Hass Foods Inc. sponsors a post-retirement medical and dental benefit plan for its employees. The company adopted the provisions of IAS 19 beginning January 1, 2017. The following balances relate to this plan on January 1, 2017:
Plan assets …………………………………………………… $2,780,000
Defined post-retirement benefit obligation ………………….. 3,439,800
Past service costs …………………………………………………… –0–
As a result of the plan’s operation during 2017, the following additional data were provided by the actuary.
1. The service cost for 2017 was $273,000.
2. The discount rate was 7%.
3. Funding payments in 2017 were $234,000.
4. The actual return on plan assets was $158,500.
5. The benefits paid on behalf of retirees from the plan were $171,600.
Instructions
(a) Calculate the post-retirement benefit expense for 2017.
(b) Prepare a continuity schedule for the defined post-retirement benefit obligation and for the plan assets from the beginning of the year to the end of 2017.
(c) At December 31, 2017, prepare a schedule reconciling the plan’s surplus or deficit with the post-retirement amount reported on the statement of financial position.
(d) If Hass Foods had remained with ASPE instead of moving to IFRS, how would your answers to parts (a) to (c) change, if at all?
(e) Explain in what ways, if any, the accounting requirements for this plan are different from the requirements for a defined benefit pension plan.
SOLUTION
(a) Post-retirement benefit expense – 2017
Current service cost $273,000
Net interest/finance cost
($3,439,800 - $2,780,000) X 7% 46,186
$319,186
(b) Continuity of Post-Retirement Benefit Obligation – 2017
Defined post-retirement benefit obligation, 1/1/17 $3,439,800
Current service cost 273,000
Interest cost ($3,439,800 x 7%) 240,786
Benefits paid out (171,600)
Balance, 12/31/17 $3,781,986
Continuity of Fund Assets – 2017
Plan assets, 1/1/17 $2,780,000
Actual return on plan assets 158,500 Contributions 234,000
Benefits paid out (171,600)
Balance, 12/31/17 $3,000,900
(c)
Reconciliation Schedule 2017
Post-retirement benefit obligation (credit) $(3,781,986)
Fair value of plan assets (debit) 3,000,900
Post-retirement benefit obligation in excess of
plan assets (plan deficit)* $ (781,086)
*Proof:
Net Defined Post-retirement Liability, Jan.11 $659,800cr
Expense recognized 319,186cr
Asset remeasurement loss (OCI)2 36,100cr
Contributions by company 234,000dr
Account balance December 31,2017 $781,086cr
$3,439,800 - $2,780,000
$158,500 – (7% X $2,780,000)
(d) Under ASPE, the post-retirement benefit expense would be the total of the IFRS calculated expense plus the asset remeasurement loss:$319,186 + $36,100 = $355,286
There would be no change in part (b). The choice of GAAP to apply does not change the calculation of the defined benefit obligation or the plan assets. Because of this, and because the total of the credit entries to the net defined post-retirement liability account remain the same, there is also no difference in this account or the plan deficit.
The only difference that might exist is if, under ASPE, the company has chosen a policy of using the funding basis measure of the benefit obligation instead of the accounting based one. In this case, the DBO would be lower, as would the interest cost related to the liability.
(e) The basic concepts and measurement methodology for post-retirement benefits that accumulate are the same as for pension benefits. The recognition and measurement criteria for the obligation and plan assets are the same, as is the actuarial valuation method, the attribution period, and the calculation of the current cost of benefits.
In reality, few post-retirement medical and dental plans build up a significant amount of plan assets. This is because, unlike pension plans, the contributions into the plan are not tax deductible; the tax deduction occurs when the medical and dental payments are made on behalf of the retirees. With pension plans, the contributions made to the plan are tax deductible.
IFRS, however, does make an exception for some long-term benefits where there is less uncertainty about the measurement of the future benefits. In cases such as those associated with long-term paid absences for long service leave, long-term disability benefits, etc., remeasurement gains and losses are recognized in expense on the income statement rather than in OCI.
The following worksheet is not required but is provided to illustrate the similarities with accounting for pension benefits.
| | General Journal Entries | General Journal Entries | General Journal Entries | General Journal Entries | General Journal Entries | |
|---|
| Items | Remeasurement (gain) loss (OCI) | Net Post-retirement Benefit Expense | | Cash | | Post-retirement Benefit Liability/ Asset | | Defined Post-retirement Benefit Obligation | | Plan Assets | | |
| Balance, Jan. 1, 2017 (a) Service cost (b) Net int/fin. cost (c) Remsmt. loss (e) Contributions (f) Benefits paid Expense entry, 12/31 Contribution entry Balance, Dec. 31/17 | 36,100Dr. 36,100Dr. | ** 273,000 Dr.** ** 46,186 Dr.* 319,186 Dr.** 319,319 | | 234,000 Cr. 234,000 Cr. | | 659,800 Cr. 355,286 Cr. 234,000 Dr. 781,086 Cr. | | 3,439,800 Cr. 273,000 Cr. 240,786 Cr. 171,600 Dr. 000 ,000Dr. 3,781,986 Cr. | | 2,780,000 Dr. 194,600 Dr. 36,100 Cr. 234,000 Dr. 171,600 Cr. 00 0,000Dr. 3,000,900 Dr. | | |
(b
(b)$46,186 = 7% X ($3,439,800 - $2,780,000); $240,786 = 7% X $3,439,800; $194,600 = 7% X $2,780,000
(c)$36,100 = $158,500 – (7% X $2,780,000)