INTERMEDIATE

ACCOUNTING
TENTH CANADIAN EDITION

Kieso Weygandt Warfield Young Wiecek McConomy

CHAPTER 1
Appendix 19
Example of a One-Person Pla

PREPARED BY:
Lisa Harvey, CPA, CA
Rotman School of Management,
University of Toronto
1

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
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HTSM Corp. Example

Period of
Employment
Jan 1,
2013

Retirement Period

Dec
31,
2059

Dec
31,
2047
35 years

12 years

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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%

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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
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HTSM Corp. Example

PV $3,000 annuity to December 31, 2047
n = 12, i = 6%
$3,000 x 8.38384 = $25,151.52
The PV on Dec. 31, 2013 of this lump sum
at Dec. 31, 2047
n= 34, i = 6%
$25,151.52 x .13791 = $3,469

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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)

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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

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HTSM Corp. Example

Pension benefit earned to Dec. 31, 2014
2% 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 8.38384 = $50,303.04
PV of this lump sum on Dec. 31, 2014
n = 33, i = 6%
= $50,303.04 x .14619 = $7,354
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HTSM Corp. Example

DBO Reconciliation
DBO January 1, 2014
$3,469
Add interest on DBO
= $3,469 x 6% x 1 year
Add 2014 current service
cost
3,677
DBO, December 31, 2014
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208

$7,354
10

HTSM Corp. Example

The process as illustrated would continue
for each year of Lee Sungs employment
Current service cost is calculated using
the two step PV process (adjusting n
accordingly)
DBO is calculated each year

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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 8.38384
= $880,303

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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
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13

HTSM Corp. Example

Before credit for
prior service

After credit for prior

service

Pension benefit
2% x $150,000 x 5
earned to Dec 31/17 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
$15,000 x 8.38384
earned at Dec 31/47 = $125,757.60
(n=12, i=6%)

$33,000 x 8.38384
= $276,666.72

PV of pension
$125,757.60 x .
earned at Dec 31/17 17411
(n=30, i=6%)
= $21,896

$276,666.72 x .
17411
= $48,170

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14

HTSM Corp. Example

DBO at Dec 31/17 after
prior service recognized
DBO at Dec 31/17 before
prior service recognized
Past service cost incurred

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$48,170
21,896
$26,274

15

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