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FAR 6 > Pension Plans > Flashcards

Pension Plans Flashcards

1
Q

Pension plan

A

An agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current/past services

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2
Q

Pension plan vs. Sponsoring company

A

Two separate legal entities

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3
Q

What is accounting for pension plans primarily concerned with?

A

Determining the amount of:

  1. Pension expense that appears on sponsor company’s I/S
  2. Any related pension accounts (asset, liability, and/or OCI) that appear on the sponsor company’s B/S
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4
Q

Funding

A

Sponsor company making contributions to the pension plan

A plan is funded when the employer makes cash contributions to the plan

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5
Q

What kind of plan does funded status (overfunded, underfunded) apply to?

A

Defined benefit plans

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6
Q

What are the type of non-GAAP methods of pension plans (cash basis)?

A
  1. “Pay-as-you-go” - expensing pension plan payments after someone has retired
  2. Terminal funding - company pays entire pension plan liability upon retirement of an employee
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7
Q

What are the types of GAAP methods of pension plans?

A
  1. Defined contribution plans

2. Defined benefit plans

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8
Q

Defined contribution plan

A

Specifies the periodic amount of contributions to the plan and the way should be allocated to employees (ex. 401K

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9
Q

What factors are considered when calculating contributions to the defined contribution plan?

A
  1. Employees’ length of service

2. Compensation amounts

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10
Q

Defined benefit plan

A

Defines the benefits to be paid to employees at retirement

Contributions computed using actuarial assumptions of future benefit payments

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11
Q

Factors considered when calculating contributions in defined benefit plan?

A
  1. Employees’ compensation levels at or near retirement
  2. Number of years of employee service
  3. Number of years until employee retires
  4. Number of years that the plan expects to pay benefits after an employee retires
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12
Q

Accumulated benefit obligation (ABO)

A

Actuarial PV of benefits attributed by a formula based on current and past compensation levels (uses current salaries)

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13
Q

Projected benefit obligation (PBO)

A

Actuarial PV of all benefits attributed by the plan’s benefit formula to employee service rendered prior to that date (uses an assumption as to future compensation levels)

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14
Q

Service cost

A

PV of all pension benefits earned by company employees in the current year

Increases the projected benefit obligation

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15
Q

Interest cost

A

Increase in PBO due to the passage of time

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16
Q

Prior service cost

A

Costs of benefits based on past service granted for:

  1. service prior to initiation of pension plan that employees retroactively receive credit for when plan is implemented
  2. Subsequent plan amendment

Increases PBO and amortized to pension expense over future service periods

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17
Q

Actuarial gains and losses

A

Adjustments to the projected benefit obligation that arise when the actuary changes one or more of the assumptions used to calculate the PBO

Gains = decrease in PBO
Loss = increase in PBO
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18
Q

Benefit payments

A

Benefits paid to pension plan participants after retirement

Reduces PBO and plan assets

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19
Q

Formula to calculate projected benefit obligation

A

Beg. PBO
+ Service Cost
+Interest Cost
+Prior service cost from current period plan amendments
+Actuarial losses incurred in current period
-Actuarial gains incurred in current period
-Benefits paid to retirees
=End. PBO

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20
Q

Plan assets

A

The assets, generally stock, bonds, and other investments, set aside to provide for pension benefits

Reported at FV

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21
Q

Actual return on plan assets

A

Returns on assets held by the pension plan

Calculated based on FV of plan assets at beginning and ending of period, adjusted for contributions and benefit payments (squeeze)

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22
Q

Formula to calculate the ending FV of plan assets or solve for actual return on plan assets

A 
Beg. FV of plan assets
\+Contributions
\+Actual return on plan asset
-Benefits paid to retirees
=End. FV of plan assets
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23
Q

Pension expense

A

Increase in the PBO during the period, offset by earnings on plan assets, and adjusted for the effects of certain smoothing mechanisms

Net periodic pension costs

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24
Q

Calculations of US GAAP net pension expense

SIR AGE

A 
Service cost (current)
Interest cost

Amortization of prior service cost
and losses
Existing net obligation or net asset (amortization)
= Net periodic pension cost

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25
Where is the unamortized portion of AGE held?
In AOCI
26
What is the requirement regarding the components of net periodic pension cost under US GAAP and under IFRS?
US GAAP: must be aggregated and presented as one amount on the I/S IFRS: generally reported separately
27
J/E to record net periodic pension cost
Dr. Net periodic pension cost Cr. Pension benefit liability Cr. Other comprehensive income
28
Current service cost | Sir age
PV of all benefits earned in the current period Increase in PBO resulting from employee services in current period Provided by actuary
29
Interest cost | sIr age
Discount rate Increase in PBO during current period due to passage of time Interest cost = Beg. PBO x Discount rate
30
Return on plan assets | siR age
Actual: calculated based on FV of plan assets at beg. and end. of period, adjusted for contributions and benefit payments Expected: calculated by: Beg. FV of plan assets x Expected rate of return on plan assets = Expected return on plan assets
31
Amortization of unrecognized prior service cost | sir Age
Beg. unrecognized prior service cost / Average remaining service life = Amortization of prior service cost Unamortized is in AOCI
32
and losses | sir aGe
Arise from: 1. difference b/w expected and actual return on plan assets when expected return on plan assets is used to calculate pension expense 2. changes in actuarial assumptions Unamortized is in AOCI
33
What are the two choices under US GAAP when accounting for gains and losses?
1. Recognize g/l on i/s in period incurred 2. Recognize g/l in OCI in period incurred and then amortize unrecognized g/l to pension expense over time using corridor approach
34
Corridor approach
Entity's net unrecognized gain/loss is amortized over employees' average remaining service period, if as of beg. of year, amount exceeds 10% or greater of beg. of year balances of: 1. market related value of plan assets = Assets 2. PBO = liabilities
35
Formula for corridor approach
``` Beg. of year: Unrecognized g/l Beg. of year: <10% of PBO OR market relate value (greater)> = Excess / Average remaining service life = Amortization of unrecognized g/l ```
36
Amortization of Existing net obligation or net asset at implementation (sir agE)
Funded status required to be amortized over greater of 15 years or the average remaining job life of the company's employee Unamortized is in AOCI
37
Calculation of amortization of existing net obligation or net asset at implementation
PBO =Initial unfunded obligation / 15 years OR average employee job life (greater) =Minimum amortization
38
JE for company pension plan contributions
Dr. Pension benefit asset/liability | Cr. Cash
39
Calculation of funded status
FV of plan assets = Funded status
40
Pension plan asset (noncurrent)
Positive funded status (FV of plan assets > PBO) Overfunded
41
Pension plan liability (current, noncurrent or both)
Negative funded status (FV of plan assets < PBO) Underfunded
42
Reconciliation of the beginning and ending funded status of defined benefit pension plan
Beg. funded status (pension benefit asset/liability) + Contributions - Service costs - Interest cost + Expected return on plan assets - Prior service cost incurred in the current period due to plan amendment + Net gains incurred during the current period - Net losses incurred during the current period = Ending funded status (pension benefit asset/liability)
43
Where should changes in the funded status of a pension plan due to prior service cost and pension gains/losses be reported in?
OCI in period incurred, unless company chooses to recognize the pension gains/losses immediately on I/S
44
J/E for recognition of prior service cost and pension losses
Dr. OCI (goes to AOCI) Cr. Pension benefit asset/liability Decrease funded status of pension plan
45
Where are deferred tax benefits recognized?
In OCI as an offset to unrecognized prior service cost or pension loss
46
JE to record deferred tax asset
Dr. Deferred tax asset | Cr. Deferred tax benefit - OCI
47
JE to record amortization of pension expense
Dr. Net periodic pension cost | Cr. OCI
48
JE to record deferred tax benefit related to amortization of pension expense
Dr. Deferred tax benefit - OCI | Cr. Deferred tax benefit - I/s
49
JE for pension gains
Dr. Pension benefit asset/liability | Cr. OCI (put into AOCI)
50
JE to recognize deferred tax liability related to pension gain
Dr. Deferred tax expense - OCi | Cr. Deferred tax liability
51
JE for reclassification adjustment for when pension gains and any remaining net transition assets are recognized in net periodic pension cost through amortization process
Dr. OCI | Cr. Net periodic pension cost
52
JE to remove related deferred tax expense from AOCI and record in I/S
Dr. Deferred tax expense - I/S | Cr. Deferred tax expense - OCI
53
Pension settlements
occur when the pension plan assets increase in value to the point that sale of the pension plan assets allows a company to purchase annuity contracts to satisfy pension obligations
54
Curtailments
Events that reduce the expected remaining years of service for present employees or eliminate accrual of defined benefits for future services of a significant number of employees
55
Termination benefits
Arise when employees are paid to terminate their rights to future pension payments Formula: Lump sum payments + PV termination benefit = Special term benefit Dr. Special term benefit expense Cr. Special term benefit liability
56
The rule of thumb for disclosures
1. More disclosure is better than less disclosure 2. Disclose as much as reasonable possible DO NOT: 1. Repeat info 2. Predict/project good items
57
Under US GAAP, what should be disclosed regarding pension plans?
1. Reconciliations of beg. and end. balances of benefit obligation 2. Reconciliations of beg. and end. balances of FV of plan assets 3. Funded status 4. Plan assets 5. Components of net periodic pension (benefit) cost 6. Benefit payments and contributions 7. Impact on other comprehensive income 8. Rates and assumptions 9. Employer and related party transactions 10. Amortization methods 11. Assumptions and commitments 12. Termination benefits
58
Required FS for defined benefit pension plans (presented by plan itself)
1. Statement of net assets available for benefits 2. Statement of changes in net assets available for benefits 3. Statement of accumulated plan benefits 4. Statement of changes in accumulated plan benefits
59
Accumulated plan benefits
Future benefit payments that are attributable to the employee's services rendered to the benefit info date
60
Actuarial PV of accumulated plan benefits
Amount that results from applying actuarial assumptions to the accumulated plan benefits
61
Net assets available for benefits
Difference between a plan's assets and laibilities
62
Under US GAAP, service cost is measured by:
using the PBO
63
Under US 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/current compensation levels only?
Accumulated benefit obligation
64
What does service cost represent?
The increase in the PBO resulting from employees' services rendered during the year
65
Accumulated benefit obligation
PV 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
66
Under IFRS, what is reported in OCI and not reclassified (amortized) to the I/S?
Remeasurements of the defined benefit liability (asset), including remeasurements from actuarial gains
67
Under US GAAP, what do interest costs included in the net pension cost recognized for a period by an employer sponsoring a defined benefit pension plan represent?
Increase in the projected benefit obligation due to the passage of time
68
What defined benefit plan disclosures should be made?
1. The funded status of the plan 2. The amount of net periodic pension cost for the period 3. The FV of plan assets
69
Under IFRS, where are past service costs recognized when there is a plan amendment?
On the I/S in the period of the plan amendment
70
Where in the FS are companies required to report the funded status of their pension plans?
On the statement of financial position as an asset or liability (or both)
71
In the FS of employee pension plans and trusts, what are the plan investments reported at?
Fair value
72
What is the incremental (unfunded) portion of the projected benefit obligation that exceeds plan assets considered to be?
A liability on the BS

FAR 6 (4 decks)

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