Pensions etc.

Question 1

Transition Asset/Obligation

Answer 1

• Must be recognized immediately in net income of the period of change as the effect of a change in accounting principle
  
  • And on a delayed basis as a component of net periodic postretirement benefit cost
    Amortize over the greater of 20 years or the average remaining service life period

Question 2

Attribution Period

Answer 2

Begins at employee’s date of hire and ends at the full eligibility date

Question 3

Deferred Compensation

Answer 3

• Defined benefit plan
  
  • IRA’s
  • Rabbi Trust
    ○ Goal is to provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation
    ○ Trust agreement must explicitly state that the assets are available to satisfy claims of general creditors in the event of bankruptcy of the employer
    ○ They can only be used to pay employers creditors in future bankruptcy or employers future compensation
    Cannot be used as payment of employers personal expenses

Question 4

Health Care Benefit Disclosures

Answer 4

• Assumed health care trend rate used to estimate expected cost of retiree benefits
  Accumulated postretirement benefit obligation

Question 5

Deferred Comp Accruals

Answer 5

• Cost of future payments must be accrued as earned
  
  • Ex - employee contract to earn future payments of 100k in years 6 - 8.
    ○ Employee still employed at the end of year 5
    This amount - 300k - must be expensed at the rate of 60k a year in years 1 - 5 and forward from 6 - 8

Question 6

Accrue a liability for the following:

Answer 6

• employers obligation relating to the employee’s rights to receive compensation for future absences is attributable to employee’s services already rendered
  
  • Obligation relates to rights that vest or accumulate
  • Payment of compensation is probable
    Amount can be reasonably estimated

Question 7

Pension Expense

Answer 7

Service Cost + 
Interest Cost + 
Expected Return on Plan Assets - 
Gain/Loss Recognition 
Prior service Cost Amortization +

Question 8

Service Cost +

Answer 8

Estimates the increase in pension benefits payable (increase in PBO) as a result of employee services rendered during the period

Question 9

Interest Cost +

Answer 9

○ Represents the increase in PBO as a result of the passage of time
○ End of year payment of Pension benefits is closer in than it was in the beginning of the year naturally causes PBO to increase
Appropriate rate * PBO

Question 10

Expected Return on Plan Assets -

Answer 10

• Increase in PA (from dividends received and increases in FV of investments held by plan) causes net cost of pension plan to employer to be less than it otherwise would be
  - The amount recognized in current period as a reduction of pension expense is the estimated return on plan assets, not the actual return
  - Estimated Return on PA - Credited to Pension Expense
  § Expected Rate of Return * FV of Plan Assets at the beginning of the year
  The actual return is recognized as a component of OCI

Question 11

Gain/Loss Recognition

Answer 11

• Unrealized G/L associated with changes in FV of plan assets and PBO are recognized in OCI
  - GAAP sometimes requires a portion of these gains and losses as a component of pension expense
  - Gain - decreases, Loss - increases
  Consequently, would be reflected as a reduction of remaining unrecognized Gain or loss included in AOCI

Question 12

Prior service Cost Amortization +

Answer 12

• When Plan amendments are made, additional benefits are sometimes applied retroactively to employees for services rendered in prior years
  § Does not mean applied retroactively to Income Statement, just to the employees
  - Increase in benefits to be paid to employees is a cost to the employer
  - Cost recognized as a component of pension expense over the remaining service years of the affected employees
  - Unrecognized prior service cost be recognized as a component of OCI
  - Amortization of unrecognized prior service cost is recognized as an increase in pension expense, and as a reduction of unrecognized amount remaining in AOCI
  Debit amount to reduce AOCI, as it is a normal credit balance account

Question 13

Projected benefit obligation

Answer 13

• Actuarial present value as of a specified date of all benefits attributed by the pension benefit formula to employee service rendered as of that date
  
  • Used to determine under/over funding of pension obligations
  • Uses assumptions to future compensation levels
  • Beginning Balance (including transition cost)
    
    • • service cost + interest cost + prior service cost +/ Actuarial G/L - Pension Benefits paid to retirees
  • PBO would not exist in the first year of a Defined Pension plan, as it is based on assumptions to future levels
    Therefor the first year plan is always overfunded

Question 14

Accumulated Benefit Obligation

Answer 14

• Based on prior compensation, includes no assumption about future compensation levels
  PV of all future retirement payments attributed the pension benefit formula to employee services rendered prior to that date and based on past/current comp levels

Question 15

Over/Underfunded Plan Assets

Answer 15

• PBO> PA - underfunded - noncurrent liability

PBO > PA - overfunded - noncurrent asset

Question 16

PBO - Discount Rate

Answer 16

• Generally based on long term debt interest rates

No direct relationship to actual or expected rate of return on plan assets

Question 17

Accrued Pension Cost

Answer 17

• Unfunded part of total pension costs
  
  • Service and Interest costs increase accrued pension costs
    Contribution and return on plan lower accrued pension costs (interest on contribution)