FRA lvl 2 - Reading 19 (Pension) Flashcards
define a defined-contribution plan
employee takes investment risk
pension expense for defined-cont. plan
pension expense = employee contribution
define defined-benefit plan
employer takes investment risk
define funded status of the plan
“difference in the benefit obligation and the plan assets”
what are other post-employment benefits
post-employment healthcare. usually unfunded plans and recognizes expense in inc. statement
Define PBO (projected benefit obligation) or PVDBO (PV of defined benefit obligation)
actual PV of all future pension benefits earned based on EXPECTED FUTURE salary increases
What are the 5 inputs/changes in PBO?
Current service cost, interest cost, past (prior) service cost, change in actuarial assumptions, benefits paid
define current service cost
PV of benefits earned by employees during the current period
define interest cost
increase in obligation due to passage of time.
how to calculate interest cost
beg. pension obligation x discount rate
define past/prior service costs
retroactive benefits awarded to employees when a plan is initiated or amended.
how does GAAP vs. IFRS treat past service costs?
IFRS = expensed immediately, GAAP= amortized over average service life of employees
define changes in actuarial assumptions (aka remeasurements)
gain/loss from change in variables like turnover, retirement age, discount rate.
how does gain/loss in actuarial assumption affect the PBO?
gain = decreases the obligation and loss = increases the obligation
Define benefits paid
they reduce the PBO
when plan assets > PBO, is plan overfunded or underfunded?
overfunded
when plan assets
underfunded
formula for funded status
fair value of plan assets - PBO
IFRS vs GAAP, funded status listed where on balance sheet?
both list it as a liability if negative and asset if positive
what is short TPPC (total periodic pension cost) under DBP?
employer contribution - change in funded status, (end-beg)
what is long TPPC (total periodic pension cost) under DBP?
current service cost + interest cost - actual return on plan assets +/- actuarial loss/gain + prior service cost
What financial statement is current service cost in for IFRS and GAAP?
recognized immediately in income statement
What financial statement is past service cost in for IFRS and GAAP
GAAP = OCI, amortized over life, IFRS = income statement
What financial statement is interest cost in for IFRS and GAAP
Income statement for both
What financial statement is expected return in for IFRS and GAAP
Income statement for both
What financial statement is actuarial gain/losses in for IFRS and GAAP
GAAP = amortized portion in income statement, unamortized in OCI. IFRS = all in OCI, called remeasurements
what are 2 components of actuarial gain/loss?
change in PBO and difference btwn actual and expected returns on plan assets
Explain corridor approach
GAAP only, amortization required once PBO exceeds 10% (gain or loss)
describe GAAP presentation of pension expense
all components reported in income statement can be aggregated but disclosure of total periodic pension cost is in the notes to financial statements
describe IFRS presentation of pension expense
all components may be presented seperately but disclosure of total periodic pension cost is in the notes to financial statements
what are three assumptions a firm will disclose?
discount rate, rate of compensation growth and expected return on plan assets
define the discount rate for the benefit obligation
interest rate used to compute the PV of the benefit obligation. it is NOT the RFR
Does increasing or decreasing the discount rate improve the reported results?
increasing
Does increasing or decreasing the compensation growth rate improve the reported results?
reducing/decreasing
Does increasing or decreasing the expected return on plan assets improve the reported results?
increasing, on GAAP
When you increase the discount rate, what happen to the PBO?
PBO is lower, which improves the funded status of the plan
when the discount rate increases, what happens to total periodic pension cost?
periodic pension cost is reduced, which also reduces the PV of the future sum for the current service cost
when decrease compensation growth rate, what happens to PBO?
PBO is lower, which improves the funded status of the plan
What happens to service cost when compensation growth rate decreases?
current service costs is reduced and therefore total periodic pension cost is decreased
What happens to periodic pension costs and total periodic pension cost with increased expected return?
periodic pension costs goes down but total periodic pension cost unaffected
what happens to the benefit obligation and funded status of the plan with increased expected return?
no affect on either
