LGD Consulting is a medium-sized provider of environmental engineering services. The corporation sponsors a noncontributory, defined benefit pension plan. Alan Barlow, a new employee and participant in the pension plan, obtained a copy of the 2011 financial statements, partly to obtain additional information about his new employer's obligation under the plan. In part, the pension footnote reads as follows:
Note 8: Retirement BenefitsThe Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the last two years of employment. The company's funding policy is consistent with the funding requirements of federal law and regulations. Generally, pension costs accrued are funded. Plan assets consist primarily of stocks, bonds, commingled trust funds, and cash.The change in projected benefit obligation for the plan years ended December 31, 2011, and December 31, 2010:
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations in the above table were 7.0% and 4.3%, respectively, at December 31, 2011, and 7.75% and 4.7%, respectively, at December 31, 2010. The expected long-term rate of return on assets was 10.0% at December 31, 2011 and 2010.
The change in the fair value of plan assets for the plan years ended December 31, 2011 and 2010:
Included in the Consolidated Balance Sheets are the following components of accumulated other comprehensive income:
Net periodic defined benefit pension cost for fiscal 2011, 2010, and 2009 included the following components:
In attempting to reconcile amounts reported in the footnote with amounts reported in the income statement and balance sheet, Barlow became confused. He was able to find the pension expense on the income statement but was unable to make sense of the balance sheet amounts. Expressing his frustration to his wife, Barlow said, "It appears to me that the company has calculated pension expense as if they have the pension liability and pension assets they include in the footnote, but I can't seem to find those amounts in the balance sheet. In fact, there are several amounts here I can't seem to account for. They also say they've made some assumptions about interest rates, pay increases, and profits on invested assets. I wonder what difference it would make if they assumed other numbers,"
Barlow's wife took accounting courses in college and remembers most of what she learned about pension accounting. She attempts to clear up her husband's confusion.
Required:
Assume the role of Barlow's wife. Answer the following questions for your husband.
1. Is Barlow's observation correct that the company has calculated pension expense on the basis of amounts not reported in the balance sheet?
2. What amount would the company report as a pension liability in the balance sheet?
3. What amount would the company report as a pension asset in the balance sheet?
4. Which of the other amounts reported in the disclosure note would the company report in the balance sheet?
5. The disclosure note reports a net actuarial gain as well as an actuarial loss. How are these related? What do the amounts mean?
6. Which components of the pension expense represent deferred recognition? Where are these deferred amounts reported prior to amortization?