FAR - 14 PENSIONS Flashcards
Vested Benefit Obligation
VBO
VBO - what is owed if an employee is terminated immediately. Benefits that the employee is entitled to.
Accumulated Benefit Obligation
ABO
(Reliable)
ABO - what is owed for service to date if employee continues in employment until normal retirement age at current wage rates.
The accumulated benefit obligation is the present value of all future retirement payments that the employee is already entitled to based on services rendered prior to that date.
Projected Benefit Obligation
PBO
(Relevance)
PBO - what is owed for service to date if the employee continues in employement under normail retirement age & receives periodic adjustments to pay for increased experience & general inflation based on future wage rates.
What are the six factors that an Actuary bases it’s assumptions on?
Salary
Life Expectancies
Interest Rates
Years Employed
Cost of Administering the Plan
Turnover Rates
What are the seven factors of Pension Expense?
A - SPIDER
- Service Cost
- Prior Service Cost
- Interest Costs
- Actual Return on PLAN Assets
- Deferred Gain
- Excess Amortization of deferred gains/loss
- Amortization of Existing Net Obligation or Net Asset at implementation
Service Cost (+)
- Acturial PV of benefits attributed to services performed during the period
- Increase PBO for 1 year
Prior Service Cost (PSC) Amortization (+/-)
- Cost associated with service years before plan was implemented or amended
-
CALCULATION:
- PSC = Beginning PSC / Avg Service Life
- Avg Service Life = Current Yr / Total Yrs
Interest Cost (+)
- Change in PBO resulting from passage of time
-
CALCULATION:
- Interest = Beginning PBO x Disc/Settlement Rate
Actual Return on PLAN Assets (-)
- Actual earnings of pension plan assets during the period
- CALCULATION = 2 Ways
- PA = Beg FV of Asset x Actual Interest Ratee
- PA = Ending PA - Beg PA - Contrib + Benefits Paid
Deferred Gain (+)
Unrecognized Gain/Loss
- When Actual investments results differ from long-run Expected returns
+ Return on PA
- (Beginning PA x Expected Rate of Return)
= Deferred Gain
Excess Amortization of Deferred Gain (-)
Corridor Approach - 3 Steps
- Unrecognized gains or losses included in OCI
- Amortization if deferrals get too large
- (Corridor Approach)
Corridor Approach Calculation:
+ Deferred Gain or Loss at the Beginning of the YR
- 10% of PA or beg PBO which ever is higher
= Excess
/ Average Service Life (divided by)
= Amortization Amount
Amortization of Existing Net Obligation or Net Asset implementation (+ / -)
How to account for the change in PBO
+ Service cost
+ Interest Cost
+/- Prior service cost (New PSC added; NOT the Amort)
+/- Acturial gain or loss
- Benefits Paid
= Ending PBO Balance
Pension Funding Journal Entry
Prepaid Pension Cost
vs.
Accrued Pension Cost
To Fund the PLan:
DR: Pension Expense (7 steps)
DR: Prepaid Pension Cost (if pmt of cash > pension exp)
CR: Cash (funding)
CR: Accrued Pension Cost (if not enough cash is paid)
NOTE: Accrued/Prepaid Pension Cost are reported on the Balance Sheet
New Target Amount for Accrued Pension Cost
- Calculate Ending PBO - Ending Plan assets
- Add Current Difference from Pension Expense - Contribution
- Difference from addition & beggining - ending target = additional liability
