Ekedahl Inc. has sponsored a non-contributory defined benefit pension plan for its employees since 1990. Prior to 2011, the funding of this plan exactly equalled cumulative net pension expense. Other relevant information about the pension plan on January 1, 2011, is as follows:
1. The accrued benefit obligation amounted to $1,250,000 and the fair and market-related value of pension plan assets was $750,000.
2. During 2011, the plan was amended and resulted in unrecognized past service cost of $500,000.
3. The company has 200 employees who are expected to receive benefits under the plan. The employees’ expected period to full eligibility is 13 years with an EARSL of 16 years.
4. Of the 200 employees, 95 employees’ pension benefits have vested, while the remaining 105 employees’ pension benefits will vest over the next 10 years. The amount of past service cost attributed to the 95 employees with vested benefits has been determined to be $245,000.
On December 31, 2011, the accrued benefit obligation was $1,187,500. The fair value of the pension plan assets amounted to $975,000 at the end of the year. A 10% discount rate and an 8% expected asset return rate were used in the actuarial present value calculations in the pension plan. The present value of benefits attributed by the pension benefit formula to employee service in 2011 amounted to $50,000. The employer’s contribution to the plan assets was $143,750 in 2011. No pension benefits were paid to retirees during this period.
Instructions
Round all answers to the nearest dollar.
(a) Calculate the amount of past service cost that will be included as a component of pension expense in 2011, 2012, and 2013 under:
1. The immediate recognition approach
2. The deferral and amortization approach under accounting standards for private enterprises
3. The deferral and amortization approach under IFRS
(b) Assuming the deferral and amortization approach is applied, determine the amount of any actuarial gains or losses in 2011 and the amount to be amortized to expense in 2011 and 2012.
(c) Calculate pension expense for the year 2011 under:
1. The immediate recognition approach
2. The deferral and amortization approach under accounting standards for private enterprises
3. The deferral and amortization approach under IFRS
(d) Prepare a schedule reconciling the plan’s funded status with the pension amounts reported on the December 31, 2011 balance sheet as accounted for with the deferral and amortization method under both PE GAAP and IFRS.
(e) Assume that Ekedahl’s pension plan is contributory rather than non-contributory. Would any part of your answers above change? What would be the impact on the company’s financial statements of a contributory plan?