FAR - Financial Statement Acct - Deferred Compensation Agreement Flashcards
2 types of pension plans
1) defined contribution plan: # of annual employer contribution is defined by contract
2) defined benefit plans: annual retirement benefit based on formula/defined, employer liable for benefits
- accrual accounting is used for both
- employer bears risk on fund performance for both
- both can be contributory/non-contributory
1) contributory = contributions by employer/employee
2) non-contributory = contributions by employer ONLY
Defined contribution plan
Simple accounting, little issues arise.
Employer pays periodic contribution into separate trust fund administered by 3rd party trustee
Investment risk is borne by employer, income is dependent on fund management by employer
Sponsor must disclose description of plan.
Acct for defined contribution plan
annual pension expense = annual employer contribution
shortfalls arise = liability, until employer covers it
Defined benefit plan
complicated acct, pension exp/PBO liab dependent on many factors: turnover, salary, life expectancy, etc.
amounts contributed are related to future benefits expected to be paid to current employees. ALL funding based on PV methods. Additional future benefits must be discounted to PV
Acct for defined benefit plans
Accrual accounting, pension exp recognized as benefits earned, pension obligation recognized for unpaid benefits
Defined Benefit Plan Benefit Formula
3 variables =
1) years of service
2) age at retirement
3) highest salary attained/annual salary
(year of service/40) X (annual salary) X (age at retire/60)
Main acct reporting issues
1) pension expense
2) projected benefit obligation (PBO)
3) Pension assets @ FMV
4) Pension Liability
Pension Expense
Cost to provide pension benefits, reported in I/S and has 5 components:
1) Service Cost: always increase pension expense
2) Interest Cost: always increase pension expense
3) Expected return on plan assets: always reduce pension expense
4) Amort. of prior service cost: always increase pension expense
5) Amor. of net gain/loss: decrease expense under gains and increase expenses under losses.
Projected Benefit Obligation (PBO)
PV of unpaid pension benefits, measured by benefit formula. Reported only in footnotes, NOT the B/S. This is an actuarial PV.
Pensions assets @ FMV
fund available for retirement benefits, reported only in footnotes, off B/S.
Ending plan assets = contributions to date + investment return (interest, divs, stock appreciation, gains/losses) - benefits paid to date
Pensions Liability
Difference between PBO & Plan Assets, reported on the B/S (amount of contribution not paid)
Formula = PBO - Assets, normal balance = underfunded = liability.
IF Assets > PBO = overfunded balance = assets.
2 important pension acct estimates (rates)
1) discount rate: used for PV calculations, rate at which the PBO could be settled and MKT interest rate is used
2) Expected rate of return: used to compute expected return on plant assets, (component of pension expense)
Service Cost
Component 1 of PE
Increase PE/PBO
PV of pension benefits earned in current period, increase pension expense due to service provided, also increase PBO
Interest Cost
Component 2 of PE
Increase PE/PBO
discount rate X BOY PBO, increase pension expense
Expected return on plant assets
Component 3 of PE
Reduce Exp/Increase Plan Asset
(expected rate) X (plant assets BOY @ FMV), reduce pension expense
Amort. of Prior Service Cost
Component 4 of PE
Increase PE/PBO
gradually increase (delayed recognition) service cost/pension expense by effects of amendments to plan, grant increase in value of PBO, no income statement impact,
Amort. of net gain/losses
Component 5 of PE
gradually increase/decrease (delayed recognition) pension expense by
1) changes in PBO due to est. changes
2) differences between expected and actual return on plan assets
asset gains/losses affect pension liability and is recognized immediately on Other Comprehensive Income, not immediately recognized in PE
3 attributes of Defined benefit plan acct
1) delayed recognition of PE items - gradual recognition through amortization
2) net reporting of PE - net sum of 5 PE components
3) offsetting in B/S - PBO & plan assets are not on B/S, they offset and yield either a liab or asset which is then reported on the B/S
Unfunded PBO
Funded status
PBO - plan assets @ FMV
Difference between PBO & Plan assets @ FMV
Accumulated Benefit Obligation
PV of all unpaid future retirement benefits as of B/S date based on (1) service rendered to that date, and (2) current salary levels.
PBO Ending Balance
BOY PBO + SC + Interest Cost = PBO Ending Balance
Plan Assets Ending Balance
Plan Assets BOY + actual return on asset + funding contribution = Plan Assets Ending Balance
Amortization methods for Prior Service Cost
1) SL Method: PSC/remaining service period
2) Service Method: equal amount of PSC per year (more amortization)
Pension Gain/Loss
Decrease PBO = Gain
Increase PBO = Loss
Actual Return > Expected Return = Asset Gain
Expected Return > Actual Return = Asset Loss
Net the PBO change & Asset Return
Net Pension Amortization Methods
1) SL Method: Net gain/Loss / Denominator
2) Corridor Method: Net pension gain/loss - Corridor amount (results in smaller number)
Corridor: 10% of larger PBO or assets @ 1/1
(amortize at least corridor #, if negative -> no minimum)
Denominator: average remaining service life of employees
Pension Formal Record
pension info. maintained in accounts (pension exp, pension liab, PSC-OCI, Pension G/L-OCI
Pension Informal Record
Pension info. not recorded in accounts, PBO/Assets @ FMV
Pension Defined Benefit Plan required Disclosures
(a) a description of the plan, (b) the amount of pension expense by component (current service cost, interest cost, return on plan assets, etc.), and (c) the weighted average discount rate used in pension calculations.
Pension gain affect exp? Liab?
Reduce pension expense & no effect on liab -> affect OCI
Pension Plan Settlement
irrevocable transaction relieves all/portion of PBO (lump sum payment to replace future pension benefits).
gain/loss recog. == net pension gain/loss not yet recognized in pension expense.
If portion of PBO settled, pro rata of gain/loss recognized
Pension plan curtailment
reduce length of future employee service/eliminates accrual of benefits (occur when employees terminate/reduces scope of operations)
IFRS - Pension differences
1) PBO = Defined Benefit Obligation (DBO)
2) Pension Liab = Defined Benefit Liab
3) PSC = Past (not Prior) Service Cost
4) Pension expense may be itemized
IFRS - Past Service Cost
Vested amount = expensed immediately
Unvested amount = amortized over remaining vesting period
IFRS - pension gain/loss differences
1) recognize immediately in defined benefit liab and in OCI
2) recognize them in defined benefit liab and in valuation account (unrecognized net gain/loss) = contra/adjunct acct to defined benefit acct
unrecognized acct is amortized through corridor amort into pension expense
Nonretirement Postemployment benefits
not pensions
EX:
1) severance pay
2) counseling/disability
3) job training
4) supplemental unemployment benefits
5) continued health care/insurance coverage ltd.
Nonretirement Postemployment Benefits Recognition
Accrual Acct
Must meet 4 criteria
1) obligation attributable to services already rendered
2) benefits vest/accumulate
3) payment is probable
4) payment amount is estimable
Nonretirement Postemployment Benefits
Criterias 1/2 don’t work
accrual continues if 3/4 are met
(probable and estimable)
if none of 4 are met -> Acct for contingencies!
Nonretirement Postemployment Benefits
Restructuring plan
recognition of benefits occurs only when restructuring plan of benefits is approved
Nonretirement Postemployment Benefits
Vesting vs Accumulation
no limit on amount of expense to be recognized for vested benefits
accumulation is generally limited
Nonretirement Postemployment Benefits
Earned vs Probable Payments
Not all earned benefits represent probably payments
Fewer earned benefits are recognized in comparison to compensated absences
Retirement Benefits
Other Postemployment Benefits (OPEB)
noncash beenfits to retirees
Eye care, health care, dental care, life insurance, etc
Acct for retirement benefits
Accrual Acct
Same as pension acct
1) delayed recognition
2) Net cost computation of expense
3) Reported balance sheet liab (obligation - assets)
Post Retirement (Plan Obligation & Liab)
Accumulated Pension Benefit Obligation (APBO) - same as PBO
B/S liab = postretirement benefit liab (obligation - assets)
APBO = fraction of (EPBO) Expected PBO:
actuarial PV of benefits expected to be received by employee at retirement
Post Retirement Benefit Expense ( 6 components)
5 first components similar to Pension Expense
+ 1 (amort of transition obligation)
1) service cost
2) interest cost
3) expected return on assets
4) Amort of PSC
5) Amort of net gain/loss as of 1/1
6) Amort of transition obligation
Amort. of transition obligation
Increases the Postretirement Benefit Expense
firms switched to accrual acct = firms had large APBO unrecognized liabilities, transition obligation = APBO at that date
1) 1 time option - recognize transition obligation immediately in earnings, no component 6
2) if not chosen option, must amortize transition obligation = SL over average remaining service life, if average period
Full Eligibility
date by which the employee has served the required number of years to attain the level of benefits the employee is expected to attain.
EPBO Computation
estimated PV of benefits expected to be paid based on level of coverage employees are expected to attain.
(no formula)
APBO Computation
MOST COSTLY BENEFIT
computed as fraction of EPBO earned by employee $ B/S date
Formula EPBO X (years worked/total years)
EOY Postretirement Benefit Liab Computation
2 methods
1) EOY APBO - EOY Assets
2) BOY Liab + P. Exp - Funding
Postretirement Benefit Disclosures
APBO & EPBO are disclosed not reported
Components of Postretirement Benefit Exp are disclosed
Discount/EROPA rates are disclosed
Postretirement Benefit per capital claims cost
basis for computing the obligation reported for a post-retirement healthcare plan
