F6 - Pension Plans Flashcards
Define two types of pension plans.
Defined Contribution Plan
Amount of contribution is specified.
Defined Benefit Plan
Amount of benefit to be received is specified or estimated.
What is the difference between projected benefit obligation (PBO) and accumulated benefit obligation (ABO)?
What is the name for the pension liability under IFRS?
ABO
Actuarial PV of benefits attributed by the pension benefit formula to employoee service rendered before a specified date based on employee service and current and past compensation levels.
PBO
Actuarial PV of all benefits attributed by the pension benefit formula to employee service rendered before a specified date based on assumptions as to future compensation levels.
Under IFRS, the pension plan liability is defined benefit obligation (DBO).
What is the formula used to calculate the ending projected benefit obligation (PBO)?
Beginning PBO
+ Service cost
+ Interest cost
+ Prior service cost from current period amendments
+ Actuarial losses incurred in the current period
- Actuarial gains incurred in the current period
_- Beneffits paid to retirees _
Ending PBO
What is the formula used to calculate the ending fair value of plan assets?
Beginning fair value of plan assets
+ Contributions
+ Actual return on plan assets
_- Benefit payment _
Ending fair value of plan assets
Name the components of net periodic pension const (net pension expense) under U.S. GAAP.
SIR AGE
Service cost
Interest cost
Return on plan assets
Amortization of prior service cost
Gains and losses
Amortization of Existing unrecognzied net obligation or unrecognized net aseset at implementation
How are unrecognized gains and losses amoritzed to pension expense under U.S. GAAP?
Using the corridor approach. The formula is:
Unrecognized gain or loss
<10% of PBO OR Market related value (greater)>
Excess
÷ Average remaining service life
Amortization of unrecognized gain or loss
How is funded status calculated and reported under U.S. GAAP?
Companies with defined benefit pension plans must report funded status on the balance sheet.
Fair Value of Plan Assets
<pbo> </pbo>
Funded Status
Under U.S. GAAP:
Overfunded: (Fair value of plan assets > PBO).
Report as a noncurrent assets.
Underfunded: (Fair value of plan assets < PBO).
Report as a current liability (to the extent that the benefits payable in the next 12 months exceed the fair value of the plan’s assets), a non current liability, or both.
How is funded status calculated and reported under IFRS?
Defined Benefit Obligation
<fair></fair>
Funded Status
Under IFRS:
Overfunded: (DBO < Fair value of plan assets)
Report as a net defined benefit asset
Underfunded: (DBO > Fair value of plan assets)
Report as a net defined benefit liability
IFRS does not specify whether the asset/liability should be reported as current or noncurrent.
How are changes in the funded status from pension gains and losses and prior service costs reported on the financial statements under U.S. GAAP and IFRS?
U.S. GAAP
Both are recognized as components of other comprehensive income in the period incurred, with the related tax effects. Then reclassified to net periodic pension cost as amortized.
IFRS
Prior (past) service cost is reported as a component of service cost on the income statement in the period incurred. Pension gains and losses are reported in the period incurred. Pension gains and losses are reported in other comprehensive income in the period incurred and are not reclassified (amortized) to the income statement.
Define pension settlements and pension curtailments.
Settlements
A transaction that (a) is an irrevocable action, (b) relieves the employer of primary responsiblity for a pension benefit obligation, and (c) eliminates significant risks related to the obligation and the assets used to effect the settlement.
Curtailments
An event that significantly reduces the expected years of future service of present employees or eliminates for a significant number of employees the accrual of defined benefits for some or all of their future services.
What are some of the required disclosures for a defined benefit plan?
I dread having to disclose this stuff!
Description: A description of funding policies and types of assets held.
Reconciling items: A schedule reconciling funded status of the plan including all reconciling items (FVPA, PBO, etc.).
Expense and OCI components: Components of net periodic pension cost (pension expense) and accumulated OCI.
Actuarial assumptions
Discount rate: The weighted-average discount rate.
