Pensions Flashcards
What are the 2 types of pension plans?
Defined benefit - company must pay a specific benefit (these are either contributory meaning both the employee and employer contribute, or noncontributory, meaning only the employer contributes)
Defined contribution - company makes a specific contribution (401(k) is an example - TE until withdrawn)
Defined benefit is the focus of the CPA
What are the general accounting guidelines for a defined benefit plan?
Must use accrual accounting (must recognize accrual of earned benefits, not deferring recognition until they are actually paid)
Recognize:
Pension expense - current cost
PBO (projected benefit obligation) - PV of unpaid, accrued benefits
Pension assets at market value
Pension liability - by how much are the pension assets insufficient to meet the PBO?
What is the benefit formula for a defined benefit obligation?
It can vary and uses different variables. An example is:
years of service/40)(final or highest annual salary)(age at retirement/65
What disclosures are required for pensions?
ABO - accrued pension benefits based on current rather than future salaries (as the PBO is)
VBO - present value of vested benefits
What are the two main estimates needed in pension accounting?
Discount rate (for PV calcs)
Expected rate of return (to calculate expected future value of pension assets)
What are the 5 components for calculating pension expense?
- Service cost (PV of pension benefits earned this period)
- Interest cost (discount rate * PBO at Jan 1st to figure out interest liability for the year)
- Expected return on plant assets (reduces expense)
- Amortization of prior service cost (usually increases exp)
- Amortization of net gain or loss (decrease exp for gains, increase exp for losses)
In the first year of a pension plan, which elements of the plan will exist?
You will have a service cost (benefits earned that year) but no interest cost or expected return since no assets exist
Key point about the JE’s for pensions?
The PBO and assets are reported in the footnotes; the actual JE’s use “pension liability” or “pension asset”
How is interest cost calculated?
interest rate * PBO
Two ways to calculate pension liability:
PBO - plan assets
beginning bal + expense - funding
What are prior service costs?
Retroactive changes that increase the PBO based on services already performed
Ex: amending the pension to pay a higher amount based on years of service
Recognized immediately in the liability, but recognition is done slowly with respect to the expense via amortization
What are the two types of pension gains and losses?
G/L due to changes in estimates used to calculate PBO
G/L due to differences between expected and actual returns
When amortizing gain/loss, a corridor may be calculated. What is the formula for the corridor amount of amortization?
(loss/gain - 1/yrs*assets at YE) / yrs
Differences between IFRS and GAAP?
Pension losses/gains are not recognized in exp
Unrecognized gain/loss and prior service costs generate adjunct or contra-accounts
The vested portion of prior service costs are recognized immediately under IFRS
