Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Pension plan vs. Sponsoring company

A

Two separate legal entities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

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

A

Defined benefit plans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the types of GAAP methods of pension plans?

A
  1. Defined contribution plans

2. Defined benefit plans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

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

A
  1. Employees’ length of service

2. Compensation amounts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Service cost

A

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

Increases the projected benefit obligation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Interest cost

A

Increase in PBO due to the passage of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Benefit payments

A

Benefits paid to pension plan participants after retirement

Reduces PBO and plan assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Plan assets

A

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

Reported at FV

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Where is the unamortized portion of AGE held?

A

In AOCI

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is the requirement regarding the components of net periodic pension cost under US GAAP and under IFRS?

A

US GAAP: must be aggregated and presented as one amount on the I/S

IFRS: generally reported separately

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

J/E to record net periodic pension cost

A

Dr. Net periodic pension cost
Cr. Pension benefit liability
Cr. Other comprehensive income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Current service cost

Sir age

A

PV of all benefits earned in the current period

Increase in PBO resulting from employee services in current period

Provided by actuary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Interest cost

sIr age

A

Discount rate

Increase in PBO during current period due to passage of time

Interest cost = Beg. PBO x Discount rate

30
Q

Return on plan assets

siR age

A

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
Q

Amortization of unrecognized prior service cost

sir Age

A

Beg. unrecognized prior service cost / Average remaining service life = Amortization of prior service cost

Unamortized is in AOCI

32
Q

and losses

sir aGe

A

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
Q

What are the two choices under US GAAP when accounting for gains and losses?

A
  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
Q

Corridor approach

A

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
Q

Formula for corridor approach

A 
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
Q

Amortization of Existing net obligation or net asset at implementation (sir agE)

A

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
Q

Calculation of amortization of existing net obligation or net asset at implementation

A

PBO

=Initial unfunded obligation
/ 15 years OR average employee job life (greater)
=Minimum amortization

38
Q

JE for company pension plan contributions

A

Dr. Pension benefit asset/liability

Cr. Cash

39
Q

Calculation of funded status

A

FV of plan assets

= Funded status

40
Q

Pension plan asset (noncurrent)

A

Positive funded status (FV of plan assets > PBO)

Overfunded

41
Q

Pension plan liability (current, noncurrent or both)

A

Negative funded status (FV of plan assets < PBO)

Underfunded

42
Q

Reconciliation of the beginning and ending funded status of defined benefit pension plan

A

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
Q

Where should changes in the funded status of a pension plan due to prior service cost and pension gains/losses be reported in?

A

OCI in period incurred, unless company chooses to recognize the pension gains/losses immediately on I/S

44
Q

J/E for recognition of prior service cost and pension losses

A

Dr. OCI (goes to AOCI)
Cr. Pension benefit asset/liability

Decrease funded status of pension plan

45
Q

Where are deferred tax benefits recognized?

A

In OCI as an offset to unrecognized prior service cost or pension loss

46
Q

JE to record deferred tax asset

A

Dr. Deferred tax asset

Cr. Deferred tax benefit - OCI

47
Q

JE to record amortization of pension expense

A

Dr. Net periodic pension cost

Cr. OCI

48
Q

JE to record deferred tax benefit related to amortization of pension expense

A

Dr. Deferred tax benefit - OCI

Cr. Deferred tax benefit - I/s

49
Q

JE for pension gains

A

Dr. Pension benefit asset/liability

Cr. OCI (put into AOCI)

50
Q

JE to recognize deferred tax liability related to pension gain

A

Dr. Deferred tax expense - OCi

Cr. Deferred tax liability

51
Q

JE for reclassification adjustment for when pension gains and any remaining net transition assets are recognized in net periodic pension cost through amortization process

A

Dr. OCI

Cr. Net periodic pension cost

52
Q

JE to remove related deferred tax expense from AOCI and record in I/S

A

Dr. Deferred tax expense - I/S

Cr. Deferred tax expense - OCI

53
Q

Pension settlements

A

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
Q

Curtailments

A

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
Q

Termination benefits

A

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
Q

The rule of thumb for disclosures

A
  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
Q

Under US GAAP, what should be disclosed regarding pension plans?

A
  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
Q

Required FS for defined benefit pension plans (presented by plan itself)

A
  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
Q

Accumulated plan benefits

A

Future benefit payments that are attributable to the employee’s services rendered to the benefit info date

60
Q

Actuarial PV of accumulated plan benefits

A

Amount that results from applying actuarial assumptions to the accumulated plan benefits

61
Q

Net assets available for benefits

A

Difference between a plan’s assets and laibilities

62
Q

Under US GAAP, service cost is measured by:

A

using the PBO

63
Q

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?

A

Accumulated benefit obligation

64
Q

What does service cost represent?

A

The increase in the PBO resulting from employees’ services rendered during the year

65
Q

Accumulated benefit obligation

A

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
Q

Under IFRS, what is reported in OCI and not reclassified (amortized) to the I/S?

A

Remeasurements of the defined benefit liability (asset), including remeasurements from actuarial gains

67
Q

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?

A

Increase in the projected benefit obligation due to the passage of time

68
Q

What defined benefit plan disclosures should be made?

A
  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
Q

Under IFRS, where are past service costs recognized when there is a plan amendment?

A

On the I/S in the period of the plan amendment

70
Q

Where in the FS are companies required to report the funded status of their pension plans?

A

On the statement of financial position as an asset or liability (or both)

71
Q

In the FS of employee pension plans and trusts, what are the plan investments reported at?

A

Fair value

72
Q

What is the incremental (unfunded) portion of the projected benefit obligation that exceeds plan assets considered to be?

A

A liability on the BS

FAR 6 (4 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions