Pension Benefits (F7 M1-M2)

Question 1

Accumulated Benefit Obligation (ABO)

Answer 1

-uses current salary to calculate actuarial present value of benefits

Question 2

Projected benefit obligation (PBO)

Answer 2

• uses ESTIMATE of future salary to calculate actuarial present value of benefits
• BS liability

Question 3

Vested benefits

Answer 3

• benefits are vested when employees have earned it.
• does not need to be retired to be vested
• not contingent on remaining in service to vest

Question 4

Service cost

Answer 4

• PV of all pension benefits earned by employee in current year
• increases PBO

Question 5

Interest cost

Answer 5

-increase in PBO due to passage of time because PBO is measured in present value

= beginning PBO * discount rate

Question 6

Prior service cost

Answer 6

cost of benefits based on past service granted for:

• service prior to initiation of plan which will be applied retroactively
• subsequent plan amendments which cause increase/new benefits to service already provided
• increases PBO on balance sheet
• goes into OCI and amortized on income statement

Dr. OCI
Cr. PBO

Question 7

Actuarial gains/losses

Answer 7

• gains decrease PBO

- losses increase PBO

Question 8

Benefit payments

Answer 8

• amounts paid to pension plan participants after retirement.
• REDUCES PBO and plan assets

Question 9

Plan assets

Answer 9

• BS asset
• generally stocks, bonds etc. set aside for pension benefits
• reported at FV
• increase with contribution (funding) and return on plan assets
• decrease with benefits paid to retirees

Question 10

Return on plan assets

Answer 10

can be calculated in two ways:
1. actual return on plan assets

2. expected return on plan assets
   =beg FV of plan assets * expected rate of return
   -the difference between actual and expected returns must be recognized in OCI and then amortized to pension expense with actuarial gains/losses

Question 11

Ending PBO calculation

Answer 11

Beg. PBO
\+Service Cost
\+Interest Cost
\+Prior service cost 
-actuarial gains
\+actuarial losses
-benefits paid 

=END PBO

Question 12

Ending FV of plan assets calculation

Answer 12

Beg FV of plan assets
+ Contributions
+ Actual return (usually need to calculate; squeeze)
- Benefits paid

= END FV

Question 13

Pension expense (IS) calculation

Answer 13

Service cost 
\+ Interest cost 
- return on plan assets
\+ amortization of prior service cost  
- amortization of gain
\+ amortization of loss 
\+ amortization of existing net obligation 

= Net periodic pension cost (pension expense/current exp/current liability)

Question 14

Pension expense JE

Answer 14

Dr. Pension expense (or net periodic pension cost)
Cr. pension benefit liability - current (SIR)
Cr. OCI (AGE)

Question 15

Amortization of prior service cost

Answer 15

amortization of prior service cost = beg. unrecognized cost / average remaining life

When plan is “bumped”:
Dr. OCI
Cr. PBO

then each year a portion is removed from AOCI

Question 16

Accounting for gains/losses (GAAP)

Answer 16

gains and losses include:

1. difference between expected and actual return on plan assets when expected is used to calculate expense
2. changes in actuarial assumptions

ex:
gain = actual return > expected return
loss = employee lives longer because increases amount of benefits to pay

G/L accounted for in two ways:
1. recognize on income statement in current year

2. recognize in OCI and expense over time (aka corridor approach)
   Beg. Unrecognized G/L
   - GREATER of 10% Beg. plan assets or PBO
   = excess
   / average remaining service life
   = amortization of unrecognized gain/loss

Question 17

Amortization of existing net obligation at implementation

Answer 17

PBO 
- FV of plan assets
= initial unfunded obligation
/ GREATER of 15 years of average employee job life
= minimum amortization 

most companies no longer report because amount has been fully amortized**

Question 18

Accounting for gains/losses (IFRS)

Answer 18

into OCI and is NOT reclassified

Question 19

Funded status

Answer 19

FV of plan assets
- PBO
= funded status

underfunded = liability 
overfunded = asset 

multiple benefit plans = calculate separately

Question 20

Pension Plan asset

Answer 20

noncurrent asset
FV plan assets > PBO

-multiple overfunded pension plans are reported in aggregate

Question 21

Pension plan liability

Answer 21

• current/noncurrent/or both
• FV plan assets < PBO
• current portion of liability is excess of expected benefit payments in current year over FV of plan assets

Question 22

Ending funded status calc

Answer 22

Beg. funded status
\+ contributions
\+ return on assets 
- service costs
- interest costs
- prior year service cost 
- actuarial losses 
\+ actuarial gains 

= ending funded status

Question 23

Contribution JE

Answer 23

Dr. Pension benefit liability - non current (PBO)

Cr. Cash