Week 5 - Textbook Questions

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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

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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.

E 19.7: Berstler Limited Berstler Limited follows ASPE, and the company sponsors a defined benefit pension plan. Berstler’s actuary provides information about the plan (in thousands of dollars). a. Calculate the actual return on the plan assets in 2023. Using the Plan Assets – Continuity Schedule we can calculate the actual return on the plan assets as follows: Plan Assets – Continuity Schedule Plan Assets (Fair Value), Beginning of Period 1,360 Add: Contributions 640 Add: Actual Return on Plan Assets in 2023 ? Less: Benefits Paid to Retirees -160 Plan Assets (Fair Value), End of Period 2,096 After setting up the schedule and defining the missing term, we can rewrite the schedule to solve for the Actual Return on Plan assets: Actual Return on Plan Assets Plan Assets (Fair Value), End of Period 2,096 Add: Benefits Paid to Retirees 160 Less: Contributions -640 Less: Plan Assets (Fair Value), Beginning of Period -1,360 Actual Return on Plan Assets in 2023 256 Thus, the actual return on plan assets in 2023 is $256,000. b. Calculate the amount of the net defined benefit liability/asset as at January 1, 2023. Based on the information given, we can calculate the net defined benefit liability/asset as follows: Net Defined Benefit Liability / Asset Defined Benefit Obligation, Accounting Basis 2,240 Plan Assets (Fair Value) - 1,360 Net Defined Benefit Liability 880 Therefore, as at January 1, 2023, Berstler Limited would have reported a Net Defined Benefit Liability of $880,000 on its SFP.

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c. Prepare a continuity schedule of the defined benefit obligation for 2023. Brestler Limited: Defined Benefit Obligation - Continuity Schedule Defined Benefit Obligation, Beginning of Period 2,240 Add: Past Service Cost 380 Add: Current Service Cost 320 Add: Interest Cost Defined Benefit Obligation, Beginning of Period 2,240 Interest/Discount Rate on DBO and Planned Assets 10% Interest Cost 224 Benefits Paid to Retirees - 160 Defined Benefit Obligation, End of Period 3,004 d. Calculate the defined benefit expense for 2023, separately identifying each amount making up the total expense. Berstler Limited: Pension Work Sheet General Journal Entries Memo Record Items Defined Benefit Expense Cash Net Defined Benefit Liability/Asset Defined Benefit Obligation Plan Assets Balance, Jan. 1, 2023 880 2,240 1,360 Past Service Cost 380 380 Service Cost 320 320 Net Interest / Finance Cost -32 224 256 Contributions 640 640 Benefits Paid -160 -160 Expense Entry 700 700 Contribution Entry 640 -640 Balance, Dec. 31. 2023 908 3,004 2,096 e. Prepare the pension-related entries made by the company during 2023. Defined Benefit Expense 700 Net Defined Benefit Liability/Asset 700 To record Defined Benefit Expense in 2023 Net Defined Benefit Liability/Asset 640 Cash 640

To record contribution to pension fund during 2023 f. Compare the plan’s surplus or deficit at December 31, 2023, with the amount reported on the December 31, 2023 balance sheet. Pension Plan Surplus / Deficit Calculation Defined Benefit Obligation, End of Period 3,004 Less: Fair Value of Plan Assets, End of Period - 2,096 Pension Plan Deficit 908 Upon calculating the pension plan’s surplus or deficit at December 31, 2023 and comparing with the amount to be reported on the December 31, 2023 balance sheet, we can see that the amount is equal. In other words, the Pension Plan Deficit is the same amount as the Net Defined Benefit Liability of $908,000. E19.10: Huntley Corporation a. Calculate defined benefit expense (also known as pension expense) for the year 2023, and provide the entries to recognize the defined benefit expense and funding for the year, assuming that Huntley follows IFRS. Berstler Limited: Pension Work Sheet General Journal Entries Memo Record Items Remeasurement Gain/Loss (OCI) Defined Benefit Expense Cash Net Defined Benefit Liability/Asset Defined Benefit Obligation Plan Assets Balance, Jan. 1, 2023 100,000 500,000 400,000 Service Cost 65,000 65,000 Net Interest / Finance Cost 8,000 40,000 32,000 Remeasurement Loss on Plan Assets 15,000 -15,000 Contributions 95,000 95,000 Benefits Paid -40,000 -40,000 Expense Entry 15,000 73,000 88,000 Contribution Entry 95,000 -95,000 Balance, Dec. 31. 2023 93,000 565,000 472,000 Defined Benefit Expense 73,000 Remeasurement Loss on Plan Assets (OCI) 15,000

Net Defined Benefit Liability/Asset 88,000 To record Defined Benefit Expense in 2023 Net Defined Benefit Liability/Asset 95,000 Cash 95,000 To record contribution to pension fund during 2023 b. Calculate defined benefit expense (also known as pension expense) for the year 2023, and provide the entries to recognize the defined benefit expense and funding for the year, assuming that Huntley follows ASPE and its accounting policy is to use an accounting basis valuation for its defined benefit obligation. Berstler Limited: Pension Work Sheet General Journal Entries Memo Record Items Defined Benefit Expense Cash Net Defined Benefit Liability/Asset Defined Benefit Obligation Plan Assets Balance, Jan. 1, 2023 100,000 500,000 400,000 Service Cost 65,000 65,000 Net Interest / Finance Cost 8,000 40,000 32,000 Remeasurement Loss on Plan Assets 15,000 -15,000 Contributions 95,000 95,000 Benefits Paid -40,000 -40,000 Expense Entry 88,000 88,000 Contribution Entry 95,000 -95,000 Balance, Dec. 31. 2023 93,000 565,000 472,000 Defined Benefit Expense 88,000 Net Defined Benefit Liability/Asset 88,000 To record Defined Benefit Expense in 2023 Net Defined Benefit Liability/Asset 95,000 Cash 95,000 To record contribution to pension fund during 2023

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E 19.11: Antoine Corporation The following information is available for Antoine Corporation’s pension plan for the 2023 fiscal year. On January 1, 2023, Antoine amended its pension plan, resulting in past service costs with a present value of $140,400. Antoine follows ASPE. a. Calculate defined benefit expense for 2023 and prepare journal entries to record the expense and funding for the year. Defined Benefit Expense 219,180 Net Defined Benefit Liability/Asset 219,180 To record Defined Benefit Expense in 2023 Net Defined Benefit Liability/Asset 97,980 Cash 97,980 To record contribution to pension fund during 2023 b. Determine the balance of the net defined benefit liability/asset reported on the December 31, 2023 balance sheet. The Net Defined Benefit Liability/Asset to be reported on the December 31, 2023 balance sheet of Antoine Corporation is, $97,980. c. Prepare a 2023 pension work sheet for Antoine. Antoine Corporation: Pension Work Sheet General Journal Entries Memo Record Items Defined Benefit Expense Cash Net Defined Benefit Liability/Asse t Defined Benefit Obligatio n Plan Assets Balance, Jan. 1, 2023 -42,000 255,000 297,000 Past Service Cost 140,400 140,400 Service Cost 63,000 63,000 Net Interest / Finance Cost 9,840 39,540 29,700 Remeasurement Loss on Plan Assets 5,940 -5,940 Contributions 79,200 79,200 Benefits Paid -43,200 -43,200 Expense Entry 219,180 219,180 Contribution Entry 79,200 -79,200 Balance, Dec. 31. 2023 97,980 454,740 356,760

d. Identify the December 31, 2023 plan surplus or deficit and compare it with the asset or liability reported on the December 31, 2023 balance sheet. Pension Plan Surplus or Deficit Defined Benefit Obligation, End of Period 454,740 Less: Fair Value of Plan Assets, End of Period 356,760 Plan Surplus or Deficit, End of Period 97,980 Therefore, the Plan Deficit at the end of the period is $97,980. On the other hand, from the Pension Plan Worksheet, we the Net Defined Benefit Liability/Asset reported on the December 31, 2023 balance sheet is also $97,980. e. Explain the result of your comparison in part (d). After calculating the pension plan surplus or deficit, since the defined benefit obligation at the end of the period outweighs the fair value of the pension plan’s assets at the end of the period, there is a pension plan deficit of $97,980 at the end of the year. Comparing this with the amount calculated in the “Net Defined Benefit Liability/Assets”, we can see that there is the same amount that is reported as Net Defined Benefit Liability of $97,980. Thus, we can conclude that the Net Defined Benefit Liability/Assets is equal to the Pension Plan Surplus or Deficit. f. Identify what would change if Antoine applied IFRS instead of ASPE. If Antoine Corporation were to follow IFRS accounting standards instead of ASPE accounting standards, the remeasurement loss on the pension plan assets would be reported separately through Other Comprehensive Income (OCI) instead of being included in Defined Benefit Expense.

g. Create a waterfall chart in Excel outlining the changes to the defined benefit obligation throughout the fiscal year.

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