Pensions Flashcards
What is service cost?
A component of pension expense;
The actuarial present value of pension benefits earned during the current period.
What makes up pension expense?
- Service cost
- Interest cost
- Expected return on plan assets
- Amortization of prior service cost
- Amortization of net gain or loss
What is interest cost?
A component of pension expense;
Growth in PBO for the period due to the passage of time = (discount rate)x(PBO at Jan. 1)
What is pension expense?
The cost to the firm of providing the pension benefits earned during the year. Reported on income statement.
What is expected return on plan assets
A component of pension expense;
(expected rate of return)x(plan assets at Jan. 1 at market value). This component reduces pension expense.
What is PBO (projected benefit obligation)?
The present value of unpaid pension benefits promised for work done through the balance sheet date, as measured by the benefit formula.
Reported only in the footnotes, not in the balance sheet (off-balance sheet).
An actuarial firm provides this information.
What is prior service cost (PSC)?
A component of pension expense;
An immediate increase in PBO from the retroactive application of an increase in benefits for service already rendered (from plan amendments or from retroactive application to employee service before the plan’s adoption).
Called “prior” service cost because the service cost of previous years has been increased.
What are pension gains and losses
A component of pension expense;
There are two sources of pension gains and losses: (a) changes in PBO due to estimate changes and experience changes, and (b) the difference between expected and actual return.
What is pension liability or asset?
The difference between ending PBO and plan assets at the balance sheet date, reported in the balance sheet. Pension liability (PBO - assets) is the amount underfunded. If the plan is overfunded (assets exceed PBO), then pension asset is reported (assets - PBO).
What is accumulated benefit obligation?
The present value of all unpaid future retirement benefits as of the balance sheet date based on (1) service rendered to that date, and (2) current salary levels.
What is the difference between projected benefit obligation and accumulated benefit obligation?
Projected benefit obligation uses estimated future salaries if the formula incorporates them, and accumulated benefit obligation uses only current salaries, regardless of the levels used in the formula.
How is pension activity reported in the financial statements?
Pension expense, and pension liability or asset is recognized in current income and balance sheet.
Prior service costs, and pension gains and losses are recognized in OCI.
