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2016 Grant Thornton Defined Benefit Pension Accounting Case An employer's reporting for a defined benefit pension is a joint effort between two professions: actuarial science and accountancy. An employer provides demographic and salary information about the current work force to an actuary who then computes a pension obligation and service cost in accordance with the provisions of the plan. While the actuary is responsible for the calculations, it is the accountant's responsibility to ensure that the assumptions, methods, and disclosures comply with generally accepted accounting principles. This exercise is designed to confirm your understanding of defined benefit pension and reporting of net periodic benefit cost, including: The accounting for acquisition of pension plan in a business combination The components of net periodic benefit cost The components of other comprehensive income The factors that determine the change in the pension obligation during a reporting period The factors that determine the change in the plan assets during the year The amounts recognized on the statement of financial position as a net pension asset or liability The amounts recognized in accumulated other comprehensive income The accounting for a retroactive plan amendment Minimum amortization of cumulative actuarial gains and losses This will be accomplished by your completing the required disclosures and journal entries for initial acquisition of a subsidiary with a defined benefit pension plan and the accounting for events and changes in the three subsequent years. For each period, you will be provided with information about changes in the plan obligation and asked to determine the funded status, disclosure for the change in the funded status, net periodic benefit cost, other comprehensive income, and accumulated other comprehensive income. Let's get started. (Round your answers to nearest thousands) Year 0 On December 31, 2010, Arrieta Incorporated purchases a subsidiary of Sales Unlimited. Sales has a defined benefit pension plan. The actuary provides you the following information: 12/31/2010 (000s) Statement of financial position Benefit obligation Fair value of plan assets Funded status 12/31/2010 Expected impact of plan alignment 2,500 2,400 (100) 240 The initial amount (in 000s) to be recognized on the books of Arrieta for initial recognition of the funded status of the Sales pension plan is: Benefit obligation Fair value of plan assets Funded status 12/31/2010 2,500 2,400 (100) Year 1 On July 1, 2011 Arrieta amends the plan to align the benefits with its own plans, retroactive to the date of employment for the acquired employees. The retroactive benefits result in a prior service cost. The remaining service lives of those employees (average time to retirement) is 12 years. The actuary presents you with the following information (in 000s) as of 12/31/2011 Service cost Interest cost Expected return on plan assets Actuarial gain (loss) Plan amendment Actual return on plan assets Benefits paid Employer contributions Discount rate Expected return Salary increases 100 94 168 22 240 125 (75) 35 1/1/2011 12/31/2011 3.75% 4.00% 7.00% 7.00% 4.00% 4.00% Required: a) Prepare the disclosure for the change in plan obligation and the change in plan assets for the year and determine the ending funded status. b) Prepare the journal entry to record net period benefit cost for the period. Provide ASC references to support the accounting for the prior service cost. c) Prepare the journal entries to record othe r comprehensive income for the year (ignore the entry for amortization of prior service cost - OCI or net loss - OCI). d) Prepare a schedule of recognized amounts in the statement of financial position. e) Record the sponsor's contributions to the plan for the y ear f) Determine the amount of any amortization of gains and losses for the following year. Provide ASC references to support the calculation. Year 2 In year two, there are no amendments to the plan, but it was a dismal year for investments. However, the actuary informs you that it will now be necessary to amortize excess actuarial losses. The actuary informs you that the average remaining service lives of current active plan participants is 14 years. The actuary provides you with the following information (in 000s). Service cost Interest cost Expected return on plan assets Actuarial gain (loss) Plan amendment Actual return on plan assets Benefits paid Employer contributions Discount rate Expected return Salary increases 110 115 174 (50) 0 (200) (78) 40 1/1/2012 12/31/2012 4.00% 4.00% 7.00% 7.00% 4.00% 4.00% Required: a) Prepare the disclosure for the change in plan obligation and the change in plan assets for the year and determine the ending funded status. b) Prepare the journal entry to record net period benefit cost for the period. c) Prepare the journal entries to record other comprehensive income for the year (ignore the entry for amortization of prior service cost - OCI or net loss - OCI). d) Prepare a schedule of recognized amounts in the statement of financial position. e) Record the sponsor's contributions to the plan for t he year f) Determine the amount of any amortization of gains and losses for the following year. Year 3 There are no amendments or other unusual events in Year 3 (numbers in 000s). Service cost Interest cost Expected return on plan assets Actuarial gain (loss) Plan amendment Actual return on plan assets Benefits paid Employer contributions Discount rate Expected return Salary increases 120 121 157 100 0 220 (80) 50 1/1/2013 12/31/2013 4.00% 4.00% 7.00% 7.00% 4.00% 4.00% Required: a) Prepare the disclosure for the change in plan obligation and the change in plan assets for the year and determine the ending funded status. b) Prepare the journal entry to record net period benefit cost for the period. c) Prepare the journal entries to record other compre hensive income for the year (ignore the entry for amortization of prior service cost - OCI or net loss - OCI). d) Prepare a schedule of recognized amounts in the statement of financial position. e) Record the sponsor's contributions to the plan for the year f) Determine the amount of any amortization of gains and losses for the following year