Financial Reporting - Chp 17

Question 1

Projected benefit obligation (PBO)

Answer 1

· Present value at an assumed discount rate of all future pension benefits earned to date, based on expected future salary increases. Measures the value of the obligation

Changes from:

• Current service cost
• interest cost
• past service cost
• Actuarial assumption changes
• benefits paid

Question 2

Funded Status Equation and Rules

Answer 2

I. funded status = fair value of plan assets – PBO

II. balance sheet asset (liability) = funded status

1. Funded status is negative -> reported as a liability
2. Funded status is positive -> reported as asset subject to ceiling of present value of future economic benefits
3. Funded status must be reported on balance sheet

Question 3

Total Periodic Pension Cost equation

or

“Economic Pension Expense”

Answer 3

TPPC = employer contributions – (ending funding status – beginning funding status)

TPPC = Current service cost + interest cost – actual return onplan assets +/- (losses/gains due to assumption changes) + prior service cost

Note that reported period pension expense uses forecasted plan returns instead

Question 4

How are components of periodic pension cost recognized?

Answer 4

Question 5

· Improve balance sheet by (3 things)

Answer 5

I. Increasing discount rate

I. Decreasing compensation growth rate

I. Increasing expected return on plan assets

Question 6

increasing discount rate does:

Answer 6

1. Reduces present values so PBO is lower
2. Lowers total periodic pension cost because lower service cost
3. Usually reduces interest cost unless plan is mature

Question 7

I. Decreasing compensation growth rate

Answer 7

1. Reduces future benefit payments so PBO lower
2. Reduces current service cost and lower interest cost so TPPC lower

Question 8

I. Increasing expected return on plan assets

Answer 8

1. Reduces periodic pension cost reported in P&L, but will leave TPPC unchanged
2. Doesn’t affect PBO

Question 9

· Adjustments to account for pension accounting differences

Answer 9

I. Gross vs. net pension assets/liabilities

Companies report net pension assets to not throw off other ratios

II. Differences in assumptions used

1. Ex. Higher assumed discount rate would be underestimating liabilities and over estimating net income

III. Differences b/t IFRS and GAAP in recognizing total periodic pension cost (in income statement vs. OCI)

IV. Differences due to classification in income statement

Question 10

Difference b/t reported pension expense in P&L and total periodic pension cost (TPPC)

Answer 10