Financial Reporting & Analysis 1: Post Employment Benefits & Measuring DB Obligations Flashcards
Compare and contrast defined contribution plan vs defined benefit plan
A defined contribution plan is like a 401k. There is a defined amount the employer contributes each period, and the employee may also contribute. Once the employee no longer works for the employer, the obligations of the employer end. The employee bares the investment risk.
A defined benefit plan is a pension. The employee is obligated to pay the employer a stated amount in the future. This kind of plan puts all the risk on the employer and requires a lot of estimates.
Under IFRS and GAAP, if a plan is not explicitly classified as a DC plan, we assume it is a ____
DB plan
Describe accounting for a DC plan
Account is pretty straight forward for a DC plan. Periodic payments made to the plan by the employer are treated as expenses in the period they are incurred. Payments will reduce assets (cash).
How are DB plans typically funded.
DB plans are typically funded through a separate entity, usually a pension trust.
How do we find the funded status of a DB plan?
The funded status (FS) is equal to the difference between the fair value of the assets in the plan and the present value of future obligations.
If the plan is overfunded, the employer is said to have a ____
If it is underfunded, they have a ____
If the plan is overfunded, they have a net pension asset.
If the plan is underfunded, they have a net pension liability.
What is the main difference between a DB plan and an OPB (Other Post Employment Benefit) Plan?
While a DB is considered a funded plan, OPB plans are considered unfounded plans. The employer is not required to make periodic distributions, the payments in the future are expenses as they occur.
How do we find the net pension liability/asset?
A net pension liability/asset is equal to the pension obligation minus the fair value of the plan assets.
Under IFRS and GAAP, how do we find the pension obligation?
Under IFRS and GAAP, the pension obligation is equal to the present value of all future benefits that the company is obligated to pay in the future.
Generally speaking, what should be used as the discount rate in assumptions for pension obligations?
The discount rate used should be based on the rate of return for high grade corporate bonds or gov bonds in some cases. The more conservative the discount rate, the less risk of an underfunded plan.
Do benefits paid have any effect on the net pension liability/asset?
No. Benefits paid decrease the pension obligation and decrease the fair value of plan assets, so they cancel out and there is no effect.
Under IFRS and GAAP, do we report DB liability/asset on the balance sheet.
Yes
The DB liability or asset is equal to the____
Funded Status (FS) of the plan
How do we find the funded status (FS) of the a DB plan?
FS equals the fair value of plan assets (FVPA) minus the Pension Obligation (PO). It is a net amount.
