Pensions and employee benefits

Learning goals

• Distinguish defined contribution and defined benefit promises.
• Calculate a simplified funded status and explain period movements.
• Separate cash funding, benefit cost, and actuarial remeasurement.

Prerequisite check

Employer cash contribution is not automatically pension expense. In a defined benefit plan, obligations change with service, interest, benefits, and actuarial assumptions; plan assets change with contributions, returns, and benefits paid.

Vocabulary

• Defined contribution plan: employer obligation is generally the agreed contribution.
• Defined benefit obligation (DBO): actuarial present value of promised employee benefits.
• Plan assets: qualifying assets held to fund benefits.
• Funded status: plan assets minus obligation, often presented as a net asset or liability subject to guidance.
• Remeasurement: effects of actuarial gains/losses and return differences treated under the applicable framework.

Core idea

A defined contribution plan usually produces expense equal to required contribution for employee service. A defined benefit plan requires actuarial measurement and a roll-forward of both obligation and assets. IFRS IAS 19 and Canadian ASPE Section 3462 differ in measurement choices and where some components are reported, so exam data must state the framework and required presentation.

Why this treatment makes sense

The employee earns benefits while working, not when paid in retirement. Present measurement makes the long-term promise visible, while separating contribution from cost prevents cash timing from disguising compensation expense.

A repeatable method

1. Identify plan type and exact employer promise.
2. Reconcile opening DBO: service cost, interest, benefits, amendments, and remeasurement.
3. Reconcile plan assets: return, contributions, benefits, and expenses.
4. Calculate funded status and consider any asset ceiling or funding rules separately.
5. Determine profit, OCI, or other presentation under the stated framework.
6. Record employer contributions and benefit components without double counting.
7. Disclose assumptions, sensitivity, maturity, risks, and reconciliation.

Worked example

At January 1, Bayline Media has a DBO of $900,000 and plan assets of $780,000. Current service cost is $70,000; interest on the DBO is $45,000; benefits paid are $40,000; actuarial loss is $25,000. Plan assets earn $35,000, receive employer contributions of $60,000, and pay benefits of $40,000.

Closing DBO = $900,000 + $70,000 + $45,000 + $25,000 − $40,000 = $1,000,000. Closing assets = $780,000 + $35,000 + $60,000 − $40,000 = $835,000. Net funded status is a $165,000 deficit/net liability before any additional constraints.

Under an IFRS case, current service cost and net interest are generally in profit or loss while defined benefit remeasurements are in OCI and not recycled. The $60,000 contribution changes plan assets/cash, not service cost. Use the question's stated presentation and discount assumptions.

Journal, ledger, and statement connection

The pension working paper reconciles actuary report, trustee statement, payroll, cash, and general ledger. The statement reports a net position; notes show gross obligation, assets, movements, assumptions, and risk. Cash contributions appear in cash flows but do not mechanically equal benefit expense.

Common mistakes

• Treating the plan deficit as the year's expense.
• Adding benefits paid to expense after they already reduce both obligation and assets.
• Inventing a discount rate instead of using supported market data supplied.
• Mixing IFRS OCI presentation with an ASPE case.

Guided practice

Opening DBO $500,000 + service $40,000 + interest $25,000 − benefits $20,000 = $545,000, before remeasurement. If assets close at $470,000, deficit is $75,000.

Independent practice

Level 1 — type: An employer promises only 4% of pay into employee accounts. Identify plan type and basic expense driver.

Level 2 — roll-forward: Opening DBO $640,000; service $52,000; interest $32,000; actuarial gain $18,000; benefits $30,000. Find closing DBO.

Level 3 — analysis: Contributions rose while the deficit also rose. Give two non-contradictory explanations.

Self-check and solutions

Level 1: Defined contribution; expense is the required contribution for employee service, subject to any unpaid accrual.

Level 2: $640,000 + $52,000 + $32,000 − $18,000 − $30,000 = $676,000.

Level 3: Service/interest/actuarial losses may exceed contributions, or plan assets may underperform assumptions. Contributions increase assets but do not freeze the obligation or markets.

Retrieval practice

1. Does contribution equal defined benefit expense?
2. Define funded status.
3. What two reconciliations are essential?

Answers: not necessarily; plan assets minus obligation; DBO and plan assets.

Exam-style application

Complete DBO and plan-asset roll-forwards, calculate closing funded status, classify specified components under the stated framework, and write a note explaining one assumption sensitivity without claiming actuarial certainty.

Lesson summary

Pension accounting measures compensation as earned, reconciles obligations and assets, and keeps funding cash, period cost, and remeasurement conceptually separate.