Pensions & Post employment Benefits

Question 1

What are the two types of plans under GAAP?

Answer 1

Defined Contribution Plan
Defined Benefit Plan

***does NOT include cash basis methods of “pay as you go” (payments are expensed after someone retires) and terminal funding (funding an annuity upon retirement)

Question 2

What is the definition of a defined contribution plan

Answer 2

ex. 401K or when the employer sets aside specific amounts aside during the time of service, and the retired employee receives whatever sum these contributions and earnings produce.

Question 3

what is the definition of a defined benefit plan?

Answer 3

the employer guarantees certain benefits to be paid to retired employees and is responsible for setting aside sufficient amounts to fulfill these promises

Question 4

What is the J/E for a defined contribution plan

Answer 4

debit: Pension Expense
Credit: Accrued Pension Cost (liability account)

Question 5

when does the liability have to be paid on a defined contribution plan?

Answer 5

by the date of the tax return which is normally 2 1/2 months following the close of the fiscal year.

Question 6

what is the j/e for pay the liability for the defined contribution plan?

Answer 6

debit: the accrued pension cost account (to clear the balance to zero)
credit: cash

Question 7

what are the two problems associated with a defined benefit pension plan?

Answer 7

matching principle-pension expense must be recognized at the time of employee service, not when benefits are paid to retired employees

estimation-cost are difficult to determine, since they depend on the lifespan of the employee’s, changes in wage rates, and the rates of return earned on pension investments.

Question 8

what is a vbo (vested benefit obligation)

Answer 8

what is owed if an employee is terminated immediately. The VBO is the actuarial present value of vested benefits, which are those benefits that the employee is entitled to that are not contingent on remaining in the employment of the entity (if quit)

Question 9

what is a abo (accumulated benefit obligation)

Answer 9

what is owed for service to date if the employee continues in employment until normal retirement age at current wage rates. the actuarial present value of benefits attributed by the pension benefit formula to employee services rendered before a specified date and based on employee services and compensation prior to that date (salaries rec’d to date) Faithful representation

Question 10

what is a pbo (projected benefit obligation)

Answer 10

what is owed for service to date if the employee continues in employment until normal retirement age and receives periodic adjustments to pay for increased experience and general inflation based on future wage rates. The present value of the obligation is determined under the benefits-years-of-service method. The PBO is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (salaries to be RECEIVED) Relevance.

Question 11

what are flat benefit or non-pay-related plans

Answer 11

when an employee’s compensation increases over time, benefits earned after the change in compensation are calculated using the new compensation rate, but benefits already earned are not adjusted for the change in rate.

Question 12

what are pay related; final pay; final average or career average pay plans?

Answer 12

when an employee’s compensation increases over time, not only are those benefits earned after the change calculated using the new compensation rates but benefits already earned are also adjusted for the change rate.

Question 13

when will the ABO & PBO be equal?

Answer 13

in a flat benefit or non pay-related plan. in all other cases the PBO will be greater than the ABO

Question 14

what is a.s.p.i.d.e.r?

Answer 14

A=amortization of existing net obligation or net asset @ implementation
S=Service Cost
P=Prior Service Cost Amortization
I=Interest Cost
D=Deferred Gain (unrecognized pension gains/losses
E=Excess amortization of deferred gain/+loss
R=Return on Plan Assets (actual)

Question 15

What is the service cost when calculating pension expense?

Answer 15

the increase in PBO that results from employee service in the current period. it represents the amount needed to be set aside by the employer to cover the employee promised benefits after retirement.

Question 16

how are prior service cost accounted for?

Answer 16

the cost are amortized systematically over the average service time of the employees in order to conform to the matching principle.

Question 17

what happens when a benefits plan is initiated?

Answer 17

PSC will consist of the actuarial present value of benefits that employees are retroactively entitled to as a result of being employed by the entity prior to initiation of the plan

• *initially recognized with a credit to the PBO and a debit to other comprehensive income (OCI)
• *the amount is amortized as an increase in pension expense

Question 18

what happens when a plan is amended?

Answer 18

the PBO may increase or decrease as a result

• *if benefits are reduced or the retirement age is postponed, the PBO will decrease
• *if benefits are increased or the retirement age is accelerated, the PBO will increase
• *the decrease or increase will result in a debit or credit, respectively to the PBO with the offset to OCI

Question 19

what is interest cost?

Answer 19

the beginning PBO multiplied by the discount rate

Beg PBO x Discount Rate (settlement rate - rate at which the plan’s obligations could be settled)

Question 20

what is the actual return on plan assets

Answer 20

the earnings of the investments in the pension plan. This represents the change in the value of the pension assets over the course of the year after adjusting for contributions and withdrawals.

Question 21

what does the actual return on plan assets include?

Answer 21

• interest & dividends accrued on investments
• unrealized gains or losses on investments acquired during the period or held for the entire period
• realized gains or losses on sales of investments net of unrealized gains or losses previously recognized

**remember the actual return on plan assets is subtracted from pension expense not added to it b/c it represents the reduced amount the company has to fund

Question 22

what is the calculation for actual return on plan assets

Answer 22

equals the market related value of plan assets at the end of the year minus the value at the beginning of the year minus contributions made to the plan plus withdrawals made from the plan (End Plan Assets-Beg Plan Assets-Contributions + withdrawals)

Question 23

what is the expected return on plan assets

Answer 23

equal to the beginning plan assets x the expected rate of return

• *if the actual return is greater, the difference is added back to pension expense
• *if the actual return is lower, the difference is deducted from pension expense.
• *the net effect is that pension expense will include the expected, rather than the actual return on plan assets.

Question 24

what is excess amortization of deferred prior pension gain (loss amortization)

Answer 24

when gains/losses will not offset each other over a long period of time, the difference will be amortized to make certain it is properly recognized in pension expense.

Question 25

what is the corridor approach for calculating the excess amortization of deferred prior pension gain/loss.

Answer 25

@ the beginning of the period, the accumulated net deferred gain or loss is compared to 10% of the greater of the beginning balance in the PBO or the Fair Value of the plan assets
([beg deferred amount-10% (higher of beg PBO or Beg PA)]/Avg Svs Life)