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FAR > F6- Pensions > Flashcards

F6- Pensions Flashcards

1
Q

Funded Pension Plans

A
  • Sponsor company making contributions to the pension plan
  • A plan is funded when the employer makes cash contributions to the plan.
  • Amount funded doesn’t have to equal the pension plan expense for the period.
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2
Q

Defined Contribution Plans

[US GAAP]

A
  • The periodic amount of contributions to the plan
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3
Q

Accumulated Benefit Obligation (ABO)

A
  • Use current Salary
  • Actuarial PV of benefits attributed by formula based on current & past compensation levels.
  • Differs from a PBO only in that the ABO includes no assumption about future compensation levels.
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4
Q

Projected Benefit Obligation

[PBO]

A
  • Use guess or estimate of future salary.
  • Actuarial PV of all benefit attributed by the plans benefit formula to employee service rendered prior to that date.
  • PBO only uses an assumption as to future compensation levels.
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5
Q

Prior Service Cost of benefits based on past service granted for:

A
  • Initiation of a pension plan that employees retroactively receive credit for when the plan is implemented.
  • Subsequent plan amendment, reflecting new or increased benefits, also is applied to service already provided.
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6
Q

Prior Service Cost Increases

A
  • The PBO in the period of the plan initiation or amendment
    &
    -Should be amortized to pension expense over the future service periods of the affected employees.
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7
Q

Actual Return on Plan Assets

A
  • Returns on the assets held by the pension plan
  • Can be calc. based on the FV of plan assets at beginning & ending of the period.

-Adjusted for contributions & benefits payments
(a squeeze)

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8
Q

Actual Return on Plan Assets Calc.

A 
B Beginning FV of plan assets
A + Contributions
   \+ Actual return on plan assets (Squeeze)
S  -Benefits paid to retirees
E =Ending FV of plan assets
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9
Q

Income Statement Accounting items

[US GAAP]

A
  • Pension Expense
    (Net Periodic Pension Cost)
  • Increase in the projected benefit obligation during the period
  • Offset by earnings on plan assets
  • Adjusted for the effects of certain smoothing mechanisms.
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10
Q

Net Periodic Pension Costs that go to I/S:

[SIR AGE]

A
  • Current Service Cost,
  • Interest Cost,

-Amortizations of Prior Service Cost
or Losses

-Amortization of Existing Net Obligation or Net Asset

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11
Q

Current Service Cost

[Net Periodic Pension Cost]

A
  • PV of all benefits earned in the current period
  • The increase in the projected benefit obligation resulting from employee service in the current period.
  • Pension benefit formula is applied to compute a PV
  • Actuary provides service cost.
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12
Q

Interest Cost

[Net Periodic Pension Cost]

A
  • Increase in the projected benefit obligation during the current period that is due to the passage of time.
  • Similar to the recognition of interest Exp.

Beg. of period PBO
X Discount rate
= Interest Cost

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13
Q

US GAAP allows companies to offset Pension Exp by either:

A
  • The Actual Return on plan assets OR

- The Expected Return on plan assets

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14
Q

Most companies choose NOT to use the Actual Return on Plan Assets in the computation of Pension Exp. B/c?

A
  • B/c the actual return can vary drastically from to period, causing earning volatility.
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15
Q

Expected Return on Plan Assets

[Formula]

A

Beg. FV of Plan Assets

X Expected rate of return on plan assets

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16
Q

The difference between Actual & Expected Return must be recognized in?

A
  • OCI each period

- Then Amortized to Pension Exp. over time with any actuarial gains or losses.

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17
Q

Amortization of Unrecognized Prior Service Cost Calc.

[Net Periodic Pension Cost]

A
  • Beginning unrecognized prior service cost/ Avg. remaining service life
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18
Q

(Gains) & Losses is?

[Net Periodic Pension Cost]

A
  • Difference betwn the expected & actual return on plan assets when the expected return on plan assets is used to calc. pension exp.
  • Changes in actuarial assumptions
    (Actuarial gain & losses)
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19
Q

Accounting for Recognizing Gains & Losses

A
  • On the Income Statement & in OCI in the period incurred
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20
Q

The Corridor Approach

[Acct. for Gains & Losses]

A
  • Market related value of plan assets= Assets
  • Projected benefit obligation (PBO) = Liabilities
  • This amount exceeds 10% of the greater of the beginning of the yr balances
21
Q

The Corridor Approach

Formula

A 
Beg. of the yr
< Beg. of PBO OR Market Related Value (greater)>
=Excess
/ Avg. remaining service life
= Amort. of unrecognized gain or loss
22
Q

Projected Benefit Obligation Minimum Amortization Formula

A

Initial unfunded obligation
/ 15 yrs OR Avg employee job life (Greater)
= Minimum amort.

23
Q

Balance Sheet- Pension Plan Contributions

A 
- Increases the pension plan asset 
(Overfunded pension plans) 
OR
- Decreases the pension plan liability 
(underfunded pension plans)

Pension Benefit Asset/Liability XXX
——Cash XXX

24
Q

Funded Status

A
  • Multiple defined benefit pension plans
  • The funded status of each plan is calc. separately
  • Note that FV of plan assets & PBO must be disclosed separately in the pension footnote disclosures.
  • FV of plan assets = Funded status
25
Q

Noncurrent Pension Plan Asset: Positive funded status (FV of plan assets> PBO) indicates?

A
  • That the pension is over-funded.

B/S:
- All over-funded pension plans are aggregated & reported in total as a non-current asset.

26
Q

Current, noncurrent or both,Pension Plan Liability Negative funded status (FV of plan assets< PBO) indicates?

A
  • The pension is underfunded
  • All underfunded pension plans are aggregated & reported as a current liability, non-current, both.
  • Underfunded pension plans are reported as a current liab. to the extent that the benefit obligation payable within the next 12 months exceeds the FV of the plans assets.
27
Q

US GAAP req. that changes in the funded status of a pension plan due to prior service cost & pension gains & losses be reported in?

A
  • In OCI in the period incurred
  • Unless the company chooses to recognize the pension gains & losses immediately on the Inc. St.
  • Tax effects of these items must also be recognized in other income.
28
Q

Pension Plan Recon. Calc.

A

Beg. Funded Status

+Contributions
-Service Cost
-Interest Cost
+Expected Return on plan assets
- Prior service cost incurred in current pd
+ Net Gains incurred during the current Pd
- Net losses incurred during current Pd.

= Ending Funded status (pension benefit asset/liab)

29
Q

FV of each major category of Plan Asset as of the date?

A
  • Each B.S. Presented.
30
Q

Plan Assets - Info. that enables users of Fin. St. to assess the inputs & valuation techniques used to develop?

A
  • FV measurement of plan assets at reporting date.
31
Q

Components of Net Periodic Pension (Benefit) Cost

A
  • Service Cost Component
  • Interest Cost component
  • Expected return on plan assets for the Pd.
  • Prior service cost component
  • Gain/Loss component
  • Transition asset or obligation component
  • Amt of Gain/Loss recogn. due to a settlement or curtailment.
32
Q

Termination Benefits

A
  • Cost of providing special or contractual termination benefits recogn. during the pd. & a description of the nature of the event.
33
Q

Disclosure Req for Nonpublic Entities

A
  • Nonpublic entities are permitted to present less info.

- Essentially eliminating the reconciliations req.

34
Q
  • After Recognizing G/L on the I.S & in OCI, Then Amortize the Unrecognized G/L to Pension Exp. over time using what Approach?
A
  • The Corridor Approach.

- Smooth Earning

35
Q

Plan Assets Narrative description of the Basis used to determine:

A
  • The overall expected long-term rate of return on plan assets.
36
Q

Plan Assets Narrative description of Investment Policies & Strategies, including?

A
  • Target allocation % for the major categories of plan assets.
37
Q

Plan Asset Amt & timing of any plan assets expected to be returned to the employer during?

A
  • The 12-month Pd following the most recent B.S date.
38
Q

Amortization of Unrecognized Prior Service Cost Increases?

A
  • The DBO & is reported as Defined benefit service cost

- Not booked to OCI

39
Q

Post-employment Benefits

A

Paid by companies to former or inactive employees during the period after their employment & before their retirement.

  • This is not the same as post-retirement benefit.
40
Q

Liability Recognition: Post-employment benefit are accrued if all are met:

A
  • Employer’s obligation is attributable to services already rendered
  • Obligation relates to rights that vest or accumulate
  • Payment of the compensation is probable
  • The amount can be reasonably estimated.
41
Q

Compensation Recognition

[Compensation for future absences]

A
  • Employers obligation to compensate employees for future absences is attributable to services already rendered by employees
  • The Obligation relates to rights that vest or accumulate
  • Payment of the compensation is probable
  • The amount can be reasonably estimated
42
Q

Cost of retiree health & other post-retirement benefits must be accrued if:

A
  • Obligation is attributable to employee’s services already rendered
  • Employees’ rights accumulate or vest
  • Payment is probable
  • Amount of the benefit can be reasonably estimated.
43
Q

Accumulated Post-retirement Benefit Obligation

APBO

A
  • Is PV of future benefits that have vested as of the measurement date
  • Is discounted using an assumed discount rate

~ Rate should reflect returns on high quality, fixed income investment

~ Used to determine the APBO, EPBO & the service & interest cost components of net periodic post-retirement benefit cost.

44
Q

Expected Post-retirement Benefit Obligations (EPBO)

A
  • PV of all future benefits expected to be paid as of the measurement date
  • Includes: Amount that has vested (APBO),
    Plus:

~ PV of expected future benefits that have not yet vested.

45
Q

Income Statement Approach

[PRBO]

A
  • Post-retirement Benefit Obligation is accrued during the period the employee works
  • Generally beginning at the employee’s date of hire & ending at the full eligibility date.
46
Q

Amortization Or Expense of the Transition Obligation

A

Accumulated post-retirement benefit obligation

=Initial Unfunded

Divided 20 years OR Avg. remaining service period (greater of)

=Minimum Amort. OR Expense Full Amount

47
Q

Rates & Assumptions Effects Includes

A
  • The effect on the APBO, service cost & interest cost of a 1% increase & a 1% decrease in the health care cost trend rate.
48
Q

What Info should be disclosed by a company providing health care benefits to its retirees?

A
  • Assumed health care cost trend rate used to measure the Expected cost of benefits covered by the plan
  • The Acc. Post-Retirement Benefit Obligation

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