Chapter 19 Pensions Flashcards
Why are Pensions Important?
Pensions ensure employees are financially secure in retirement, which helps attract and retain talent.
They are a liability for businesses, impacting financial statements and requiring careful management.
Pension obligations affect cash flow and long-term financial planning.
Defined Contribution vs Defined Benefit Plans
Defined Contribution Plan:
Employer sets a fixed contribution, but employee’s benefits depend on the fund’s performance.
Employer has no further obligation beyond the contribution made.
Employee bears the investment risk.
Defined Benefit Plan:
Employee’s benefits are fixed, based on a formula or fixed amount.
Employer is responsible for ensuring the fund has enough money to meet future obligations.
Employer bears the risk if the fund is underfunded.
What is the Employer’s Benefit Obligation?
The amount the employer is liable to pay to employees based on pension plans.
For defined benefit plans, this is the amount the employer guarantees for future pension benefits.
Alternative Measures for Benefit Obligation
Defined Benefit Obligation (DBO): The actuarial present value of future pension payments.
Plan Assets: The value of assets set aside to cover pension obligations.
What is a Continuity Schedule?
It tracks changes in the defined benefit obligation over time, including:
Service costs (benefits earned in the period).
Interest costs (accrued due to time value of money).
Past service cost (benefits earned in prior periods but not funded).
Actuarial gains and losses (changes in assumptions or experience).
Payments made to retirees.
How do Transactions Affect Plan Assets?
Contributions from the employer and employee increase plan assets.
Investment returns (gains or losses) change the value of assets.
Payments to retirees reduce the value of plan assets.
Plan Surplus or Deficit:
Surplus: If plan assets exceed the defined benefit obligation (DBO).
Deficit: If the DBO exceeds plan assets
Plan Surplus or Deficit:
Surplus: If plan assets exceed the defined benefit obligation (DBO).
Deficit: If the DBO exceeds plan assets.
How to Calculate Plan Assets and Surplus/Deficit:
Plan Assets: Include contributions, returns, and payments.
Surplus/Deficit: Compare plan assets to the DBO at year-end.
Surplus: If assets > DBO.
Deficit: If DBO > assets.
Components of Defined Benefit Cost
Components under IFRS
Current Service Cost: Pension benefits earned during the period.
Past Service Cost: Pension benefits earned for past work or plan changes.
Net Interest: Interest cost on the DBO minus expected return on assets.
Remeasurement: Gains/losses from changes in assumptions or experience, recognized in Other Comprehensive Income (OCI).
Components of Defined Benefit Cost
Components Under ASPE
All costs are included in net income, and remeasurements are disclosed separately.
Accounting for Defined Benefit Plans
Defined Benefit Plan Accounting (IFRS):
Recognize the current/past service costs and net interest in net income.
Remeasurements are recognized in OCI.
Defined Benefit Plan Accounting (ASPE):
All costs are recognized in net income as they are earned.
Remeasurements are disclosed separately.
Defined Benefit Plans with Vested or Accumulated Benefits
These plans provide benefits that employees are entitled to receive based on their service.
They may apply to pension plans or other employee benefits (like post-retirement health care).
Defined Benefit Plans with Vested or Accumulated Benefits
Accounting for these Benefits:
Vested benefits are recognized as an obligation.
The cost is accrued based on the benefits earned to date.
Required Information for Defined Benefit Plans
Description of the plan.
Major changes in the plan.
Actuarial assumptions and valuations.
Fair value of plan assets and DBO.
Surplus or deficit of the plan at year-end.
Reconciliation of the net defined benefit liability/asset.
Understanding and Preparing Basic Schedules
Continuity schedules tracking changes in the DBO and plan assets.
Reconciliation of the net pension liability or asset.
Disclosure of any actuarial gains/losses and remeasurements.
Disclosure Requirements (ASPE)
Key ASPE Disclosures:
Description of plans and actuarial assumptions.
Major plan changes.
Dates of actuarial valuations.
Fair value of DBO and plan assets.
Surplus or deficit of the plan at year-end.
Disclosure Requirements (IFRS)
Additional IFRS Disclosures:
Characteristics and risks of the plan.
Cash flow effects of the plan.
Sensitivity of significant actuarial assumptions.
Reconciliation of the net defined benefit liability/asset.
Amounts recognized in OCI, including actuarial gains/losses.
Differences Between IFRS and ASPE
Key Differences:
IFRS: Remeasurements are recognized in OCI.
ASPE: Remeasurements are recognized in net income but disclosed separately.
Recognition of Benefit Cost: Minor differences in how benefit cost is recognized between IFRS and ASPE.
Nature of Pension Plans
What are Pension Plans?
Pension plans provide employees with benefits after they retire, based on the work they did while employed.
Contributory Plans: Employees pay part of the pension cost.
Non-contributory Plans: Employers pay the full cost.
Taxation: Contributions to pension plans are tax-deductible, but retirement benefits are taxable.
Structure of Pension Plans
Pension Fund: A separate entity that handles the pension money.
It receives contributions, invests them, and makes retirement payments.
It keeps its own financial records.
What is a Defined Contribution Plan?
Employer contributions are set, but the employee’s benefits depend on how the fund performs.
The employee bears the risk.
The employer has no further obligation after the contribution is made.
Accounting for a Defined Contribution Plan
Employer’s Liability
Annual Cost
Accrued Contributions
Employer’s Liability
Based on how much they have contributed.
Annual Cost:
Annual Cost: Amount the employer must contribute for employee services.
