F6- Pension Plans

Question 1

Define two types of pension plans.

F6-1

Answer 1

Defined Contribution Plan
Amount of contribution is specified.

Defined Benefit Plan
Amount of benefit to be received is specified or estimated.

Question 2

What is the difference between projected benefit obligation (PBO) and accumulated benefit obligation (ABO)?

What is the name for the pension plan liability under IFRS?

Answer 2

ABO

Actuarial PV of benefits attributed by the pension benefit formula to employee 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 the defined benefit obligation (DBO).

Question 3

What is the formula used to calculate the ending projected benefit obligation (PBO)?

F6-3

Answer 3

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
_-Benefits paid to retirees _
= Ending PBO

Question 4

What is the formula used to calculate the ending fair value of plan assets?

F6-4

Answer 4

Beginning fair value of plan assets

+ Contributions

+ Actual return on plan assets

_- Benefit payment __ _

= Ending fair value of plan assets

Question 5

Name the components of net periodic pension cost (net pension expense) under U.S. GAAP.

Hint: SIR AGE

Answer 5

S = Service cost.

I = Interest cost.

R = Return on plan assets.

A = Amortization of prior service cost.

G = Gains and losses.

E = Amortization of Existing unrecognized net obligation or unrecognized net asset at implementation.

Question 6

How are unrecognized gains and losses amortized to pension expense under U.S. GAAP?

F6-6

Answer 6

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_

Question 7

How is the funded status calculated and reported under U. S. GAAP?

F6-7

Answer 7

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 non-current asset.

Underfunded: (Fair value of plan assets < PBO).

Report as a current liability (to the extent that benefits payable in the next 12 months exceed the fair value of the plan’s assets), a noncurrent liability, or
both.

Question 8

How is the funded status calculated and reported under IFRS?

F6-8

Answer 8

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.

Question 9

How are the 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?

F6-9

Answer 9

U.S. GAAP

• Both are recognized as components of other comprehensive income in the period incurred, with the related tax effect. 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 other comprehensive income in the period incurred and are not reclassified (amortized) to the income statement.

Question 10

Define pension settlements and pension curtailments.

F6-10

Answer 10

Settlements

• A transaction that (a) is an irrevocable action, (b) relieves the employer of primary responsibility 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.

Question 11

What are some of the required disclosures for a defined benefit plan?

Hint: I dread having to disclose this stuff!

F6-11

Answer 11

Description: A description of funding policies and types of assets held.

Reconciling items: A schedule reconciling funded status of the plan including all reconciling itmes (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.