Chapter 20-Accounting for Pensions and Postretirement Benefits

Question 1

Accumulated benefit obligation

Answer 1

The employer’s pension obligation that is computed using the deferred compensation amount on all years of service performed by employees under the plan–both vested and nonvested–using current salary levels.

Question 2

Accumulated Postretirement Benefit Obligation (APBO)

Answer 2

The actuarial present value of future benefits attributed to employees’ services rendered to a particular date.

Question 3

Actual return on plan assets

Answer 3

The return earned by the accumulated pension fund assets in a particular year. The return can be from interest, dividends, and realized and unrealized changes in the fair market value of the plan
assets.

Question 4

Actuaries

Answer 4

Individuals who are trained through a long and rigorous certification program to assign probabilities to future events and their financial effects.

Question 5

Amortization of unrecognized prior service cost

Answer 5

Recognition of the cost of pension plan amendments that provide for an increase in benefits for employee service provided in prior years.

Question 6

Attribution period

Answer 6

The period of service during which the employee earns postretirement benefits under the terms of the plan.

Question 7

Capitalization approach

Answer 7

The approach for recording pension plans that represents the economic substance of the pension plan arrangement over its legal form.

Question 8

Contributory pension plan

Answer 8

A pension plan where the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits.

Question 9

Corridor approach

Answer 9

An approach used to limit the growth in the Unrecognized Net Gain or Loss account by amortizing the accumulated balance in the account when it gets too large.

Question 10

Defined benefit plan

Answer 10

A pension plan which defines the benefits that the employee will receive at the time of retirement.

Question 11

Defined contribution plan

Answer 11

A pension plan where the employer agrees to contribute to a pension trust a certain sum each period based on a formula.

Question 12

Employer’s pension obligation

Answer 12

The deferred compensation obligation the employer has to its employees for their service under the terms of the pension plan.

Question 13

Expected Postretirement Benefit Obligation (EPBO)

Answer 13

The actuarial present value as of a particular date of all benefits expected to be paid after retirement to employees and their dependents.

Question 14

Funded pension plan

Answer 14

A pension plan where the employer (company) sets funds aside for future pension benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund and for making payments to the recipients as the benefits become due.

Question 15

Interest on the liability

Answer 15

The interest expense which accrues each year on the projected benefit obligation.

Question 16

Multiemployer pension plans

Answer 16

Pension plans sponsored by two or more different employers.

Question 17

Noncapitalization approach

Answer 17

The approach for recording pension plans off the balance sheet.

Question 18

Noncontributory pension plan

Answer 18

A pension plan where the employer bears the entire cost.

Question 19

Pension Benefit Guaranty Corporation

Answer 19

A corporation created by ERISA who’s purpose is to administer terminated pension plans and impose liens on the employer’s assets for certain unfunded pension liabilities.

Question 20

Pension plan

Answer 20

An arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while employed.

Question 21

Pension plan gain or loss

Answer 21

The difference between the actual return and the expected return on plan assets and amortization of the unrecognized net gain or loss from previous periods.

Question 22

Projected benefit obligation

Answer 22

The employer’s pension obligation that is computed using the deferred compensation amount on all years of service performed by employees under the plan⎯both vested and nonvested⎯using future salaries.

Question 23

Qualified pension plan

Answer 23

A pension plan in accordance with federal income tax requirements that permits deductibility of the employer’s contributions to the pension fund and tax-free status of earnings from pension fund assets.

Question 24

Service cost

Answer 24

The expense caused by the increase in pension benefits payable (the projected benefit obligation) to employees because of their services rendered during the current year.

Question 25

Vested benefits

Answer 25

Benefits that the employee is entitled to receive even if the employee renders no additional services under the plan.

Question 26

Vested benefit obligation

Answer 26

The employer’s pension obligation that is computed using current salary levels and includes only vested benefits.