F6

Question 1

The funded status of a defined benefit pension plan for a company should be reported in:

Answer 1

The statement of financial position (Balance Sheet).

Question 2

Components of the Changes in the Net Assets Available for Benefits of a defined benefit pension plan trust.

Answer 2

• Contributions from the employer and participants
• The net change in fair value of each significant class of investments
• Benefits paid to participants

Question 3

A Pension Plan is funded or Non-funded when?

Answer 3

A sponsor company makes contributions to the plan

It is funded when an Employer makes a contribution.

Question 4

True or False: The contribution must be the same as amount as the Pension Expense?

Answer 4

False

Question 5

What is the Defined Contribution Plan?

Answer 5

A plan the specifies the periodic amount of contributions and how those contributions are allocated to employees. Must like a 401k

Question 6

What is a Defined Benefit Plan?

Answer 6

Defines benefits to be paid to employees at retirement. Contributions are computed using actuarial assumptions of future benefits.

Question 7

4

Factors of a Defined Benefit Plan

Answer 7

1. Employees’ compensation levels at or near retirement
2. Number of years of employee service
3. Number of years until the employee retires
4. Number of years that the plan expents to pay benefits after an employee retires

Question 8

What is Accumulated Benefit Obligation? (ABO)

Answer 8

The actuarial present value of benefits attributed by a formula based on current and past compensation levels. Use Current Salaries

Question 9

Projected Benefit Obligation? (PBO)

Answer 9

The actuarial present value of all benefits attributed by the plan’s benefit formula to Employee service prior to that date.

Question 10

What is the Difference between PBO and ABO?

Answer 10

There is no assumption about Current Salary levels for the ABO.

Question 11

What is the Service Cost?

Answer 11

PV of pension benefit earned by company employees in the current year.

Question 12

What is Prior Service Cost?

Answer 12

Prior service costs increases the PBO in the period of initiation or amendment and should be amortized to the pension expense over the future service periods

Question 13

2

Costs of the Prior service costs are?

Answer 13

1. Service prior to the initiation of a pension plan that employees retroactively receive credit for (past)
2. Subsequent plan amendment, reflected new or increased benefits that is also applied to service already provided (bump-up)

Question 14

Formula

What is BASE for the PBO?

Answer 14

Beg. PBO

+ Add: Service cost
+ Interest cost
+ Prior service cost
+ Actuarial Losses incurred i period

- Subtract: Benefits paid
Actuarial Gains incurred in current period

= End PBO

Question 15

Formula

What is BASE for Plan Assets?

Answer 15

Beg. Fair Value of Plan Assets

• *+ Add:** Contributions
• Actual return on plan assets* (SQUEEZE)

- Subtract: Benefits paid to retirees

= Ending Fair Value of Plan Assets

Question 16

What is the Pension expense under US GAAP?

Answer 16

Pension Expense (AKA Net Periodic Pension Cost) is the Increase in the PBO, offset by earning on plan assets.

Adjusted for the effects of certain smoothing mechanisms.

Question 17

SIR AGE

What is the Income Statement expense formula is…?

Answer 17

SIR AGE

• *Service** Cost Current
• *+ Interest** Cost
• *- Return** on Plan Assets

+ Amortization of (Unrecognized) Prior Service Costs
- Gains/+ Losses on minimum amortization
+ Existing Net Obligation of Net Asset
= Net periodic pension cost

Question 18

Old AGE goes to the…?

Answer 18

The income statement from the prior year balance sheet

Question 19

New AGE goes to the?

Answer 19

The Balance Sheet

Question 20

What is the current service cost?

Answer 20

The increase in the PBO resulting from employee service in the current period

Question 21

What is interest cost?

Answer 21

Beg. PBO x Discount Rate % = Interest Cost

Discount rate is not prime or or market rate!

Increase in the PBO during the current period that is due to the passage of time.

Question 22

What is Actual Return on Plan Assets?

Answer 22

Use the BASE formula to squeeze the amount.

Beg. FV Plan Asset
+ Add: Contributions
Actual Return⇔
Subtract: Benefits Paid
= Ending Balance

Question 23

What are the Expected Return on Plan Assets?

Answer 23

Beg. FV of Plan Assets
x Expected Rate of Return %
= Expected Return on Plan Assets

It used to smooth earnings.

Question 24

What’s the difference between the Expected and Actual return on plan asset?

Answer 24

It’s recognized in OCI and is amortized to pension expense over time.

Question 25

Amortization of Unrecognized Prior Service Cost

Answer 25

Unrecognized prior service cost
÷ Avg. remaining service life
= Amortization of prior service cost.

The unrecognized prior service cost goes into OCI and and amortize of the participants remaining service years.

Question 26

What is prior service cost in IFRS?

Answer 26

Past service cost.

It is NOT booked to Other Comprehensive Income (OCI)

Question 27

Gains and Losses (for the Pension Expense formula)?

Answer 27

Come from 2 sources.

1. Difference between the expected and actual return. When the expected return is used to calculate Pension expense
2. Changes in actuarial assumptions.

Question 28

How to determine whether something is a gain or a loss?

Answer 28

When something is good, like a when a return is more than expected, it is a Gain.

When something is bad, like when employees are expected to live longer, it is a Loss.

Question 29

Formula

How to calculate the Funded Status of a Pension?

Answer 29

FV of Plan Assets
- (PBO)
= Funded Status

Over(under)funded

Question 30

Pension Plan Asset

What is a positive fund status?

Answer 30

AKA positive fund status

FV Plan Assets > PBO.

ALWAYS noncurrent asset

Question 31

Underfunded Pension

What is a Pension Plan Liability?

Answer 31

A negatively funded status

FV of Plan Assets < PBO.

This can be a current, noncurrent (or both) Liability.

Question 32

Formula

Defined Defined Benefit plan calculation.

Answer 32

Beginning Funded States
Plus: Contribution
Plus: SIR AGE
Less: Net Losses incurred during the current period
Equals: Ending funded status

Question 33

What is Deferred Tax Liability?

Answer 33

Future Tax Accounting Income GREATER > Future Financial Accounting Income

Question 34

What is Deferred Tax Asset?

Answer 34

Future Tax Accounting Income LESS < Future Financial Accounting Income

Question 35

Deferred tax items should be classified as?

Answer 35

The related to the asset or liability for financial reporting.

Question 36

Gains and losses from differences in Expected and Actual returns are present in OCI and…?

Answer 36

They are Net of Tax!

Question 37

Under IFRS,when is prior service cost is recognized ?

Answer 37

The full cost is recognized in the period of amendment

Question 38

Corridor Approach (10%)

Minimum amortization of unrecognized net gain/loss?

Answer 38

GREATER of FV PA/PBO

x 10% Threshold (Corridor)

Unrecognized pension gain/loss - Corridor

= Gain/Loss over corridor

÷ Avg. Service Life

= Minimum Amortization of Gain/Loss

Question 39

I DREAD having to disclose this.

Disclosures for Pension Plans

Answer 39

• *Description** of funding policies and types of assets held.
• *Reconciling** items: schedule reconciling funded status of the plan including all items (FVPA, PBO, etc.).
• *Expense** and OCI components: Components of net periodic pension cost and AOCI.
• *Actuarial** assumptions
• *Discount** rate: The weighted-avg. discount rate

Question 40

What to do with vacation days and sick days?

Answer 40

Vacation pay should be **accrued if it either vests or accumulates. **

Sick pay should not be accrued even if it accumulates since it is not an additional benefit.