FAR Chapter# 6 Flashcards
FAR 6-1 - PENSION PLANS | Define two types of pension plans.
DEFINED CONTRIBUTION PLAN
Amount of contribution is specified.
DEFINED BENEFIT PLAN
Amount of benefit to be received is specified or estimated.
FAR 6-2 - PENSION PLANS | What is the difference between projected benefit obligation (PBO) and accumulated benefit obligation (ABO)?
ABO:
Actuarial PV of benefits attributied by the pension benefit formula to employee service rendered before a specified date based on employee service and current and 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).
FAR 6-3 - PENSION PLANS | What is the formula used to calculate the ending projected benefit obligation (PBO)?
Beginning PBO
+ Service cost
+ Interest cost
+ Prior service cost from current period amendments
+ Actuarial losses incurred in the current period
- Actuarial gains incurred in the current period
- Benefits paid to retirees
=
Ending PBO
FAR 6-4 - PENSION PLANS | What is the formula used to calculated the ending fair value of plan assets?
Beginning fair value of plan assets \+ Contributions \+ Actual return on plan assets - Benefit payments = Ending fair value of plan assets
FAR 6-5 - PENSION PLANS | Name the components of net periodic pension cost (net pension expense) under U.S. GAAP. SIR AGE
S - service cost I - interest cost R - return on plan assets A - amortization of prior service cost G - gains and losses E- amortization of Existing unrecognized net obligation or unrecognizred net asset at implementation
FAR 6-6 - PENSION PLANS | How are unrecognized gains and losses amortized to pension expense under U.S. GAAP?
Using the corridor approach, the formula is:
Unrecognized gain or loss - 10% of PBO or Market related value (greater) = Excess / Average remaining service life = Amortization of unrecognized gain or loss
FAR 6-7 - PENSION PLANS | How is funded status calculated and reported under U.S. GAAP?
Companies with defined benefit pension plans must report funded status on the balance sheet.
Fair Value of Plan Assets
= Funded Status
Under U.S. GAAP:
Overfunded: (Fair value of plan assets >PBO)
Report as noncurrent asset.
Underfunded: (Fair value of plan assets <PBO)
Report as current liability (to the extent benefits payable in the next 12 months exceed the fair value of the plan assets), a noncurrent liability or both.
FAR 6-8 - PENSION PLANS | How is funded status calculated and reported under IFRS?
Defined Benefit Obligation
= Funded Status
Under IFRS:
Overfunded: (DBOFair value of plan assets)
Report as a net defined benefit liability
IFRS does not specify whether the asset/liability should be reported as current or noncurrent.
FAR 6-9 - PENSION PLANS | How are changes in funded status from pension gains and losses and prior service costs reported on the financial statements under U.S. GAAP and IFRS?
U.S. GAAP
Both are recognized as components of other comprehensive income in the period incurred, with the related tax effects. Then reclassified to net periodic pension cost as amortized.
IFRS Prior (past) service cost is reported as a component of service cost on the income statement in the period incurred. Pension gains and losses are reported in other comprehensive income in the period incurred and are not reclassified (amortized) to the income statement.
FAR 6-10 - PENSION PLANS | Define pension settlements and pension curtailments.
Settlements: A transaction that (a) is an irrevocable action, (b) relieves the employer of primary responsibility for a a pension benefit obligation, and (c) eliminates significant risks related to the obligation and 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.
FAR 6-11 - PENSION PLANS | What are some of the required disclosures for a defined benefit plan? I DREAD having to disclosue this stuff!
Description: a description of the funding policies and types of assets held
Reconciling items: A schedule reconciling funded status of the plan including all reconciling items (FVPA, PBO, etc.).
Expense and OCI components: Components of net periodic pension cost (pension expense) and accumulated OCI.
Actuarial assumptions:
Discount rate: The weighted average discount rate.
FAR 6-12 - POSTRETIREMENT BENEFITS | What are the componetns of net periodic postretirement benefit cost (postretirement expense) under U.S. GAAP?
S - service cost I - interest cost R - return on plan assets A - amortization of prior service cost G - gains and losses E- expense/amortization of transition obligation
FAR 6-13 - POSTRETIREMENT BENEFITS | How do we account for postretirement benefits on the balance sheet under U.S. GAAP?
The funded status of the postretirement benefit plan must be shown as a noncurrent asset (if overfunded) or a current liability, a noncurrent liability, or both (if underfunded). Changes in funded status due to net gains or losses, prior service costs, or net transition assets or obligations should be shown in accumulated other comprehensive income until amortized to net periodic postretirement benefit cost.
FAR 6-14 - COMPENSATION and BENEFITS | What are some of the required disclosures for postretirement benefit plans? I DREAD having to disclose this stuff!
Description: a description of the plan
Reconciling items: a schedule reconciling funded status of plan
Expense and OCI components: elements of the net periodic postritirement benefit cost, including all components, and accumulated OCI.
Actuarial assumptions: Assumptions and rates used for computing APBO and EPBO.
Discount rate: The weighted average discount rate.
FAR 6-15 - INCOME TAXES | List the four critera for recognizing postemployment benefits and compensation for future absences.
Employees services already rendered
Rights vest or accumulate
Payment of the compensation is probable
Amount can be reasonably estimated