Lecture 6

Question 1

Unrecognized prior service costs

Answer 1

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.

Question 2

Service cost

Answer 2

Service cost represents the increase in the projected benefit obligation resulting from employees’ services rendered during the year.

Question 3

Footnote disclosures in the financial statements for pension

Answer 3

The components of period pension cost “SIRAGE” is a required disclosure.

Question 4

SIRAGE ( elements of pension expense)

Answer 4

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

Question 5

Accumulated benefit obligation

Answer 5

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.

Question 6

Service costs

Answer 6

Service cost is the present value of all pension benefits earned by company employees in the current year.

Question 7

Interest cost

Answer 7

Interest cost is the interest on the projected benefit obligation. Begining PBO*interst expense

Question 8

Projected benefit obligation

Answer 8

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.

Question 9

the “E” in SIRAGE

Answer 9

includes amortization of transition asset

Question 10

Transition asset vs transition obligation

Answer 10

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.

Question 11

Project benefit obligation

Answer 11

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

Question 12

Fair value of plan assets

Answer 12

FV of PAb+contributions+actual return on plan assets- benefits paid to retirees= PAe

Question 13

Expected return on plan assets

Answer 13

Fair value of PAb*expected return = Expected return

Question 14

Expected vs actual return

Answer 14

US GAAP allows companies to offset pension expense by either the actual return or the expected return

Question 15

Amortization of PSC

Answer 15

PSCb/Average remaining useful life

Question 16

(Gains) and losses - unamortized in AOCI

Answer 16

Difference between expected and actual return. If actual is higher than gain. Changes in actuarial assumptions.

Question 17

Corridor approach (amortization of unrecognized gain or loss)

Answer 17

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

Question 18

Amortization of exisiting net obligation or net asset at implementation

Answer 18

PBOb-fair value of PAb= initial unfunded obligation

initial funded obligation / ( greater of 15 yrs and average service life)= minimum amortization

Question 19

Pensions are great

Answer 19

Pensions are greater

Question 20

Funded status

Answer 20

FV of PA- PBO = funded staatus

Question 21

overfunded

Answer 21

contributions would increase asset or decrease liability

Pension asset/liability
Cash

Question 22

attribution period

Answer 22

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.”

Question 23

initial PSC and Pension losses incurred

Answer 23

OCI
PEnsion asset/liability

Deferred tax asset
Deferred tax benefit OCI

Question 24

Amortize of PSC and Losses to pension expense

Answer 24

Net period pension cost
OCI

Deferred tax benefit-OCI
DEferred tax benefit - income statement

Question 25

Initial entry for gains

Answer 25

Pension benefit asset
OCI

Deferred tax expense -OCI
Deferred tax liability

Question 26

amortize

Answer 26

OCI

Net period cost

Deferred tax expense
Deferred tax asset

Question 27

Compensation for future

Answer 27

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

Question 28

Non current asset,Current liability, Non current liability

Answer 28

all overfunded (FV plan assets > PBO) pension plans be aggregated and reported as a noncurrent asset, and that all underfunded (FV plan assets

Question 29

PSC, transit obligations ,net gains and losses

Answer 29

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

Question 30

service costs

Answer 30

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