Chapter 19 - Pensions and other Postretirement Benefits Flashcards
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
What is a a pension plan
an arrangement where an employer provides benefits to retired employees for services they provided during their working years
Who does the employer give the contributions to in a pension plan
the pension plan administrator
(Think about TPA’s like Empower)
Who gives the retired employee it’s benefit payment
The pension plan administrator (TPA)
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%
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
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
What does PBO stand for
projected benefit obligation
What is PBO based on
pension plan formula, anticipated future salaries, and service time
What does PPA stand for
pension plan asset
what does PSC stand for
prior service costs
what does OCI stand for
other comprehensive income
what does AOCI stand for
accumulated other comprehensive income
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
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
what is an actuaries job?
access the uncertainties and estimate companies PBO
what do uncertainties in defined benefit plan affect
- PBO
- PPA
- Pension expense
What is the definition of the PBO
benefits for vested and non vested employees at future salaries
What is a vested benefit obligation?
benefits for vested employees only at current salaries
what is accumulated benefit obligation?
benefits for non vested employees at current salaries
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
- years of service method (board preference)
- 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
