Bouter Corporation Limited (BCL) began operations in 1993 and in 2003 adopted a defined benefit pension plan for its employees. By January 1, 2013, the accrued benefit obligation was $510,000. The Net Defined Benefit Liability/Asset account on the December 31, 2012 statement of financial position was reported as a $190,000 liability balance.
On January 2, 2013, BCL agreed to a new union contract that granted retroactive benefits for services that employees had provided in years before the pension plan came into effect. The actuary informed BCL's chief accountant that, using its normal discount rate of 6%, benefits relating to these past services would cost the company $240,000. The expected average remaining service life of the group expected to receive benefits under this plan at this date was 21 years, the same as the group's period to full eligibility.
On January 1, 2013, the fair value of the pension plan assets was $320,000. The actuary estimates that these assets should earn a long-term rate of return of 7%, although, due to a downturn in the market, the actual return reported for the 2013 year was a loss of $9,500. The workforce is made up of a relatively young group of employees, so payments to those who had retired came to only $48,000 during the year, with these payments being made close to year end. The actuary also reported that the current service cost for BCL's employees for 2013 was $107,500. It is the company's policy, on advice from the actuary, to contribute amounts to the pension plan equal to each year's current service cost and the amount of any expense related to past service costs. This payment was made just before BCL's fiscal year end of December 31, 2013.
At the end of 2013, the actuary revised some key estimates, resulting in an actuarial loss of $15,500 related to the accrued obligation. Assume that the ABO amounts under the funding and accounting basis are the same.
Instructions
(a) Calculate the pension expense that should be reported for BCL's year ended December 31, 2013, under both the immediate recognition approach and the deferral and amortization approach under ASPE.
(b) Reconcile the difference in pension expense between the immediate recognition approach and the deferral and amortization approach under ASPE.
(c) Calculate the amount in the pension account to be reported on the December 31, 2013 statement of financial position under both the immediate recognition approach and the deferral and amortization approach under ASPE.
(d) How does the method of accounting for the pension plan (immediate recognition approach versus deferral and amortization approach under ASPE) impact cash flows in light of the company's policy regarding its contributions to the pension plan?