Chapter 19 - Pensions and other Postretirement Benefits Flashcards by Mara Freeman

What is the nature of a deferred compensation plan and what is it’s goal

-funds are set aside during employees service years and accumulate funds plus returns from funds

is supposed to provide income to individuals during their retirement years

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What is a a pension plan

an arrangement where an employer provides benefits to retired employees for services they provided during their working years

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Who does the employer give the contributions to in a pension plan

the pension plan administrator

(Think about TPA’s like Empower)

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Who gives the retired employee it’s benefit payment

The pension plan administrator (TPA)

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What is a defined contribution plan?

current employer/employee contributions are defined by an agreement and the future retiree benefits are dependent on success of employee’s investment

*Think about employee setting a 5% deferral and employer matching up to 5%

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What is a defined benefit plan?

The future retiree benefits are defined by a pension formula and the current employer contribution is dependent on success of employers investments

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Differences between Defined contribution and defined benefit plans

-contributions
-benefits (money paid)
-risk
-what it emphasizes

contributions:
D.C: defined by agreement
D.B: based on formula

benefits:
D.C: don’t know what is coming out
D.B: benefits are known and based on formula

risk:
D.C: employee
D.B: employer

emphasizes
D.C new talent
D.B long term loyalty

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What does PBO stand for

projected benefit obligation

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What is PBO based on

pension plan formula, anticipated future salaries, and service time

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What does PPA stand for

pension plan asset

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what does PSC stand for

prior service costs

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what does OCI stand for

other comprehensive income

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what does AOCI stand for

accumulated other comprehensive income

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how do you account for a D.C pension plan?

what is the J.E

you expense it in period incurred

pension expense
A/P

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What does uncertainty in defined benefit plans arise from?

employee turnover
return on plan assets
age of retirement and life expectancies
future compensation
interest rates

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what is an actuaries job?

access the uncertainties and estimate companies PBO

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what do uncertainties in defined benefit plan affect

PBO
PPA
Pension expense

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What is the definition of the PBO

benefits for vested and non vested employees at future salaries

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What is a vested benefit obligation?

benefits for vested employees only at current salaries

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what is accumulated benefit obligation?

benefits for non vested employees at current salaries

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How is the pension plan recognized on the balance sheet

at the difference of the fair value of the PBO and PPA

what does it mean if a plan is overfunded

PPA > PBO

net debt

what does it mean if a plan is underfunded?

PBO>PPA

net credit

What are all the factors that affect the PPA, PBO and Pension expense

service cost
interest cost
ROA
contributions
benefits paid
prior service costs
amortization of prior service cost
gain/loss on plan assets/liabilities
ammort of unexpected loss/gain

what are service costs and why is it expensed

an expense that is incurred as an increase to the PBO due to additional years worked by the employee (ex: moving from 10 to 11 years of service)

what are interest costs

interest expenses due to the PBO being a large liability

what is the actual return

the actual return that happened on the plan funds *increase PPA

what is the expected return

average return expected on a long term basis - reduces pension expense

what is the difference between the expected and actual return on the pension plan assets

an unexpected gain/loss to OCI

What does a positive return with an unexpected gain result in and what are the J.E

means: actual>expected DR. PPA CR. Pension Expense CR. OCI - gain/loss

What does a positive return with an unexpected loss result in and what are the J.E

results in actual < expected J.E DR. PPA DR. OCI- gain/loss CR. Pension expense

What does a negative return with an unexpected loss result in and what are the J.E

actual < expected OCI- gain/loss PPA Pension expense

what is the J.E for an employer contribution

PPA Cash

what is the J.E for a benefits paid to retirees

PBO PPA

what are prior service costs

amending a benefit plan which result in a change to service costs

How are Prior service costs accounted for in the grant year

OCI - PSC PBI end-of-year amortization Pension expense OCI

What are the two ways of calculating the yearly expense to a prior service cost

1. years of service method (board preference) 2. straight-line method (more common)

where does PSC get classified to until it is amortized

AOCI

Prior service costs are accounted for _______

retroactively

how do you calculate amortization expense using straight-line basis

total PSC at grant date/average remaining service life of the employee

what to OCI - Gain/Losses on pension liability result from?

- Changes in PBO related to pension plan assumption changes gain is a decrease in liability loss is an increase in liability

what happens if too much unexpexted gain/losses accumulate in AOCI

then it needs to be recognized as a pension expense

what is the corridor threshold

10% of the max beginning of PBO or PBA (whatever is bigger)

If the AOCI is larger then the 10% threshold how is it accounted for

by amortizing the amount

what is the formula to figure out how much of the AOCI should be ammortized

(amount in AOCI at beg of year - corridor amount) / average remaining service years

what are attributes of postretirement benefits

- other post-retirement benefits are generally not funded - have multiple beneficiaries -benefits are used as needed - difficult to predict as cost levels vary

what is the attribute period

period over which the post-retirement benefit cost accrues

how is an EBP accounted for on the financial satements

- company accounts for period expenses in I/S and reports funded status on B/S - EBP is a completely separate entity, so it needs its own audit

what are on the Financial statements of the EBP audit for a D.B plan

statement of net assets available for benefits statement of changes in net assets available for benefits statement of accumulated plan benefits statement of changes in accumulated plan benefits

what does a D.C EBP plan have on its financial statements

Statement of net assets available for benefits statement of changes in net assets available for benefits