F6- Pensions Flashcards
Funded Pension Plans
- 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.
Defined Contribution Plans
[US GAAP]
- The periodic amount of contributions to the plan
Accumulated Benefit Obligation (ABO)
- 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.
Projected Benefit Obligation
[PBO]
- 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.
Prior Service Cost of benefits based on past service granted for:
- 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.
Prior Service Cost Increases
- 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.
Actual Return on Plan Assets
- 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)
Actual Return on Plan Assets Calc.
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
Income Statement Accounting items
[US GAAP]
- 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.
Net Periodic Pension Costs that go to I/S:
[SIR AGE]
- Current Service Cost,
- Interest Cost,
-Amortizations of Prior Service Cost
or Losses
-Amortization of Existing Net Obligation or Net Asset
Current Service Cost
[Net Periodic Pension Cost]
- 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.
Interest Cost
[Net Periodic Pension Cost]
- 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
US GAAP allows companies to offset Pension Exp by either:
- The Actual Return on plan assets OR
- The Expected Return on plan assets
Most companies choose NOT to use the Actual Return on Plan Assets in the computation of Pension Exp. B/c?
- B/c the actual return can vary drastically from to period, causing earning volatility.
Expected Return on Plan Assets
[Formula]
Beg. FV of Plan Assets
X Expected rate of return on plan assets
The difference between Actual & Expected Return must be recognized in?
- OCI each period
- Then Amortized to Pension Exp. over time with any actuarial gains or losses.
Amortization of Unrecognized Prior Service Cost Calc.
[Net Periodic Pension Cost]
- Beginning unrecognized prior service cost/ Avg. remaining service life
(Gains) & Losses is?
[Net Periodic Pension Cost]
- 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)
Accounting for Recognizing Gains & Losses
- On the Income Statement & in OCI in the period incurred
The Corridor Approach
[Acct. for Gains & Losses]
- 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
The Corridor Approach
Formula
Beg. of the yr < Beg. of PBO OR Market Related Value (greater)> =Excess / Avg. remaining service life = Amort. of unrecognized gain or loss
Projected Benefit Obligation Minimum Amortization Formula
Initial unfunded obligation
/ 15 yrs OR Avg employee job life (Greater)
= Minimum amort.
Balance Sheet- Pension Plan Contributions
- Increases the pension plan asset (Overfunded pension plans) OR - Decreases the pension plan liability (underfunded pension plans)
Pension Benefit Asset/Liability XXX
——Cash XXX
Funded Status
- 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
Noncurrent Pension Plan Asset: Positive funded status (FV of plan assets> PBO) indicates?
- That the pension is over-funded.
B/S:
- All over-funded pension plans are aggregated & reported in total as a non-current asset.
Current, noncurrent or both,Pension Plan Liability Negative funded status (FV of plan assets< PBO) indicates?
- 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.
US GAAP req. that changes in the funded status of a pension plan due to prior service cost & pension gains & losses be reported in?
- 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.
Pension Plan Recon. Calc.
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)
FV of each major category of Plan Asset as of the date?
- Each B.S. Presented.
Plan Assets - Info. that enables users of Fin. St. to assess the inputs & valuation techniques used to develop?
- FV measurement of plan assets at reporting date.
Components of Net Periodic Pension (Benefit) Cost
- 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.
Termination Benefits
- Cost of providing special or contractual termination benefits recogn. during the pd. & a description of the nature of the event.
Disclosure Req for Nonpublic Entities
- Nonpublic entities are permitted to present less info.
- Essentially eliminating the reconciliations req.
- After Recognizing G/L on the I.S & in OCI, Then Amortize the Unrecognized G/L to Pension Exp. over time using what Approach?
- The Corridor Approach.
- Smooth Earning
Plan Assets Narrative description of the Basis used to determine:
- The overall expected long-term rate of return on plan assets.
Plan Assets Narrative description of Investment Policies & Strategies, including?
- Target allocation % for the major categories of plan assets.
Plan Asset Amt & timing of any plan assets expected to be returned to the employer during?
- The 12-month Pd following the most recent B.S date.
Amortization of Unrecognized Prior Service Cost Increases?
- The DBO & is reported as Defined benefit service cost
- Not booked to OCI
Post-employment Benefits
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.
Liability Recognition: Post-employment benefit are accrued if all are met:
- 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.
Compensation Recognition
[Compensation for future absences]
- 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
Cost of retiree health & other post-retirement benefits must be accrued if:
- 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.
Accumulated Post-retirement Benefit Obligation
APBO
- 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.
Expected Post-retirement Benefit Obligations (EPBO)
- 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.
Income Statement Approach
[PRBO]
- 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.
Amortization Or Expense of the Transition Obligation
Accumulated post-retirement benefit obligation
=Initial Unfunded
Divided 20 years OR Avg. remaining service period (greater of)
=Minimum Amort. OR Expense Full Amount
Rates & Assumptions Effects Includes
- The effect on the APBO, service cost & interest cost of a 1% increase & a 1% decrease in the health care cost trend rate.
What Info should be disclosed by a company providing health care benefits to its retirees?
- Assumed health care cost trend rate used to measure the Expected cost of benefits covered by the plan
- The Acc. Post-Retirement Benefit Obligation
