Chapter 17 Power Point Notes

Question 1

Defined contribution plan

Answer 1

employer promises to make a certain level of contributions e.g. 5% of salary
JE:
Compensation Expense
Cash (cash goes into trust)

No liability for future payments (employee bears the risk/reward of market fluctuations).

Question 2

Defined benefit plan

Answer 2

employer promises a certain level of future benefits based on employee’s ending salary and years of service
Plan Assets (PA): Measured at FAIR VALUE
Plan Obligation:
Projected benefit obligation (PBO): PV of benefits earned based on service to date and salary levels projected to exist when the employee retires

Question 3

Contributory Pension Plan

Answer 3

employees voluntarily make payments to increase their benefits

Question 4

Noncontributory

Answer 4

employer bears the entire cost.

Question 5

Qualified pension plans

Answer 5

offer tax benefits

Question 6

Vested benefit obligation

Answer 6

PV of vested benefits @ current salary levels

Question 7

Accumulated benefit obligation (ABO)

Answer 7

PV of vested and non-vested benefits @ current salary levels

Question 8

Projected benefit obligation (PBO)

Answer 8

PV of vested and non-vested benefits @ future salary levels

Question 9

Net Pension Expense equals

Answer 9

Service cost
Costs associated with employees providing service during the period and qualifying for pension benefits

+ Interest cost
Interest expense on the liability. The liability is one year closer

• Expected return on plan assets (not actual)
  Smoothing out unexpected returns by using the expected

+/- Amortization of “smoothing items” resulting from actual return on plan assets differing from expectations, changes in actuarial assumptions, plan amendments, etc.

Question 10

balance sheet reporting for PBO and Pension Assets

Answer 10

We report difference between PBO and Pension Assets, i.e., the funded status, on the balance sheet as a net asset or net liability

Question 11

Unrecognized changes in pension accounts are reported on

Answer 11

OCI in equity

Question 12

Prior service costs

Answer 12

are amortized into pension expense over the expected service lives of employees who are expected to receive the benefits

Question 13

Calculate Pension Expense

Answer 13

Service costs+ interest costs-actual return + amortization or prior service costs
Pension Expense XX
Plan Assets (expected return) XX
Amortization or PSC XX
PBO (service and interest costs) XX

Question 14

Corridor Threshold

Answer 14

A portion of the cumulative gain or loss will be recognized if it exceeds the threshold or “corridor”

Defined as 10% of the larger of:
PV of projected benefit obligation (PBO)
Market-related value of the pension plan assets (Plan Assets)

If it exceeds this threshold the excess is amortized straight-line over the estimated average remaining service period of the active employees

Question 15

Disclosures within financial statement when it comes to pension

Answer 15

Pension expense
Pension Asset / Liability
Components of Accumulated Other Comprehensive Income
Major components of pension expense.
Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed.
Amounts recognized in accumulated other comprehensive income that have not yet been recognized in pension expense, showing separately the net gain or loss and prior service costs, and the amounts to be recognized is pension expense in the next year.
Disclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plan assets, rate of compensation).
Table indicating the allocation of pension plan assets by category (e.g., types of investments).
The expected benefit payments to be paid to current plan participants for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter.