Chapter 19 - Pensions and other Postretirement Benefits Flashcards

1
Q

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

A

-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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a a pension plan

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

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

A

the pension plan administrator

(Think about TPA’s like Empower)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Who gives the retired employee it’s benefit payment

A

The pension plan administrator (TPA)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is a defined contribution plan?

A

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%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a defined benefit plan?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Differences between Defined contribution and defined benefit plans

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

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What does PBO stand for

A

projected benefit obligation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is PBO based on

A

pension plan formula, anticipated future salaries, and service time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What does PPA stand for

A

pension plan asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what does PSC stand for

A

prior service costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what does OCI stand for

A

other comprehensive income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what does AOCI stand for

A

accumulated other comprehensive income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

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

what is the J.E

A

you expense it in period incurred

pension expense
A/P

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What does uncertainty in defined benefit plans arise from?

A
  • employee turnover
  • return on plan assets
  • age of retirement and life expectancies
  • future compensation
  • interest rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is an actuaries job?

A

access the uncertainties and estimate companies PBO

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what do uncertainties in defined benefit plan affect

A
  • PBO
  • PPA
  • Pension expense
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is the definition of the PBO

A

benefits for vested and non vested employees at future salaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is a vested benefit obligation?

A

benefits for vested employees only at current salaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what is accumulated benefit obligation?

A

benefits for non vested employees at current salaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

How is the pension plan recognized on the balance sheet

A

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

22
Q

what does it mean if a plan is overfunded

A

PPA > PBO

net debt

23
Q

what does it mean if a plan is underfunded?

A

PBO>PPA

net credit

24
Q

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

A
  • 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
25
Q

what are service costs and why is it expensed

A

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)

26
Q

what are interest costs

A

interest expenses due to the PBO being a large liability

27
Q

what is the actual return

A

the actual return that happened on the plan funds

*increase PPA

28
Q

what is the expected return

A

average return expected on a long term basis

  • reduces pension expense
29
Q

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

A

an unexpected gain/loss to OCI

30
Q

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

A

means: actual>expected

DR. PPA
CR. Pension Expense
CR. OCI - gain/loss

31
Q

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

A

results in actual < expected

J.E
DR. PPA
DR. OCI- gain/loss
CR. Pension expense

32
Q

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

A

actual < expected

OCI- gain/loss
PPA
Pension expense

33
Q

what is the J.E for an employer contribution

A

PPA
Cash

34
Q

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

A

PBO
PPA

35
Q

what are prior service costs

A

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

36
Q

How are Prior service costs accounted for in the grant year

A

OCI - PSC
PBI

end-of-year amortization

Pension expense
OCI

37
Q

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

A
  1. years of service method (board preference)
  2. straight-line method (more common)
38
Q

where does PSC get classified to until it is amortized

A

AOCI

39
Q

Prior service costs are accounted for _______

A

retroactively

40
Q

how do you calculate amortization expense using straight-line basis

A

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

41
Q

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

A
  • Changes in PBO related to pension plan assumption changes

gain is a decrease in liability
loss is an increase in liability

42
Q

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

A

then it needs to be recognized as a pension expense

43
Q

what is the corridor threshold

A

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

44
Q

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

A

by amortizing the amount

45
Q

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

A

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

46
Q

what are attributes of postretirement benefits

A
  • other post-retirement benefits are generally not funded
  • have multiple beneficiaries

-benefits are used as needed

  • difficult to predict as cost levels vary
47
Q

what is the attribute period

A

period over which the post-retirement benefit cost accrues

48
Q

how is an EBP accounted for on the financial satements

A
  • 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
49
Q

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

A

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

50
Q

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

A

Statement of net assets available for benefits

statement of changes in net assets available for benefits