Teaching notes to Accompany Intermediate Accounting, Tenth Canadian Edition, by Kieso et al

CHAPTER 19 PENSIONS AND OTHER EMPLOYEE FUTURE BENEFITS

This topic covers a variety of employee future benefits that are “earned by active employees and expected to be provided to them when they are no longer in active service” and that are usually covered by the benefit policies of an organization (CICA Handbook, Part II Section 3461 and adjusted IAS 19). The emphasis will be placed on the complex accounting issues related to defined benefit plans with benefits that vest or accumulate as the employee provides services.

PENSION PLANS Pension plan is an arrangement by which an employer provides benefits (payments) to employees after they retire.

Benefit to retired

employees

Employees

Provides Service Receives rights to during pension benefits

employment during retirement

Makes contributions

Pension Plan Company

Recognizes expense

(and perhaps asset or

liability)

Financial Statements Financial Statements

Prepares financial Accounts for pension

statements based on according to IAS 19 or part IV of CPAHB

ASPE Fund assets=

Investments +

earnings Pension plans are either contributory or non-­‐contributory. In a contributory pension plan, contributions are made partly by the employer and partly by the employee. In a non-­‐contributory pension plan, contributions are paid in entirely by the employer.

Bus 321-­‐ Spring 2014, Dr. Jamal Nazari, SFU

19-­‐1

Chapter 19

Teaching notes to Accompany Intermediate Accounting, Tenth Canadian Edition, by Kieso et al

Types of Pension Plans

Defined contribution plans: In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. The formula might consider such factors as age, length of service, employer's profits, and compensation level. Because the contributions are defined, the accounting for this type of plan is quite straightforward and the pension expense is simply equal to the contributions made. Example 1-­‐ Defined contribution plans Assume that the annual contribution to the pension plan is set to be 10% of an employee’s salary at SFU. If an employee earned $120,000 during the