Week 5 - Textbook Questions

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Feb 20, 2024

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Week 5: Chapter 19 – Pensions and Other Post- Employment Benefits Brandon Anh Pham BE 19.1: Scott Enterprises Inc. Scott Enterprises Inc. sponsors a defined benefit plan for its 500 employees. On December 31, 2023, the company’s actuary provided the following information related to the plan: defined benefit obligation $11.3 million and fair value of plan assets $9 million. Defined benefit expense was $3 million in 2023. Scott Enterprises’ SFP as at December 31, 2023, shows total assets of $9 million and total liabilities of $9.8 million (which includes a net defined benefit liability of $2.3 million). There were no actuarial gains or losses or remeasurement gains or losses in 2023. Scott Enterprises follows IFRS. A. Discuss the effect of the pension plan on Scott Enterprises’ SFP as at December 31, 2023. It is often said that costs relating to employee benefits, including pensions and other post-employment benefits, can be one of the largest expenditures of a business. Given that there were no actuarial gains or losses, no remeasurement gains or losses, and the defined benefit obligations outweighed the fair value of the plan assets, Scott Enterprises will report a net defined benefit liability. In this context, we can therefore say that the pension plan increased the company’s liabilities on the SFP and ultimately affected Scott Enterprises’ financial ratios. We can see that without the pension plan, the total liabilities reported at year end of 2023 would be reduced to $7.7 million. In measuring the company’s Total-Debt-to-Total Asset Ratio, by having the pension plan the TD/TA ratio would be much higher than without having the pension. B. Discuss some of the costs of the pension plan to Scott Enterprises’ business. Depending on the type of pension plan, whether it is contributory or non-contributory, and additional factors, there are a variety of costs to implementing a pension plan. In the case of Scott Enterprises’ business, because they are a sponsor of the pension plan, the business ultimately incurs the cost and contributes to the pension plan. Additionally, the company may incur costs associated with the hiring of an actuary internally or costs of requiring the services of a third-party actuary. There may also be costs incurred with the management of assets to a funding agency that will be responsible for the accumulation of pension plan assets and for making pension payments to recipients as their benefits come due. Therefore, there are quite a lot of different costs associated with the implementation of a pension plan.

BE 19.2: Ditek Corp Ditek Corp. provides a defined contribution pension plan for its employees. The plan requires Ditek to contribute 5% of employees’ gross pay to a fund trustee each year. Ditek’s total payroll for 2023 was $2,735,864. At the start of 2023, Ditek revised the terms of the plan, which resulted in past service costs of $845,350. Ditek expects to realize the economic benefits from the plan change for at least five years, beginning in 2023. a. Calculate Ditek’s defined benefit expense for 2023 assuming that the company follows IFRS. IFRS Accounting Standards Payroll - 2023 2,735,864.00 Contribution Plan 5% Pension Plan Contribution for 2023 136,793.20 Therefore, Ditek’s Defined Benefit Expense for 2023 would be $136,794, if the company follows IFRS accounting standards. b. Calculate Ditek’s defined benefit expense for 2023 assuming that the company follows ASPE. Round to the nearest dollar. ASPE Accounting Standards Payroll - 2023 2,735,864 Contribution Plan 5% Pension Plan Contribution for 2023 136,793 Past Service Cost 845,350 Economic Benefits Realized (Years) 5 Economic Benefits Realized Yearly 169,070 Defined Benefit Expense - 2023 305,863 Thus, Ditek’s Defined Benefit Expense for 2023 would be $305,863, if the company follows ASPE accounting standards.

BE 19.4: Maya Corp Maya Corp. reports the information (in hundreds of thousands of dollars) to you about its defined benefit pension plan for 2023. a. Provide a continuity schedule for the DBO for the year. Maya follows IFRS. Maya Corp: Defined Benefit Obligation - Continuity Schedule Amount in $000,000s Defined Benefit Obligation, Beginning of Period 138 Add: Current Service Cost 32 Add: Interest Cost 14 Less: Benefits Paid to Retirees - 12 Add: Cost of Plan Amendment in Year 20 Defined Benefit Obligation, End of Period 192 Therefore, at the end of 2023, Maya Corp would report a Defined Benefit Obligation of $192,000. E 19.3: Rebek Corporation Rebek Corporation provides information about its defined benefit pension plan for the year 2023. Rebek follows IFRS. a. Prepare a continuity schedule for 2023 for the defined benefit obligation. Rebek Corporation: Defined Benefit Obligation - Continuity Schedule Defined Benefit Obligation, Beginning of Period 2,000,000 Add: Past Service Cost 50,000 Add: Current Service Cost 235,000 Add: Interest Cost Defined Benefit Obligation, Beginning of Period 2,000,000 Interest/Discount Rate on DBO and Planned Assets 10% Interest Cost 200,000 Benefits Paid to Retirees - 100,000 Defined Benefit Obligation, End of Period 2,385,000 Therefore, at the end of 2023, Rebek Corporation’s DBO would amount to $2.385 million. b. Prepare a continuity schedule for 2023 for the plan assets. Rebek Corporation: Planned Assets - Continuity Schedule Plan Assets, Fair Value at Beginning of Period 1,600,000 Add: Contributions to the Pension Plan 262,500 Add: Actual Return on Plan Assets 160,000 Less: Benefits Paid to Retirees - 100,000

Plan Assets, Fair Value at End of Period 1,922,500 Therefore, Rebek Corporation’s Plan Assets at the end of the period would be $1,922,500. c. Calculate defined benefit expense for the year 2023. From previous calculations of the defined benefit obligation and the plan assets, we can calculate the defined benefit expense for the year 2023 as follows: Pension Plan Surplus / Deficit Defined Benefit Obligation, End of Period 2,385,000 Less: Fair Value of Plan's Assets, End of Period - 1,922,500 Plan's Surplus or Deficit 462,500 Since the defined benefit obligation amount is greater than the fair value of the plan’s assets, the pension plan is underfunded or in a deficit and therefore a net defined benefit liability would be reported. As a result, Rebek Corporation would report a defined benefit expense of $462,500 for the end of 2023. d. Prepare all pension journal entries recorded by Rebek in 2023. Rebek Corporation: Pension Work Sheet General Journal Entries Memo Record Items Defined Benefit Expens e Cash Net Defined Benefit Liability/Asset Defined Benefit Obligation Plan Assets Balance, Jan. 1, 2023 400,000 2,000,000 1,600,000 Past Service Cost 50,000 50,000 Service Cost 235,000 235,000 Net Interest / Finance Cost 40,000 200,000 160,000 Contributions 262,500 262,500 Benefits Paid -100,000 -100,000 Expense Entry 325,000 275,000 Contribution Entry 262,500 -262,500 Balance, Dec. 31. 2023 462,500 2,385,000 1,922,500 Defined Benefit Expense 325,000 Net Defined Benefit Liability/Asset 325,000 To record Defined Benefit Expense in 2023 Net Defined Benefit Liability/Asset 262,500 Cash 262,500 To record contribution to pension fund during 2023

e. What pension amount will appear on Rebek’s SFP at December 31, 2023? On December 31, 2023, Rebek will report a Net Defined Benefit Liability of $412,500 on their Statement of Financial Position.

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