TENTH CANADIAN EDITION INTERMEDIATE ACCOUNTING PREPARED BY: Lisa Harvey, CPA, CA Rotman School of Management, University of Toronto 1 CHAPTER 19 Appendix 19A Example of a One-Person Plan Kieso Weygandt Warfield Young Wiecek McConomy

HTSM Corp. Example Lee Sung: –Age 30 –Employment date January 1, 2013 –Starting salary $37,500 –Expected to work for 35 years –Retirement date December 31, 2047 (Age 65) –Expected annual salary increase of 4% (approx.) –Expected salary at retirement $150,000 –Life expectancy at December 31, 2047 is 12 years Copyright John Wiley & Sons Canada, Ltd. 2

HTSM Corp. Example Copyright John Wiley & Sons Canada, Ltd. 3 Period of Employment Jan 1, 2013 Dec 31, 2047 Dec 31, years12 years Retirement Period

HTSM Corp. Example The Pension Plan –Defined benefit plan –Annual pension benefits on retirement 2% of salary at retirement for each year of service, or 2% x final salary x years of service –Discount rate = 6% Copyright John Wiley & Sons Canada, Ltd. 4

HTSM Corp. Example Current Service Cost – 2013 Annual benefit on retirement earned in 2010: 2% x $150,000 x 1 year of service = $3,000 This annuity must be discounted to determine the cost in 2013 First discount back to the retirement date of 2047 then discount back to 2013 Copyright John Wiley & Sons Canada, Ltd. 5

HTSM Corp. Example PV $3,000 annuity to December 31, 2047 n = 12, i = 6% $3,000 x = $25, The PV on Dec. 31, 2013 of this lump sum at Dec. 31, 2047 n= 34, i = 6% $25, x = $3,469 Copyright John Wiley & Sons Canada, Ltd. 6

HTSM Corp. Example Current service cost is then calculated in same manner for each year with n adjusted accordingly For 2014, the current service cost = $3,677 (n is now = 33) Copyright John Wiley & Sons Canada, Ltd. 7

HTSM Corp. Example Defined Benefit Obligation (DBO) At December 31, 2013 (first year) ABO will equal the current service cost At December 31, 2014 has two years of service therefore must be calculated Copyright John Wiley & Sons Canada, Ltd. 8

HTSM Corp. Example Pension benefit earned to Dec. 31, % x $150,000 x 2 years = $6,000 per year of retirement PV of this annuity at Dec. 31, 2047 n = 12, i = 6% = $6,000 x = $50, PV of this lump sum on Dec. 31, 2014 n = 33, i = 6% = $50, x = $7,354 Copyright John Wiley & Sons Canada, Ltd. 9

HTSM Corp. Example DBO Reconciliation DBO January 1, 2014$3,469 Add interest on DBO = $3,469 x 6% x 1 year 208 Add 2014 current service cost 3,677 DBO, December 31, 2014 $7,354 Copyright John Wiley & Sons Canada, Ltd. 10

HTSM Corp. Example The process as illustrated would continue for each year of Lee Sung’s employment Current service cost is calculated using the two step PV process (adjusting n accordingly) DBO is calculated each year Copyright John Wiley & Sons Canada, Ltd. 11

HTSM Corp. Example At December 31, 2047 (at retirement) assuming all initial assumptions remain in effect DBO on retirement will be: Pension benefit earned = 2% x $150,000 x 35 years = $105,000 per year of retirement PV of the pension annuity, and DBO at Dec. 31, 2047 is = $105,000 x = $880,303 Copyright John Wiley & Sons Canada, Ltd. 12

HTSM Corp. Example Past Service Cost: –If Lee Sung had previously worked for six years for another of HTSM subsidiary companies but was not a pension participant –He may be given credit for the prior years worked There is a cost to HTSM when these past service credits are granted The DBO is calculated both before and after the past service entitlement –The difference will be the cost of the past service obligation Copyright John Wiley & Sons Canada, Ltd. 13

HTSM Corp. Example Copyright John Wiley & Sons Canada, Ltd. 14 Before credit for prior service After credit for prior service Pension benefit earned to Dec 31/17 2% x $150,000 x 5 years = $3,000 x 5 = $15,000 per year 2% x $150,000 x 11 years = $3,000 x 11 = $33,000 per year PV of pension earned at Dec 31/47 (n=12, i=6%) $15,000 x = $125, $33,000 x = $276, PV of pension earned at Dec 31/17 (n=30, i=6%) $125, x = $21,896 $276, x = $48,170

HTSM Corp. Example DBO at Dec 31/17 after prior service recognized$48,170 DBO at Dec 31/17 before prior service recognized 21,896 Past service cost incurred$26,274 Copyright John Wiley & Sons Canada, Ltd. 15

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