 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at IAS 19, which is employee benefit, and we'll work a few examples. Specifically, I'm going to be working with defined benefit plans, or to be more specific, we're going to be dealing with pension. To be more specific, we're going to be looking at the two components of pension, and hopefully you remember them from the prior session, the net benefit obligation, and the defined, this is the balance sheet account, and we're going to look at the income statement account, the defined benefit cost. Those are the two components. One, two. This is a balance sheet account. This is an income statement account. Again, as always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have over 1,500 plus accounting, auditing, and tax lectures. 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Even if you're a college student, you can supplement your college studies by utilizing your multiple choice exercises, simulations, and hundreds of hours lectures from qualified Becker faculty. Let's take a look at a few examples. Remember, every time I say examples, it means I covered the topic already. So look at the prior session. Let's take a look at this example. Kay Trucking Company has a defined pension benefit, defined benefit pension plan. On December 31st, the following information is available. They have the fair value of the plan asset, the present value of the defined obligation, service cost, interest cost, actuarial gains, past service cost. Determine the amount that the company should report on the balance sheet. Well, for this plan under IEFRS. Easy. What goes on the balance sheet? What goes on the balance sheet is the present value of the defined benefit obligation minus the fair value of the asset. If we have more assets than liabilities, we have an asset. If we have more liabilities than assets, we have a liability. Therefore, what are the assets? So basically, all this information is irrelevant. All we care about is those two figures. The fair value of the plan is, well, let's start with the liability. The liabilities is $38 million, which is the present value of the defined benefit obligation, the fair value of the assets, $30 million. So we have, in a sense, a liability or net defined liability of $8 million. $8 million. It's a liability. Let's assume on January 1st, this company made an amendment to its defined pension plan resulting in $150,000 in past service cost. The plan has 100 active employees with an average expected remaining working life of 10 years. There are currently no retirees under the plan. Determine the amount of past service costs to be amortized under IEFRS. Well, easy. If you're given these questions on the CPA exam, you'll be nothing to be amortized. The whole $150,000 will be expense. Well, what about US GAAP? Under US GAAP, this is what you would amortize. We have $150,000 in plan amendment. We're going to divide this by 10, and every year we are going to expense $15,000. Simply put, the $150,000 goes into OCI. Then from OCI, $15,000 of it is released to expense for the next 10 years. Let's take a look at this example. Determine the amount of the defined benefit cost. This is what we're talking about, the expense for the current year to be reported in net income and other comprehensive income. So they want you to define benefit cost, the net income component, and the other comprehensive income component. We looked at this earlier in the other session. Let's see if we know how to do this. Let's first take a look at the defined benefit cost. What goes under the defined benefit cost? Well, let's first see what we are giving. We are giving the obligation. We are giving the assets. We are giving the service costs for the current year. We are giving the actuarial gain for the current year. We are giving the actual return on plan asset, something I didn't really cover. I mean, I didn't really cover in this session, but I cover it in my pension and the effective yield on high quality bond. So what is the defined benefit cost? Remember, the defined benefit cost would include. Let me highlight them for you. Let me get my highlighter here. Come on. Let's go. Okay. It will include the service. It will include. Come on. It would include, there we go. It would include the service cost, which is $50,000. It would include past or prior service cost. There is no prior service cost. It would include net interest cost. We're not giving net interest cost. We have to compute net interest cost. So now we're going to go back and determine what's our net interest cost. Remember, for the net interest cost, we're going to take the liability, $1 million. This is the liability. In this liability, we're going to be using a discount rate of 5%. So the interest expense on the obligation is $50,000. Then we have assets. The assets are $800,000. And those are going to generate interest income at 5%. That means they're going to generate $40,000 of income. This is interest income. This is interest expense. The difference between them is a net interest expense of $10,000. Net interest expense of $10,000. Therefore, the defined benefit cost is $50,000, which is the current service cost, plus $10,000. We have no prior service cost or past service cost. This is the expense that goes on the income statement. Now, we need to compute the other comprehensive income. That goes on the other comprehensive income, which is the re-measurement. Well, actuarial gain and losses. We talked about this. Actuarial gain and losses. It means when we have a change in estimate, let me just now go back and highlight the figures that goes there. Let me see. Actuarial gain and losses. And actuarial, we don't call them actuarial, but the difference between the actual return and the expected return. What does that mean? Remember when I computed this $40,000 here? I said this is the expected return. How did I compute the expected return? It's my assets, fair value of the assets, and they're going to earn 5%. So this is the expected. This is how you compute the expected. Well, guess what? This is the expected. The actual was 55. The difference between the expected and the actual goes into OCI, goes into the re-measurement. And how much is that? Well, obviously that's $15,000. Also, what could go there is the change in the effect of the asset ceiling, which we don't have asset ceiling here. Simply put, what goes into OCI? The $8,000, the actuarial gain, plus $15,000. The access between the actual return and the expected return in total will go to park in OCI, $23,000. And remember, this number is never recycled, is never recycled into OCI. And you will be saying, okay, if they're never recycled, would it sit there forever? And the answer is not really, here's why. This year we happen to have an actuarial gain. Maybe next year we might have an actuarial loss. And as a result, the 23 will go down. Remember, this is the balance sheet that stays. This year we had an actual return of 55, and the expected is 40. Next year we could have an expected of 40, an actual of only 20. Or let's make it 15. Only 15. Only 15. Okay, therefore we're going to have a loss. I keep pressing to the share-based payment, which I'm coming to it shortly. Okay, so now we have a loss. Okay, so that's why it's on OCI. So sometime it goes up, sometime it goes down. And on average, its average will be zero. That's the hope. It has no effect. That's why we don't take it to the income statement. Because in some years it's going to be a gain. In some years it's going to be positive. In some years negative. In some years gains. In some year losses. They will cancel each other out. If you have any questions, please email me. If you're happened to be studying for your CPA exams, study hard. If you happen to visit my website for additional or YouTube for my additional lectures or lessons, please consider donating. Good luck and see you on the other side of success.