FAR 6 - Pension Plans

Question 1

How to calculate Net Periodic Pension Cost?

Answer 1

SIRAGE

S - Current Service Cost (given)
I - Interest Cost (formula)
R - (Return on Plan Assets)
A - Amortization of Prior Service Cost (formula)
G - (Gains) and Losses (formula)
E - Amortization of Existing Net Obligations of Net Asset (formula)

Question 2

How do you calculate interest cost in SIRAGE?

Answer 2

Beg PBO x Discount Rate = Interest Rate

Question 3

How do you calculate returns on plan assets in SIRAGE?

Answer 3

A) Actual Return
Beg FV
\+ Contributions
\+ Actual Return (SQUEEZE)
- Benefit Payment
= Ending FV

OR

B) Expected Return
Beg FV of plan assets x Expected rate of return on plan assets = Expected Return on plan assets

Question 4

How do you calculate amortization of prior service cost in SIRAGE?

Answer 4

Beg Unrecognized Prior Service Cost / Average Remaining Service Life.

*Unamortized is in AOCI

Question 5

How do you calculate gains or losses in SIRAGE?

Answer 5

1) (Gains) and Losses arise from the differences between actual returns and expected returns.

OR

2) Corridor Approach
Unrecognized (Gains) or loss
- (10% of PBO or Market Related Value (greater)
= Excess
/ Average remaining service life
= Amortization of unrecognized gain or loss

*Unamortized is in AOCI

Question 6

How do you calculate amortization of existing net obligation or net asset in SIRAGE?

Answer 6

Projected Benefit Obligation
- Fair value of plan assets
= Initial unfunded obligation
/ 15 years OR average employee life (greater)
= amortization of existing net obligation

• Unamortized is in AOCI

Question 7

How do you calculate the funded status of a pension plan?

Answer 7

FV of Plan Assets
- Projected Benefit Obligation
=Funded Status

Question 8

Is a pension plan a separate legal entity?

Answer 8

A pension plan is a separate legal entity with its own financials.

Question 9

What is a defined benefit plan? MORE COMPLEX

Answer 9

defines benefits to be paid to employees at retirement - It is the sponsor company’s responsibility to make sure there are sufficient plans at when they are due.

• we’ve defined how much you will get paid when retired, now we have to calculate how much to put in.

Question 10

What is a defined contribution plan?

Answer 10

defines the amount contributed to the plan
- the employees’ retirement benefits are based on the amount of funds in the plan

• specifies the periodic amount of contributions to the plan

Question 11

What are Non-GAAP methods of pension plans?

Answer 11

1) Pay-as-you-go - you pay them every year until they die - cash basis (not good matching)
2) terminal funding - you buy an annuity contract or insurance policy on employee life - cash basis (not good matching)

Question 12

Define Accumulated Benefit Obligation? ABO

Answer 12

Present value of your retirement payments using current salary.

Question 13

Define Projected Benefit Obligation? PBO

Answer 13

Present value of your retirement payments using future salary.

Question 14

What is Prior Service Cost?

Answer 14

Prior service cost is based on past service:

1) You receive credit for service prior to the initiation of a retirement plan
2) You receive credit for an amendment reflecting increased benefits.

Question 15

What is the Projected Benefit Obligation called in IFRS?

Answer 15

The PBO in U.S. GAAP is the DBO in IFRS.

Projected Benefit Obligation is same as Defined Benefit Obligation.

Question 16

How do you record Prior Service Cost?

Answer 16

Prior Service Cost increases PBO in the period of the plan initiation or amendment and should be AMORTIZED to pension expense over the future service periods of the employees.