Pensions

Question 1

Deferred Gain Impact

Answer 1

INCREASES Liability because the Gain IS deferred (so NOT recognized)

Question 2

Pension Overview

Answer 2

1. Separate Plans at Same Company are NOT offset (Reported separately). (PBO less Fund is Net Liability).
2. Pension Expense Increases the PBO
3. Contributions increase Assets in Fund (FV) and Benefit Payments to Retirees decreases PBO and Fund so no change in NET Liability (Pension Liability).
4. Return on Fund uses Beg + Contributions + Return less Payments = Ending Formula
   5.

Question 3

Funded Status

Answer 3

Funded status is the difference between projected benefit obligation and plan assets at fair value. Neither of these amounts is reported in the balance sheet (they appear in the notes only), but their difference is reported in the balance sheet as the reported pension liability for defined benefit plans. It is the amount the plan is “behind” in terms of having assets available for payment of benefits.

Question 4

Accumulated Benefit Obligation

Answer 4

Accumulated benefit obligation is 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.

Even if the pension benefit formula incorporates future salaries, accumulated benefit obligation uses current salary levels only to provide a more current measure of the pension liability

Question 5

B/S Reported Pension Liability

Answer 5

The reported liability for defined benefit pension plans is the unfunded projected benefit obligation. This is the projected benefit obligation, less pension plan assets at fair value. Projected benefit obligation is the fundamental measure of a firm’s pension liability, but is reported only in the footnotes.

Question 6

Pension Questions

Answer 6

1. When is the ABO (Accumulated Benefit Obligation) used or shown?
   2.

Question 7

PBO Gain / Loss

Answer 7

This is from changes to assumptions like Future Life Expectancy increasing from previous estimates. This would INCREASE the PBO as longer life means more payouts (more benefits) which is a PBO LOSS.

JET: I view these as Adjustments, not Gain / Loss

Caused by:

1. Changes in the PBO (assumptions) and
2. Difference between actual and Expected Gain

Accounting:
1. Net Gain or loss at BEGINNING of Period is Amortized.

Question 8

Funding Contribution

Answer 8

1. Reduces the Net Liability (What is reported) since the Assets (Fund) increases, but this does not lower the PBO itself (just the net of the PBO and the Fund).

Question 9

PBO Calc at B/S Date:

Answer 9

Service cost to date + interest cost to date - benefits paid to date + prior service cost + or - net PBO gain or loss to date

Question 10

What is the formula for ending net gain or loss subject to amortization the following period?

Answer 10

Beginning net gain or loss - amortization of the beginning amount +/- Projected benefit obligation (PBO) change in the period + /- asset gain or loss.

Question 11

J/E to recognize a net Gain.

Answer 11

The amortization decreases pension expense because the gain reduced the firm’s pension costs. The amortization amount is the portion of the gain that is entered into pension expense (as a negative amount). The gain was recorded previously. At that time, pension liability was decreased, and other comprehensive income increased. The complete entry is: (dr.) Pension gain/loss-OCI $50, (cr.) Pension expense 50

Question 12

Pension Expense and Amort of PSC

Answer 12

PSC originally immediately increased PBO, so Amort is Dr to Expense, but no impact to PBO so must be backed out of Total Pension Expense.

Pension expense is $60mn, but includes $4mn of amortization of PSC, which increases pension expense without an increase in the pension liability (the previous recognition of PSC caused pension liability to increase).

Question 13

PBO Gain

Answer 13

Decreases Pension Liability. QUESTION: confirm this immediately reduces PBO.

ANSWER: it does, but J/E is to Pension Liability as PBO and FV of Assets are NOT on Books (in footnotes). Only the Liability (over/under funded) is on the Books.

When the actuarial gain is recognized, pension liability is debited, because PBO is reduced by the gain, and pension liability is the difference between PBO and assets. Pension gain/loss-OCI is credited, because the firm’s pension costs have decreased. The pension gain/loss-OCI account causes other comprehensive income to be credited (increased).

Question 14

Actuarial PV

Answer 14

The net change in the actuarial present value of accumulated plan benefits refers to the liability side of the pension plan, rather than to the plan assets. This amount is the change from the previous reporting period of the amount required to pay the present value of promised benefits. It is one measure of the change in the obligation of the plan. Changes in net assets refers to the asset side of the plan. Assets are typically held by a trust company that provides financial statements that report the amount of assets available to pay pension benefits, and changes in those assets.

Question 15

Pension Cost Calculation Example

Answer 15

QUESTIONS: Actual Return vs. Expected? What is the Amort of unrecognized net obligation?

Service cost $300,000
Return on plan assets ($80,000)
Interest cost on pension benefit obligation $164,000
Amortization of actuarial loss $30,000
Amortization of unrecognized net obligation $70,000
Pension cost (or expense) $484,000

Question 16

Interest portion of Pension Expense and Beg PBO

Answer 16

If Beg PBO is IMMEDIATELY increased due to PSC Adjustment, that TOTAL Balance of PBO is used to calculate the Interest Expense using the Discount Rate.

i.e. Don’t need to back out the PSC impact if part of the Beginning Balance.

Question 17

Which of the following would not cause a change in the net gain or loss at the beginning of a period?

Answer 17

JET: don’t read too much into the Beg of Period part. Point is that PSC is a separate component from the Gain / Loss piece.