FAR 6-1: Pension Plans

Question 1

Define 2 types of pension plans.

Answer 1

*Defined Contribution Plan:
Amt of contribution is specified.

*Defined Benefit Plan:
Amt of benefit to be received is specified or estimated.

Question 2

What is the difference between projected benefit obligation (PBO) & 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 & 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 PBO?

Answer 3

Beginning PBO
+ Service cost
+ Interest cost
+ Prior service cost from current period adjustments
+ 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 FV of plan assets?

Answer 4

Beginning FV of plan assets
\+ Contributions
\+ Actual return on plan assets
- Benefit pymt
\+ Ending FV of plan assets

Question 5

Name the components of net periodic pension cost (net pension expense).

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Answer 5

Service cost

Interest cost

Return on plan assets

Amortization of prior service cost

Gains & losses

Existing unrecognized net obligation or unrecognized net asset at implementation, amortization of

Question 6

How are unrecognized gains & losses amortized to pension expense?

Answer 6

Using the corridor approach.

FORMULA: see p. 418 of textbook

Question 7

Define funded status.

Answer 7

Companies with defined benefit pension plans must report funded status on the B/S.

FV of Plan Assets

=Funded Status

Under GAAP:
*Overfunded: (FV of plan assets > PBO)–Report as a noncurrent asset.

*Underfunded: (FV of plan assets < PBO)–Report as a current liability (to the extent that benefits payable in the next 12 months exceed the FV of the plan’s assets), a noncurrent liability, or both.

Question 8

How are changes in the funded status from unrecognized pension gains & losses & unrecognized prior service costs reported on the financial statements under GAAP & IFRS?

Answer 8

*GAAP:
Recognized as components of OCI in the period incurred, with the related tax effects. Then reclassified to net periodic pension cost as amortized.

*IFRS:
Reported in the footnotes in the period incurred. Recognized on the B/S (pension asset/liability) & net periodic pension cost through amortization.

Question 9

Define pension settlements & pension curtailments.

Answer 9

*Settlements:
A transaction that (a) is an irrevocable action, (b) relieves the employer of primary responsibility for a PBO, & (c) eliminates significant risks related to the obligation & 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 10

What are some of the req’d disclosures for a defined benefit plan?

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Answer 10

• Description: A description of funding policies & types of assets held.
• Reconciling items: A schedule reconciling funded status of the plan including all reconciling items (FVPA, PBO, etc.).
• Expense & OCI components: Components of net periodic pension cost (pension expense) & AOCI.

*Actuarial assumptions
Discount rate: The weighted-avg discount rate.