRS – 2022 General Journal Entries Memo Record

Remst Net Defined

Gain/ Pension Benefit
Loss (OCI) Expense Cash Liab/Asset DBO Plan Assets
Opening balance 343,390 Cr. 972,440 Cr. 629,050 Dr.

Service cost 59,800 Dr. 59,800 Cr.

Net Int./Fin. Cost1 34,339 Dr. 97,244 Cr. 62,905 Dr.
Asset Remsmt. Loss2 7,705 Dr. 7,705 Cr.

Contributions3 140,300Cr 140,300 Dr.

Benefits paid 48,300 Dr. 48,300 Cr.
Actuarial loss on DBO4 114,816Dr. 114,816 Cr.
Expense entry 122,521 Dr. 94,139 Dr. 216,660 Cr.
Funding entry 140,300 Cr. 140,300 Dr.
Total 419,750 Cr. 1,196,000Cr 776,250 Dr.
1
$34,339 = ($972,440 - $629,050) X 10%; $97,244 = $972,440 X 10%; $62,905 = $629,050 X 10%
2
$7,705 = ($629,050 X 10%) - $55,200
3
$140,300 = $59,800 + $80,500
4
$114,816 = $1,196,000 – ($972,440 + $59,800 + $97,244 - $48,300)
PROBLEM 19.3 (CONTINUED)

b. Continuity of Defined Benefit Obligation – 2020

Defined benefit obligation, 1/1/20 $460,000

Current service cost 36,800
Interest cost ($460,000 x 10%) 46,000
Benefits paid out (32,200)
Defined benefit obligation, 12/31/20
$510,600

Continuity of Defined Benefit Obligation – 2021

Defined benefit obligation, 1/1/21 $510,600

Past service cost, 1/1/21 368,000
878,600
Current service cost 43,700
Interest cost ($878,600 x 10%) 87,860
Benefits paid out (37,720
Defined benefit obligation, 12/31/21
$972,440

Continuity of Defined Benefit Obligation – 2022

Defined benefit obligation, 1/1/22 $972,440

Current service cost 59,800
Interest cost ($972,440 x 10%) 97,244
Benefits paid out (48,300)
Actuarial loss, end of year1 114,816
Defined benefit obligation, 12/31/22
$1,196,000
1
$114,816 = $1,196,000 - $972,440 - $59,800 - $97,244 + $48,300
PROBLEM 19.3 (CONTINUED)

c. Continuity of Fund Assets – 2020

Plan assets, 1/1/20 $460,000

Actual return on plan assets 39,100
Contributions 36,800
Benefits paid out (32,200
Plan assets, 12/31/20
$503,700

Continuity of Fund Assets – 2021

Plan assets, 1/1/21 $503,700

Actual return on plan assets 50,370
Contributions ($43,700 + $69,000) 112,700
Benefits paid out (37,720
Plan assets, 12/31/21
$629,050

Continuity of Fund Assets – 2022

Plan assets, 1/1/22 $629,050

Actual return on plan assets 55,200
Contributions ($59,800 + $80,500) 140,300
Benefits paid out (48,300
Plan assets, 12/31/22
$776,250
PROBLEM 19.3 (CONTINUED)

d. Pension expense – 2020

Current service cost $ 36,800

Net interest/finance cost:
10% ($460,000 - $460,000) -0-
$ 36,800

Pension expense – 2021

Current service cost $ 43,700

Net interest/finance cost:
10% ($878,600 - $503,700)
37,490
Past service cost 368,000
$449,190

Pension expense – 2022

Current service cost $59,800

Net interest/finance cost:
10% ($972,440 - $629,050) 34,339

$94,139
e. Journal entries:
2020
Pension Expense................................................ 36,800
Remeasurement Loss (OCI)1.............................. 6,900
Net Defined Benefit Liability/Asset.............. 43,700
To record pension expense

Net Defined Benefit Liability/Asset...................... 36,800

Cash............................................................ 36,800
To record contribution to the pension fund
1
$6,900 = ($460,000 X 10%) – $39,100
PROBLEM 19.3 (CONTINUED)

e. (continued)
2021
Pension Expense................................................449,190
Net Defined Benefit Liability/Asset.............. 449,190
To record pension expense

Net Defined Benefit Liability/Asset......................112,700

Cash............................................................ 112,700
To record contribution to the pension fund

2022
Pension Expense................................................ 94,139
Remeasurement Loss (OCI)2..............................122,521
Net Defined Benefit Liability/Asset.............. 216,660
To record pension expense

Net Defined Benefit Liability/Asset......................140,300

Cash............................................................ 140,300
To record contribution to the pension fund
2
$122,521 = ($629,050 X 10%) – $55,200 + $114,816

Note: the remeasurement gains and losses taken to OCI do not get
recycled into net income at a later date.

f. Reconciliation Schedule 2020

Defined benefit obligation (510,600)
Fair value of plan assets   503,700
Defined benefit obligation in excess of plan
   assets (plan deficit), and net defined benefit
(liability)/asset   $(6,900)
PROBLEM 19.3 (CONTINUED)

f. (continued)

Reconciliation Schedule 2021

Defined benefit obligation $(972,440)
Fair value of plan assets   629,050
Defined benefit obligation in excess of plan
   assets (plan deficit), and net defined benefit
(liability)/asset  $(343,390)

Reconciliation Schedule 2022

Defined benefit obligation $(1,196,000)
Fair value of plan assets   776,250
Defined benefit obligation in excess of plan
   assets (plan deficit), and net defined benefit
(liability)/asset $(419,750)

g. Pension expense – 2020

Current service cost $ 36,800

Net interest/finance cost:
10% ($460,000 - $460,000) -0-
Asset remeasurement loss ($46,000 - $39,100) 6,900
$ 43,700

Pension expense – 2021

Current service cost $ 43,700

Net interest/finance cost:
10% ($510,600 + $368,000 - $503,700) 37,490
Asset remeasurement loss ($50,370 - $50,370) -0-
Past service cost 368,000
$ 449,190
PROBLEM 19.3 (CONTINUED)

g (continued)

Pension expense – 2022

Current service cost $ 59,800

Net interest/finance cost:
10% ($972,440 - $629,050) 34,339
Asset remeasurement loss ($62,905 - $55,200) 7,705
Actuarial loss on DBO 114,816

$ 216,660
PROBLEM 19.3 (CONTINUED)
g. (continued)

ASPE – 2020 General Journal Entries Memo Record

Net Defined
Pension Benefit
Expense Cash Liab/Asset DBO Plan Assets
Opening balance 0 460,000 Cr. 460,000 Dr.

Service cost 36,800 Dr. 36,800 Cr.

Net Int./Fin. Cost1 0 Dr. 46,000 Cr. 46,000 Dr.
Asset Remeasurement
Loss2 6,900 Dr. 6,900 Cr.
Contributions 36,800 Cr. 36,800 Dr.
Benefits paid 32,200 Dr. 32,200 Cr.
Expense entry 43,700 Dr. 43,700 Cr.
Funding entry 36,800 Cr. 36,800 Dr.
Total 6,900 Cr. 510,600 Cr. 503,700 Dr.
1
$0 = ($460,000 - $460,000) X 10%; $46,000 = $460,000 X 10%; $46,000 = $460,000 X 10%
2
$6,900 = ($460,000 X 10%) - $39,100

Although not required, all work sheets under ASPE have been provided. Pension expense can be
calculated as in the “Pension Expense” column in each work sheet.
PROBLEM 19.3 (CONTINUED)
g. (continued)
 ASPE – 2021 General Journal Entries Memo Record
Pension Cash Net Defined DBO Plan Assets
Expense Benefit
Liab/Asset

Opening balance 6,900 Cr. 510,600 Cr. 503,700 Dr.

Past service cost 368,000Dr 368,000 Cr.
1/1/21
Service cost 43,700 Dr. 43,700 Cr.
Net Int./Fin. Cost1 37,490 Dr. 87,860 Cr. 50,370 Dr.
Asset Remeasurement
Loss2 0 Dr. 0 Cr.
Contributions3 112,700Cr 112,700 Dr.
Benefits paid 37,720 Dr. 37,720 Cr.
Expense entry 449,190Dr 449,190 Cr.
Funding entry 112,700Cr 112,700 Dr.

Total 343,390 Cr. 972,440 Cr. 629,050 Dr.

1
$37,490 = ($510,600 + $368,000 - $503,700) X 10%; $87,860 = $(510,600 + $368,000) X 10%; $50,370 =
$503,700 X 10%
2
$0 = ($503,700 X 10%) - $50,370
3
$112,700 = $43,700 + $69,000
PROBLEM 19.3 (CONTINUED)
g. (continued)
 ASPE – 2022 General Journal Entries Memo Record

Net Defined
Pension Benefit
Expense Cash Liab/Asset DBO Plan Assets
Opening balance 343,390 Cr. 972,440 Cr. 629,050 Dr.

Service cost 59,800 Dr. 59,800 Cr.

Net Int./Fin. Cost1 34,339 Dr. 97,244 Cr. 62,905 Dr.
Asset Remeasurement
Loss2 7,705 Dr. 7,705 Cr.
Contributions3 140,300Cr 140,300 Dr.
Benefits paid 48,300 Dr. 48,300 Cr.
Actuarial loss on DBO4 114,816 Dr. 114,816 Cr.
Expense entry 216,660 Dr. 216,660 Cr.
Funding entry 140,300Cr 140,300 Dr.
Total 419,750 Cr. 1,196,000Cr 776,250 Dr.
1
$34,339 = ($972,440 - $629,050) X 10%; $97,244 = $972,440 X 10%; $62,905 = $629,050 X 10%
2
$7,705 = ($629,050 X 10%) - $55,200
3
$140,300 = $59,800 + $80,500
4
$114,816 = $1,196,000 – ($972,440 + $59,800 + $97,244 - $48,300)
PROBLEM 19.3 (CONTINUED)

h.

Potential investors would be most interested in seeing the

components of pension expense so they can determine which
components are recurring in nature. They would also be very
interested in seeing the surplus or deficit position of the plan and
how it changes from year to year. The higher the deficit, the
higher the risk to investors. Another important disclosure would
be the amount of cash that would likely have to be committed to
fund the plan each year going forward. The estimates used in
discount calculations would be useful as this can make a
significant difference in the DBO, current service cost, and
interest calculations involving pension plans. More of this
information is required to be provided under IFRS. However,
under ASPE, past service costs and remeasurement gains and
losses on the plan assets and DBO are considered
remeasurements that must be presented separately on the
income statement or disclosed in the notes to the financial
statements. Also, it is assumed that users of the financial
statements of smaller private entities using ASPE have greater
access to required information from management.
LO 3,4,5 BT: AP Difficulty: C Time: 55 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 19.4

a. ASPE: At January 1, 2020, note that the balance of the net

defined benefit liability on the opening SFP will be equal to the
plan surplus or deficit at that date. The net defined benefit
liability, therefore, was $175,000 - $165,000 = $10,000 cr.
2020
Defined benefit obligation, 1/1/20 $175,000
Past service cost, 1/1/20 78,000
253,000
Interest cost ($253,000 x 7%) 17,710
Current service cost 35,000
Benefits paid (24,000)
DBO, 12/31/20 $281,710

Plan assets, 1/1/20 $165,000

Actual return on plan assets ($165,000 x 8%) 13,200
Contributions—plan funding 44,000
Benefits paid (24,000)
Plan assets, 12/31/20 $198,200

Plan deficit, Dec. 31/20, and the balance of the

Net Defined Benefit Liability at Dec. 31/20
[see proof in part (b)] $83,510

2021
Defined benefit obligation, 1/1/21 $281,710
Interest cost ($281,710 x 7%) 19,720
Current service cost 47,250
Benefits paid (26,000)
DBO, 12/31/21 $322,680

Plan assets, 1/1/21 $198,200

Actual return on plan assets ($198,200 x 6%) 11,892
Contributions 44,000
Benefits paid (26,000)
Plan assets, 12/31/21 $228,092
 PROBLEM 19.4 (CONTINUED)

a. (continued)

2021 (continued)

Plan deficit, Dec. 31/21, and the balance of the

Net Defined Benefit Liability at Dec. 31/21
[see proof in part (b)] $94,588

2022
Defined benefit obligation, 1/1/22 $322,680
Interest cost ($322,680 x 7%) 22,588
Current service cost 52,500
Benefits paid (28,000)
DBO, 12/31/22 $369,768

Plan assets, 1/1/22 $228,092

Actual return on plan assets ($228,092 x 7%) 15,966
Contributions 44,000
Benefits paid (28,000)
Plan assets, 12/31/22 $260,058

Plan deficit, Dec. 31/22, and the balance of the Net

Defined Benefit Liability at Dec. 31/22
[see proof in part (b)] $109,710
PROBLEM 19.4 (CONTINUED)

b. Pension expense 2020:

Current service cost $ 35,000
Net interest/finance cost:
7% ($253,000 - $165,000) 6,160
Asset remeasurement gain:
(7% X $165,000) – (8% X $165,000) (1,650)
Past service cost incurred in year 78,000
$117,510

Pension expense 2021:

Current service cost $47,250
Net interest/finance cost:
7% X ($281,710 - $198,200) 5,846
Asset remeasurement loss:
(7% X $198,200) – (6% X $198,200) 1,982
$ 55,078

Pension expense 2022:

Current service cost $52,500
Net interest/finance cost:
7% X ($322,680 - $228,092) 6,622
Asset remeasurement loss:
(7% X $228,092) – (7% X $228,092) -0-
$59,122

The SFP net defined benefit liability account balance as given in

part (a) can be proved as follows:
Opening balance + expense – contributions = ending balance

2020: 10,000 cr. + 117,510 cr. – 44,000 dr. = 83,510 cr.

2021: 83,510 cr. + 55,078 cr. – 44,000 dr. = 94,588 cr.
2022: 94,588 cr. + 59,122 cr. – 44,000 dr. = 109,710 cr.

As expected, these also reflect the plan deficiency at each year

end.
PROBLEM 19.4 (CONTINUED)

c. At January 1, 2020, note that the balance of the net defined benefit
liability on the opening SFP will be equal to the plan surplus or
deficit at that date. The net defined benefit liability, therefore, was
$175,000 - $165,000 = $10,000 cr.

2020
Defined benefit obligation, 1/1/20 $175,000
Past service cost, 1/1/20 78,000
253,000
Interest cost ($253,000 x 7%) 17,710
Current service cost 35,000
Benefits paid (24,000)
DBO, 12/31/20 $281,710

Plan assets, 1/1/20 $165,000

Actual return on plan assets ($165,000 x 8%) 13,200
Contributions—plan funding 44,000
Benefits paid (24,000)
Plan assets, 12/31/20 $198,200

Plan deficit, Dec. 31/20, and the balance of the

Net Defined Benefit Liability at Dec. 31/20
[see proof in part (d)] $83,510

2021
Defined benefit obligation, 1/1/21 $281,710
Interest cost ($281,710 x 7%) 19,720
Current service cost 47,250
Benefits paid (26,000)
DBO, 12/31/21 $322,680

Plan assets, 1/1/21 $198,200

Actual return on plan assets ($198,200 x 6%) 11,892
Contributions 44,000
Benefits paid (26,000)
Plan assets, 12/31/21 $228,092
PROBLEM 19.4 (CONTINUED)
c. (continued)

2021 (continued)

Plan deficit, Dec. 31/21, and the balance of the

Net Defined Benefit Liability at Dec. 31/21
[see proof in part (d)] $94,588

2022
Defined benefit obligation, 1/1/22 $322,680
Interest cost ($322,680 x 7%) 22,588
Current service cost 52,500
Benefits paid (28,000)
DBO, 12/31/22 $369,768

Plan assets, 1/1/22 $228,092

Actual return on plan assets ($228,092 x 7%) 15,966
Contributions 44,000
Benefits paid (28,000)
Plan assets, 12/31/22 $260,058

Plan deficit, Dec. 31/22, and the balance of the Net

Defined Benefit Liability at Dec. 31/22
[see proof in part (d)] $109,710

d. Pension expense 2020:

Current service cost $ 35,000
Net interest/finance cost:
7% ($253,000 - $165,000) 6,160
Past service cost incurred in year 78,000
$119,160
Remeasurement (gain) loss (OCI) 2020
Asset remeasurement loss (gain):
(7% X $165,000) – (8% X $165,000) $ (1,650)
PROBLEM 19.4 (CONTINUED)

d. (continued)

Pension expense 2021:

Current service cost $47,250
Net interest/finance cost:
7% X ($281,710 - $198,200) 5,846
$ 53,096
Remeasurement (gain) loss (OCI) 2021
Asset remeasurement loss (gain):
(7% X $198,200) – (6% X $198,200) $ 1,982

Pension expense 2022:

Current service cost $52,500
Net interest/finance cost:
7% X ($322,680 - $228,092) 6,622
$59,122
Remeasurement (gain) loss (OCI) 2022
Asset remeasurement loss (gain):
(7% X $228,092) – (7% X $228,092) -0-

Note: the remeasurement gains and losses taken to OCI do not get
recycled into net income at a later date.

The SFP net defined benefit liability account balance as given in

part (c) can be proved as follows:
Opening balance + expense +/– remeasurement loss/gain
– contributions = ending balance

2020: 10,000 cr. + 119,160 cr. – 1,650 dr. – 44,000 dr. = 83,510 cr.
2021: 83,510 cr. + 53,096 cr. + 1,982 cr. – 44,000 dr. = 94,588 cr.
2022: 94,588 cr. + 59,122 cr. +/–0 – 44,000 dr. = 109,710 cr.

As expected, these also reflect the plan deficiency at each year

end.
PROBLEM 19.4 (CONTINUED)

e. In part (b) under ASPE, all the changes in the DBO and plan
assets get reported in net income, while under IFRS, the changes
in the DBO and plan assets get split between the expense
recognized in net income and the remeasurements recognized in
OCI. Under IFRS, the remeasurements that are items likely to
change (reverse) in the future are recognized in OCI, and not
subsequently recycled to net income. ASPE does not recognize
OCI in its financial statements, but does require disclosures of
remeasurements similar to IFRS, although what is included in
“remeasurements and other items” under ASPE differs from what is
reported in OCI under the IFRS standard.

One difference is the treatment of past service costs. Under both

GAAPs, past service cost is included in pension expense in the
year of the plan amendment and is reported in net income.
However, ASPE requires past service costs to be included in
“remeasurements and other items” that are separately disclosed
because such costs are not replicable (recurring each period).
IFRS also reports past service costs in the expense because it is
not a remeasurement that is likely to reverse in the future. That is,
separate disclosure treatment under ASPE and OCI treatment
under IFRS are required for different reasons.

The measure of expense over the three-year period, when changes

to OCI are included, will total the same amount. However, on an
annual basis, net income will be more variable under ASPE. In
addition, under ASPE, the entity has an accounting policy choice of
whether to use a funding valuation of the DBO or the accounting
basis DBO. The funding basis measure of expense is often lower.
PROBLEM 19.4 (CONTINUED)

e. (continued)

Which method results in a better measure of expense over the

three-year period? Because both methods have the same effect on
comprehensive income and on the balance sheet liability, it is
difficult to give an opinion on which measure of expense is better.
To the extent that the expense amount is taken into account in
determining net income and earnings per share, the IFRS
approach may be considered better because items that may
change significantly in future periods are eliminated from the EPS
measure. However, because analysts have full information of the
various components under both approaches, they can determine
the components that are recurring in nature.

f. As indicated in part (e), all the changes in the DBO and plan assets
under ASPE get reported in net income, while under IFRS, the
changes in the DBO and plan assets get split between the expense
recognized in net income and the remeasurements recognized in
OCI. However, the IFRS net income amount plus the OCI-reported
amount add up to the same amount as is included in expense in
ASPE’s net income. As a result, the net defined benefit
liability/asset reported on the SFP and the plan surplus or deficit
are exactly the same. Therefore, the measure is the same.

LO 3,4,5,7,8 BT: AP Difficulty: M Time: 50 min. AACSB: None CPA: cpa-t001 CM: Reporting
 PROBLEM 19.5

a. IFRS
Pension Expense
2020 2021 2022
Current service cost 12,000 13,000 14,500
Net interest/finance cost (benefit) 0 (40) (405)
8% x ($75,000 - $75,000); 8% X ($93,000 –
$93,500); 8% X ($109,440 - $114,500)
Past service cost 75,000 0 0
Total 87,000 12,960 14,095

Remeasurement (Gain) Loss (OCI)

Asset remeasurement (gain) loss (500) (2,520) 1,160
(8% x $75,000) - $6,500; (8% X $93,500) -
$10,000; (8% X $114,500) - $8,000
Total (500) (2,520) 1,160

Plan Assets
Opening balance 0 93,500 114,500
Contributions ($75,000 original + $12,000) 87,000 15,000 16,000
Actual return 6,500 10,000 8,000
Benefits paid 0 (4,000) (5,000)
Ending balance 93,500 114,500 133,500

Defined Benefit Obligation

Balance January 1 0 93,000 109,440
Past service cost, January 1 75,000
Current service cost 12,000 13,000 14,500
Interest cost $75,000 X 8%; $93,000 X 6,000 7,440 8,755
8%; $109,440 X 8%
Benefits paid 0 (4,000) (5,000)
Ending balance 93,000 109,440 127,695

Plan Surplus (Dr.) or Deficit (Cr.)

Defined benefit obligation 93,000 CR 109,440 CR 127,695 CR
Plan Assets 93,500 DR 114,500 DR 133,500 DR
Plan surplus and Net Defined Benefit 500 DR 5,060 DR 5,805 DR
Asset on SFP
PROBLEM 19.5 (CONTINUED)

b. ASPE: The following calculations are based on an accounting policy

choice of using the accounting basis measure of the defined benefit
obligation.
Pension Expense
2020 2021 2022
Current service cost 12,000 13,000 14,500
Net interest/finance cost (benefit) 0 (40) (405)
8% x ($75,000 - $75,000); 8% X ($93,000 –
$93,500); 8% X ($109,440 - $114,500)
Asset remeasurement (gain) loss (500) (2,520) 1,160
(8% X $75,000) - $6,500; (8% X 93,500) -
$10,000; (8% X $114,500) - $8,000
Past service cost 75,000 0 0
Total 86,500 10,440 15,255

Plan Assets
Opening balance 0 93,500 114,500
Contributions ($75,000 + $12,000) 87,000 15,000 16,000
Actual return 6,500 10,000 8,000
Benefits paid 0 (4,000) (5,000)
Ending balance 93,500 114,500 133,500

Defined Benefit Obligation

Opening balance 0 93,000 109,440
Past service cost, 1/1/20 75,000
Service cost 12,000 13,000 14,500
Interest cost (8% X $75,000); (8% X 6,000 7,440 8,755
$93,000); (8% X $109,440)
Benefits paid 0 (4,000) (5,000)
Ending balance 93,000 109,440 127,695

Plan Surplus (Dr.) or Deficit (Cr.)

Defined benefit obligation 93,000CR 109,440 CR 127,695 CR
Plan assets 93,500 DR 114,500 DR 133,500 DR
Plan surplus and Net Defined Benefit 500 DR 5,060 DR 5,805 DR
Asset on SFP
PROBLEM 19.5 (CONTINUED)

c. To: Ms. President

From: CFO

Please see the attached tables that set out the results of using IFRS and of
using ASPE. The major difference between these methods (assuming
an ASPE accounting policy choice of an accounting basis measure of
the defined benefit obligation) is where some components of the
pension cost are reported. In our case under IFRS, the difference
between the return on plan assets at the discount rate and the actual
return earned on the plan assets is recognized in OCI rather than in net
income as it is under ASPE. The items recognized in OCI under IFRS
are due to events that may reverse in the future and as a result, should
not affect net income and earnings per share reported. Under ASPE, all
events that change either the plan assets or the defined benefit
obligation must be recognized and reported in net income. Other
comprehensive income is not a feature of financial statements under
ASPE. In addition, under ASPE, the past service cost would be
considered a remeasurement that must be presented separately on the
income statement or disclosed in the notes to the financial statements.

In future years, there may be other situations, such as actuarial valuation

adjustments, that are required to be reported in OCI. This is not
something that is a choice of policy – it is a result of adopting IFRS.
Other than these remeasurement items, the IFRS and ASPE effects
are identical as you can see. The net effect is higher net income under
ASPE when these remeasurement items are positive (gains) and lower
net income when the remeasurements are negative (losses).
PROBLEM 19.5 (CONTINUED)

c. (continued)

Under ASPE, we do have an accounting policy choice, and I have used the
policy that results in the ASPE reports being close to the IFRS reports,
as you requested. The company could choose to use an actuarial
measure for its defined benefit obligation that is prepared for funding
purposes. Invariably however, this measure of the DBO is lower than
the measure of the DBO for accounting purposes.

While the accounting measure of the DBO would have the effect of
increasing the plan surplus and the pension asset reported on our
balance sheet, and reducing the net interest/finance cost component
of the pension expense, these numbers would not correspond as well
with those reported under IFRS.

Therefore, I recommend making the accounting policy choice to use the

accounting measure of the defined benefit obligation. This will make
the ASPE results as close as possible to the IFRS-based reports.