Chapter 6 Section 1: Pension Plans Flashcards
What does it mean to have a contributory or noncontributory pension plan?
Contributory means the employee also contributes to it. Noncontributory means that only the employer does.
What does funding mean?
Funding refers to the employer making contributions to the plan
What is the difference between accumulated benefit obligation and projected benefit obligation?
ABO is the actuarial PV of benefits attributed by a formula based on current and past compensation levels.
PBO is based on an assumption about future compensation levels.
What does it mean for a plan to be vested?
It means they’ve earned their benefits, usually by reaching retirement age or waiting a specific amount of time. It is not contingent on staying an employee.
What goes into prior service cost?
Service prior the the initiation of the plan that employees retroactively receive credit for
Subsequent plan amendment, reflecting new or increased benefit that is also retroactively provided for
How do you calculate projected benefit obligation?
Beginning PBO \+ Service cost \+ Interest cost \+ Prior service cost from current period adjustments \+ Actuarial losses - Actuarial gains - Benefits paid = Ending PBO
How do you calculate the ending FV of plan assets?
Beginning FV \+ Contributions \+ Actual return - Benefits paid = Ending FV
Define net periodic pension cost
Increase in the PBO during the period, offset by earnings on assets and adjusted for amortization
How do you calculate net periodic pension cost?
SIRAGE
\+ Service cost \+ Interest cost - Return on assets \+ Amortization of prior service cost - Gain amortization or + Loss amortization \+ Existing net obligation amortization = Net periodic pension cost
Explain current service cost
This is a given value from an actuary
Explain interest cost
This is the beginning of period PBO x the discount rate
It’s the increase in the PBO due to the passage of time
Explain return on plan assets
You can either use actual or expected. Actual - not used often: Beginning FV \+ Contributions ACTUAL RETURNS (squeeze) - Benefit Payments = End FV Expected - smooths earnings: Beginning FV or plan assets x expected rate of return If you use expected, the difference between actual and expected needs to go to OCI and be amortized to expense with actuarial gains and losses
Explain amortization of unrecognized prior service cost
This is taking the prior service cost out of AOCI
Beginning unrecognized prior service cost/average remaining service life
Explain gains and losses
Come from two sources:
- difference between actual and expected return, when expected is used
- changes in actuarial assumptions
Explain the corridor approach to accounting for gains and losses
Unrecognized gain or loss - 10% of GREATER of PBO or market value of assets = excess /average remaining service life = amortization
if you don’t have excess, don’t amortize or recognize.
