Pensions Flashcards
What is a defined contribution plan?
the amount of the employer contribution is based on a contract
What is a defined benefit plan?
benefits paid during retirement are based on a formula and therefore are defined
What is the basic account for defined benefit plans?
based on accrual accounting, pension expense is recorded as benefits are earned and the pension obligation is recognized for unpaid benefits (cannot use cash basis)
For current year a firm must report?
pension expense, PBO (projected benefit obligation), pension assets @ MV, pension liability (PBO- assets)
What is current pension liability?
excess of benefits pay for coming year over the FV of plan assets (remainder noncurrent)
What happens if PBO
reported as a pension asset and classified as noncurrent because it is restricted and not available for other purposes.
What are the 5 components of pension expense?
- Service costs 2. interest costs 3. expected return on plan assets 4. amortization of prior service costs 5. amortization of net gain/loss (each is computed independently)
What are service costs?
actuarial PV of pension benefits earned during the current period. Service cost is immediate increase in PBO (this always INC pension expense)
Interest costs?
growth in the PBO for period due to pass of time
disc. rate x PBO @Jan. 1
How to calculate the expected rate of return on plan assets?
exp. ROR x plan assets @ Jan1 @ MV (this component reduces pension expense)
Amortization of Prior service costs (PSC)
causes pension expense to increase gradually by the effect of amendments to the plan when grant an increase in the value of the pension benefit or services already provided by EE.
Amortization of net gain/loss
causes pension expense to be gradually inc. or dec. by a) changes in PBO caused by estimate changes or experienced changes and b) difference between expected ROR and actual return on plan assets
two methods allowed:
Straight-line: net pension g/l / avg remaining service period of plan participants
Minimum (corridor) amortization: (net pension g/l - corridor amount)/ avg. remaining service life
How are plan investments reported?
at FV on the financial statements
ABO
ABO is the PV of all unpaid future retirement benefits as of the B.S. date based on a) services rendered to that date and b) current salary level
what is the corridor amount?
10% of the larger of the PBO or assets @ Jan 1.
firmst must amortize at least the corridor amount, if the numerator is negative there is no minimum amounts, corridor amortization allows more opportunity for cancelllation of g/l.
What is the JE to recognize amount of net gain
Dr. Pension g/l - OCI
Cr. Pension expense
