C10-33 HOME HEALTH CARE, INC. Accounting for Settlement and Curtailment Gains of Employer's Defined Benefit Pension Plan Home Health Care, Inc. (HHC) is a distributor of health care products and equipment. It sells primarily to hospitals, nursing homes, and health maintenance organizations. HHC has over 2,000 employees and maintains a defined benefit pension plan for them. HHC has become increasingly concerned over the escalating cost of maintaining its defined benefit pension plan. After an extensive analysis of its pension plan, HHC concluded that as the plan was signif- icantly overfunded, now was the opportune time to terminate the plan. Accordingly, HHC froze all bene- fits related to its defined benefit plan effective October 1, 20X1, and terminated the plan effective Decem- ber 31, 20X1, the last day of its 20X1 fiscal year. Simultaneously, HHC adopted a defined contribution plan effective January 1, 20X2. The new plan covers essentially all the employees of HHC, and HHC's contri- butions to the plan represent a percentage of each participating employee's annual contribution. On termination of the defined benefit plan, all participants were considered fully vested. The accumu- lated plan benefits associated with the terminated plan were settled through the purchase of annuity con- tracts in 20x2 or through lump-sum distributions to participants in 20X2 with remaining lump-sum dis- tributions to be made in 20X3. HHC determined that on plan termination a gain on curtailment and settlement would result. As a result of overfunding, residual plan assets would revert to HHC. The curtailment gain and settlement gain were $5.75 million and $6.25 million, respectively. HHC planned to report the curtailment gain in 20X1 and the settlement gain in 20X2. Required 1. Discuss why HHC would want to terminate its defined benefit plan and adopt a defined contribu- tion plan. 2. Discuss when, if at all, HHC should recognize the $5.75 million curtailment gain and $6.25 million settlement gain. 3. If several years ago HHC had funded prior service costs, discuss how HHC should account for the unamortized balance of the prior service costs at the date that it terminates participation in the defined benefit plan.

Home Health Care, Inc. Accounting for Settlement and Curtailment Gains of Employer's Defined Benefit Pension Plan Home Health Care, Inc. (HHC) is a distributor of health care products and equipment. It sells primarily to hospitals, nursing homes, and health maintenance organizations. HHC has over 2,000 employees and maintains a defined benefit pension plan for them. HHC has become increasingly concerned over the escalating cost of maintaining its defined benefit pension plan. After an extensive analysis of its pension plan, HHC concluded that as the plan was significantly overfunded, now was the opportune time to terminate the plan. Accordingly, HHC froze all benefits related to its defined benefit plan effective October 1,20X1, and terminated the plan effective December 31,201, the last day of its 201 fiscal year. Simultaneously, HHC adopted a defined contribution plan effective January 1, 20X2. The new plan covers essentially all the employees of HHC, and HHC's contributions to the plan represent a percentage of each participating employee's annual contribution. On termination of the defined benefit plan, all participants were considered fully vested. The accumulated plan benefits associated with the terminated plan were settled through the purchase of annuity contracts in 202 or through lump-sum distributions to participants in 202 with remaining lump-sum distributions to be made in 203. HHC determined that on plan termination a gain on curtailment and settlement would result. As a result of overfunding, residual plan assets would revert to HHC. The curtailment gain and settlement gain were $5.75 million and $6.25 million, respectively. HHC planned to report the curtailment gain in 201 and the settlement gain in 202. Required 1. Discuss why HHC would want to terminate its defined benefit plan and adopt a defined contribution plan. 2. Discuss when, if at all, HHC should recognize the $5.75 million curtailment gain and $6.25 million settlement gain. 3. If several years ago HHC had funded prior service costs, discuss how HHC should account for the unamortized balance of the prior service costs at the date that it terminates participation in the defined benefit plan