FAR6 Flashcards
Funded Status (reported in Statement of Financial Position)
FV of plan assets - PBO = funded status
Pension Plan Asset (noncurrent)
Overfunded = FV of plan assets > PBO
Pension Plan Liability (current, noncurrent, both)
Underfunded = PBO > FV of plan assets
Defined Contribution Plan
Specifies the periodic amount of contributions to the plan (charge expenses, and credit cash)
Defined Benefit Plan
Defines the benefits to be paid to employees at retirement (computed using actuarial assumptions of future benefit payments)
Accumulated Benefit Obligation (ABO)
Based on current and past compensation levels (only current salaries)
Projected Benefit Obligations (PBO)
The actuarial present value of all benefits attributed by the plan’s benefit formula to employee service rendered prior to that date. PBO only uses assumptions as to future compensation levels (guess future salary)
Calculating PBO
B: Beginning PBO
A: Service cost, Interest cost, Prior service cost from current period plan amendments, Actuarial losses incurred in the current period
S: Actuarial gains incurred in the current period, Benefits paid to retirees
E: Ending PBO
Calculating Actual return on plan assets
B: Beginning FV of plan assets
A: Contributions,
Actual return on plan assets (squeeze)
S: Benefits paid to retirees
E: Ending FV of plan assets
Income Statement (expense) formula
S current Service cost I Interest cost (R) (Return on plan assets) A Amortization of prior service cost (G) (Gains) and Losses E amortization of Existing net obligations (+) OR net assets (-) = Net periodic pension cost
Net Periodic Pension Costs JE
DR: Net periodic pension costs
CR: Pension benefit liability
CR: Other comprehensive income
when pay: Pension benefit liability
Cash
Interest Costs
Beginning of period PBO x Discount rate
(Expected return on plan assets)
Beginning FV of plan assets x expected rate of return on plan assets
= (expected return on plan assets)
Amortization of unrecognized prior service costs
Beginning unrecognized prior service cost / Average remaining service life
= Amortization of prior service cost
(unamortized is in AOCI)
(Gains) and Losses(+)
The difference between the expected and actual return on plan assets when the expected return on the plan assets is used AND changes in actuarial assumptions
(unamortized is in AOCI)
Accounting for (Gains) and Losses
Recognize G/L immediately in I/S OR Recognize G/L in OCI and amortize over time using the corridor approach
Corridor Approach: Accounting for (Gains) and Losses
GREATER of:
Market related value of plan assets = assets OR PBO = liabilities multiplied by 10%
Then divided by Average remaining service life
amortization of Existing net obligations/net assets at implementation
PBO - FV of plan assets = Initial unfunded obligation / 15 years OR average employee job life (GREATER OF) = Minimum amortization (unamortized is in AOCI) (net obligations +, net assets -)
B/S Accounting Pension Plan Contributions
DR: Pension benefit asset/liability
CR: Cash
to fund the pension