Employee Compensation Flashcards
How to reconcile beginning and ending PBO
PBO beginning of year \+ Current service cost \+ Interest cost \+- Actuarial gains and losses \+ Plan amendments - Benefits paid = PBO end of year
What is projected benefit obligation
Actuarial present value of all future pension benefits earned to date, based on expected future salary increases
How to calculate fair value of plan assets
Fair value of plan assets at beginning of year
+ Actual return on assets
+ Employer contributions
- Benefits paid
= Fair value of plan assets at end of year
How to calc pension plan funded status
Funded status = fair value of plan assets - PBO
How to interpret funded status
Positive = overfunded status Negative = underfunded status
Difference between IFRS and GAAP pension reporting on balance sheet
US GAAP: report net of pension assets and liabilities = actual funded status
IFRS: net balance sheet pension may not equal actual funded status due to diff in exp and actual asset returns and amortization of g/l
How to calc pension expense under US GAAP
Service cost
+ interest cost
- expected return on plan assets
+ amort of unrecognized prior service costs
+- amort of deferred (gains) losses
= reported pension expense (income) on IS
What is economic pension expense
Non- smoothed version of reported pension expense; includes actual return on assets
More volatile
How to calculate economic pension expense
Economic pension expense = ending PBO - beginning PBO + benefits paid - actual return on assets
OR = contributions + beginning funded status - ending funded status
What are three actuarial assumptions fundamental to calculating pension cost
Discount rate
Rate of compensation increase
Expected return on plan assets
What aggressive assumptions result in lower earnings quality
High discount rates
Low compensation growth rates
High expected return on plan assets
What are key differences with non pension post retirement benefits
Accumulated post retirement benefit obligation = actuarial PV of exp post retirement benefits
If unfunded, employer contributions = benefits paid, funded status = APBO
How must firms report compensation expense for share based compensation
Based on value at issuance using option pricing model; expense is amortized over vesting period.
Results in increased expense thus significantly decreased reported earnings
