Pension Benefits / Employee Benefits Flashcards
Defined benefit plan
The benefits that the employee receives at retirement are determined by formula
Defined contribution plan
Contributions that the sponsor company makes to the plan are determined by formula
Vested benefits
Benefits are secured when employees earned their benefits by either reaching retirement age or meeting other pension plan requirements.
Service cost (JE compensation expense)
Present value of all pension benefits earned by company employees in the current year.
Service cost component increases the project benefit obligation.
Basic formula for PBO
Beginning PBO \+ service cost \+ interest cost \+ prior service cost - prior service credit \+ losses - gains - benefits paid to retirees
= ending PBO
Ending FV of plan assets formula
or Actual Return on pa can be calculated this way
Beginning FV of plan asset
+ contributions
+ actual return on plan assets
- benefits paid to retirees
= ending FV of plan assets
Plan assets
Generally stocks, bonds, and other investments set aside to provide for pension benefits. Should be reported at fair value.
Increase by contributions and returns
Decreases by benefits paid to retirees
Pension expense ( Net period pension cost )
SIR AGE
Service cost Interest cost (Return on plan assets) Amortization of prior serv.cost (Gains) and losses Existing net obligation or net asset (amortization) [can be 0] = net periodic pension cost
Interest cost
Beginning of period PBO
x discount rate
Is the increase in the PBO due to the passage of time
Expected return on plan assets
Beginning FV of plan assets
x expected rate of return on plan assets
Amortization of unrecognized prior service cost
Beginning unrecognized prior service cost / average remaining service life
Gains and losses
Difference between the expected and actual return on plan assets
when the expected is used to calculate net periodic pension cost
Prior service cost
Among multiple employees - Take $amount contributed divided by average service life (all years added divided by number of employees)
Accumulated benefit obligation (ABO)
The actuarial present value of benefits attributed by a formula based on current and past compensation levels.
Include no assumption about future compensation levels - uses current salaries
Projected benefit obligation (PBO)
The actual present value of all benefits attributed by the plans benefit formula to employee service rendered prior to the date.
Only uses assumption as to future compensation levels.
