Pension Plans

Question 1

What is the discount rate?

Answer 1

The rate of interest used to compute the present value of future cash flows.

Question 2

What is the discount rate for the PBO based on?

Answer 2

Long-term debt interest rates

Question 3

What is the projected benefit obligation?

Answer 3

Actuarial present value as of a specific date of all benefits attributed by the pension benefit formula to employee service rendered as of that date.

It is measure using assumption as to future compensation levels.

Question 4

How is the PBO calculated?

Answer 4

PBO, beginning balance
\+ service cost
\+ interest cost
\+ prior service cost
\+ actuarial losses
- actuarial gains
- pension benefits paid to retirees
= PBO, ending balance

Question 5

How is an unfunded PBO determined?

Answer 5

The excess of PBO over plan assets

If PBO is more than plan assets then it is unfunded and a liability

Question 6

How is net periodic pension cost calculated for the income statement/statement of activities?

Answer 6

Service cost is not included with net periodic pension cost on the income statement
- it is recorded on the i/s as separate line item with compensation expense

Compute for the income statement reporting:

• subtract the expected rate of return on plan assets
• add prior service cost
• add the interest cost

Question 7

What does service cost represent for the employer in a defined benefit pension plan?

Answer 7

Represents an estimate of the increase in pension benefits payable (the increase in the projected benefit obligation) as a result of employee services rendered during the current period

Question 8

What does interest cost represent for the employer in a defined benefit pension plan?

Answer 8

Represents the increase in the projected benefit obligation as a result of the passage of time.

End of year payment is closer in time than beginning of year

Interest cost component causes an increase in net periodic pension cost

Question 9

Formula to calculate the net periodic pension cost?

Answer 9

Service cost
plus interest cost
plus amortization of past service cost
less expected return on plan assets
plus amortization of unrecognized loss
less amortization of unrecognized gain
= net periodic pension cost

Question 10

How do you calculate the PBO at the end of the year?

Answer 10

Beg Year Bal
add service cost
add interest cost
subtract benefits paid during the year
= End Year Bal