Lecture 4 - employee benefits

Question 1

What are the 2 broad categories of pensions?

Answer 1

• defined contribution
• defined benefit

Question 2

What is a defined contribution pension plan?

Answer 2

Employee will set an amount to invest that wil be managed to provide a pension

Question 3

What is a defined benefit pension plan?

Answer 3

Variable contributions to achieve a set level of benefits

Question 4

What are the characteristic of a defined contribution plan?

Answer 4

• contribution determined by plan
• risk borne by employees
• benefits based on plan value

Question 5

What are the characteristic of a defined benefit plan?

Answer 5

• benefit determined by plan
• employee contribution varies
• risk borne by employer

Question 6

What is the double entry of defined contribution plans before and after contributions have been paid?

Answer 6

before:
Dr wage expense
Cr liability (obligation to pay at retirement)
After:
reduce cash and extinguish liability

Question 7

What are the facts that make defined benefit plans harder to calculate?

Answer 7

• pension based on length of service and final salary
• Benefit reasonable predictable
• cost to employer uncertain
• need to ensure sufficient funds to meet commitment
• employer may need to vary contributions

Question 8

What are assets in a pension plan measured in, and what are the different assets that need to be accounted for?

Answer 8

measured at market value
Opening balance
- expected return
- benefits paid (to retired employees)
- Contributions paid (investments by company)
- actuarial gains/loss
Plan assets C/F

Question 9

What are liabilities in a pension plan measured in, and what are the different liabilities that need to be accounted for?

Answer 9

Present value of obligation
opening balance
- interest costs
- benefits paid
- current service costs
- actuarial gain/loss
Liabilities B/F

Question 10

What are the 3 types of defined benefit plan (IAS19)?

Answer 10

1. Final pay plan - calculated as percentage of the final salary before retirement
2. Final avg pay plan - average salary of last 3/5 years before retirement
3. Career avg pay plan - avg salary over whole career

Question 11

Why is accounting for defined benefit plans so complicated

Answer 11

• Subjective
• uncertain future costs
• total benefit uncertain
• how much lump sum on retirement
• how long will pension last (when will pensioner die?)

Question 12

What are some other factors that add complexity to defined benefit pension plans?

Answer 12

• inflation
• RPI
• Salary increase expectations
• life expectancy

Question 13

How are pension scheme assets to be measured?

Answer 13

At market value

Question 14

How are pension scheme liabilities to be measured?

Answer 14

Projected unit credit method

Question 15

What are some estimates that are needed by actuaries for the plans investments?

Answer 15

• inflation
• time value of money
• discount rate

Question 16

What is actuarial gains/losses?

Answer 16

difference between expectation and reality - discount rate, return on assets, life expectancy etc

Question 17

Where do we recognise actuarial gains/losses?

Answer 17

in equity, usually as part of retained earnings in other comprehensive income

Question 18

When changes in net assets, where should we recognise capital changes?

Answer 18

Statement of changes in equity

Question 19

When changes in net assets, where should we recognise performance changes from primary performance activities?

Answer 19

Statement of profit and loss

Question 20

When changes in net assets, where should we recognise performance changes from other activities allowed in OCI by another IFRS?

Answer 20

Statement of other comprehensive income

Question 21

What are the key OCI items we should know about?

Answer 21

• Changes in revaluation surplus related to PPE
• Actuarial gains and losses

Question 22

What is included in the income statement?

Answer 22

• Current service cost
• Interest cost
• the expected return on any plan assets