M1 - Pension Benefits: Part 1

Question 1

Under GAAP, the service cost component of a company’s net periodic pension cost is measured using what?

Answer 1

The Projected Benefit Obligation

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

Question 2

Under GAAP what is the PV of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on past and current compensation levels only?

Answer 2

Accumulated benefit obligation

Under US GAAP the accumulated benefit obligation is the PV of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on past and current compensation levels.

Question 3

How to calculate Net Periodic Pension Cost:

Answer 3

S Service Costs
I Interest Costs (Beginning PBO x Discount Rate)
(R) Expected return on plan assets (Beg FV x expected rate)
A Amortization of prior service cost (prior serv cost/remaining service life)
G Amortization of (gains) / losses
(E) Amortization of transition asset (transition asset/ remaining service life)
————————————————————————————————————–
Net Periodic Pension Cost

Note 1: The difference between the expected and actual return on plan assets will be amortized starting the next year. Amortization is based on the beginning balance in the unrecognized gain/loss account.

Note 2: When calculating pension expense (SIR AGE) the “R” is either the expected return or the actual return. Most companies use the expected return to calculate pension expense. For exam purposes, use the expected return provided unless the problem indicates to use the actual return.

Question 4

How do you calculate the unrecognized gains and losses that are recognized in net periodic pension cost under US GAAP? (this is the “G” in SIR AGE)

Answer 4

Unrecognized Gain or Loss
<10% of the greater of the PBO or FMV of plan assets at beginning of the year>
——————————————————————————————————————
Excess
Divide by the average remaining service life
——————————————————————
Minimum Recognized amount to be reported

Note that the gain due to the difference between the expected and actual return on plan assets will be amortized starting in the next year.

Question 5

How to calculate actual return on plan assets:

Answer 5

Beginning Plan Assets (B)
\+ Contributions (A)
\+Actual Return (A)
-Benefits Paid (S)
------------------------
Ending Plan Assets (E)

BASE

Question 6

Under US GAAP, the prior service cost is booked to other comprehensive income and then amortized to the income statement (net periodic pension cost) by assigning an equal amount to each future period of service of each employee who is active at the date of the amendment. (true or false)

Answer 6

True

Note that under IFRS, the prior service cost would be reported on the income statement, not in OCI, and therefore would not be amortized.

Question 7

How to calculate Projected Benefit Obligation Ending:

Answer 7

Beginning Projected Benefit Obligation (B)
+ Interest Costs (A)
+ Service Costs (A)
-Pension benefits paid during year (S)
——————————————————-
Ending Projected Benefit Obligation (E)

Question 8

Under US GAAP, interest costs included in the net periodic pension cost recognized for by an employer sponsoring a defined benefit pension plan represents the what?

Answer 8

The increase in the Projected Benefit Obligation due to the passage of time.

Question 9

True or false: Under IFRS, past service cost is recognized on the income statement in the period of the plan amendment.

Answer 9

True,

Retroactive charges to pas periods are not made and it is not necessary to amortize the cost to future periods because it has already been recognized in earnings.