Lecture 6 Flashcards
Unrecognized prior service costs
Under U.S. GAAP, amortization of unrecognized prior service cost is calculated by assigning an equal amount of the cost to the future periods of service of each employee at the date of amendment to the plan. The average service life of the four employees is five years.
Service cost
Service cost represents the increase in the projected benefit obligation resulting from employees’ services rendered during the year.
Footnote disclosures in the financial statements for pension
The components of period pension cost “SIRAGE” is a required disclosure.
SIRAGE ( elements of pension expense)
Current SERVICE costs,INTEREST costs,(RETURN on plan assets),AMORTIZATION of prior service costs, amortization of (GAINS) and lossses, Amortization of EXISTING net obligations or net assets= Net period pension cost
Accumulated benefit obligation
Under U.S. GAAP, the accumulated benefit obligation is the present value of future retirement payments attributed to the pension benefit formula to employee services rendered prior to a date, based on current and past compensation levels.
Service costs
Service cost is the present value of all pension benefits earned by company employees in the current year.
Interest cost
Interest cost is the interest on the projected benefit obligation. Begining PBO*interst expense
Projected benefit obligation
the projected benefit obligation is the present value of future retirement payments attributed to the pension benefit formula to employee services rendered prior to a date, based on current and past and (an assumption about) future compensation levels. The only difference between the accumulated benefit obligation and the projected benefit obligation is the assumption of future compensation levels. The projected benefit obligation is used for most pension calculations.
the “E” in SIRAGE
includes amortization of transition asset
Transition asset vs transition obligation
It is important to note that the amortization of a net transition obligation increases net periodic pension cost, while the amortization of a net transition asset decreases net periodic pension cost.
Project benefit obligation
PBOb+service cost+Interest cost+prior service cost from current ammendments+actuarial losses incurred in the current period-actuarial gains incurred in the period-benefits paid to retirees= PBOe
Fair value of plan assets
FV of PAb+contributions+actual return on plan assets- benefits paid to retirees= PAe
Expected return on plan assets
Fair value of PAb*expected return = Expected return
Expected vs actual return
US GAAP allows companies to offset pension expense by either the actual return or the expected return
Amortization of PSC
PSCb/Average remaining useful life
(Gains) and losses - unamortized in AOCI
Difference between expected and actual return. If actual is higher than gain. Changes in actuarial assumptions.
Corridor approach (amortization of unrecognized gain or loss)
Unrecognized gain or loss(b) - ( greater of 10% of PBOb or market related value of PAb)=excess
Excess / average remaining useful life = amortization of unrecognized gain or loss
Amortization of exisiting net obligation or net asset at implementation
PBOb-fair value of PAb= initial unfunded obligation
initial funded obligation / ( greater of 15 yrs and average service life)= minimum amortization
Pensions are great
Pensions are greater
Funded status
FV of PA- PBO = funded staatus
overfunded
contributions would increase asset or decrease liability
Pension asset/liability
Cash
attribution period
efinition: The “attribution period” is the period of an employee’s service to which the expected postretirement benefit obligation for that employee is assigned. Generally, the beginning of the period is the employee’s date of hire (unless the plan’s benefit formula grants credit only for service from a later date, in which case the beginning of the attribution period is generally the beginning of that credited service period). The end of the “attribution period” is the “full eligibility date.”
initial PSC and Pension losses incurred
OCI
PEnsion asset/liability
Deferred tax asset
Deferred tax benefit OCI
Amortize of PSC and Losses to pension expense
Net period pension cost
OCI
Deferred tax benefit-OCI
DEferred tax benefit - income statement
Initial entry for gains
Pension benefit asset
OCI
Deferred tax expense -OCI
Deferred tax liability
amortize
OCI
Net period cost
Deferred tax expense
Deferred tax asset
Compensation for future
Rule: Employees’ compensation for future absences (mostly vacation) should be accrued if:
Services have already been rendered, and
The obligation relates to vested or accumulated rights, and
The amount can be reasonably estimated, and
Payment is probable
Non current asset,Current liability, Non current liability
all overfunded (FV plan assets > PBO) pension plans be aggregated and reported as a noncurrent asset, and that all underfunded (FV plan assets
PSC, transit obligations ,net gains and losses
Under U.S. GAAP, unrecognized prior service cost, unrecognized transition obligations and unrecognized net gains or losses must be reported in accumulated other comprehensive income, net of tax, until recognized as a component of net periodic pension cost through amortization. Unrecognized prior service cost, transition obligations and net losses all increase pension expense when recognized and are therefore recorded as a debit to accumulated OCI. Unrecognized transition assets and net gains decrease pension expense when recognized and are therefore recorded as a credit to accumulated OCI
service costs
Deferred taxes must be considered when recording net periodic pension cost and changes in pension plan funded status due to prior service cost, net gains and losses, and net transition assets and obligations. Therefore, the service cost component of AmeriGene’s net periodic pension cost would be recorded with the following JE:
Debit (Dr) Credit (Cr)
Net periodic pension cost $ 300,000
Pension benefit asset $ 300,000
Deferred tax asset 90,000
Deferred tax benefit - income statement 90,000
