FRA - Pension Flashcards
DB
China
Employer pay after retirement
firm bears the risk
DC
US
Employee contributes and bears the risk
PBO/PVDBO (IFRS)
actuarial pv as a date of al benefits attributed by the pension benefit formula to employee service rendered prior to that date
(LIABILITY)
assumptions:
expected futures salary increases
going concern
employee’s continued service
Accumulated benefit obligation
actuarial pv of benefits attributed to employee service rendered prior to that date and based on current and past compensation levels
current compensation levels
liquidation of pension obligation
Vested Benefit obligation
the amount of ABO to which the employee is entitled
vesting schedule
Fund Status
report on B/S under IFRS and US GAAP
= FV OF PA - FV of PBO
if < 0 , underfunded as net pension liability
>0, overfunded, net pension asset
report the surplus in min(surplus, asset ceiling)
subject to a ceiling defined as the pv of future economic benefits, such as refunds from the plan or reductions of future contribution
Plan Asset
BB FV PA
+Employer contribution
+Actual return
-benefit paid to employee
PBO
BB PBO \+Current service cost \+past service cost (plan amendments during the year) \+interest costs \+actuarial losses -actuarial gains during the year -benefit paid to employee
Assumptions of PBO
- Discount rate: based on current rates of return on high quality corporate bonds with durations consistent with the durations of the benefit
- assumed rate of increase in compensation
- vesting
disclose the discount rate, the expected return on plan assets, and the rate of compensation growth in footnote
Pension expense - IFRS
Service cost (current &past) recognized as an expense in P&L
Net interest expense
=dr * bb fund status
remeasurement gains/losses
-actuarial gains/losses affecting PVDBO
&
diff. in actual and expected returns
Expected return on PA
has no effect on pension obligation, but reduces pension expenses
Pension Expense - US GAAP
Recognized in P&L:
Current service cost
+Interest cost = bb PBO* discount rate
-Expected return on PA = discount rate * BB PA
+Amortization of gain/loss
+amortization of prior service cost (oci)
Recognized in OCI:
the amortization of past service costs
Actuarial gains/losses
= diff. b/w expected return on PA - actual return on PA
unamortized Past Service Cost, subsequent period are amortized to P&L over the average service lives of the affected employees
Amortization
corridor approach
if the cumulative amount of the Unrecognized actuarial gains and losses > 10% of max(DBO or fv of PA)
unrecognized actuarial gains and losses - 10% of max(PBO or fv of PA)
over working life of the plan
THEN the EXCESS is amortized over the expected average remaining working lives of the employees participating in the plan, report on P&L
Amortization of past service cost: under GAAP, it’s reported as a part of OCI and amortized over the remaining service life of the affected employees
Period Pension Expense - US GAAP
recognized in P&L = current service cost \+ interest cost - EXPECTED return on PA \+Amortization of past service cost -amortization of actuarial gains \+amortization of actuarial losses
Period Pension Expense - IFRS
recognized in P&L
=Current service cost
+ net interest cost = discount rate * bb FS
+ past service cost
diff. between actual return and expected returns recognized in OCI
Recognized in OCI:
actuarial gains/losses on PB + net return on PA (ACTUA RETURN - PA * interest)
