Pensions & Postemployment Benefits Flashcards
What type of pension plan sets aside specific amounts during the time of service, and the retired employee receives whatever sum these contributions and earnings produce?
Defined Contribution plan
What type of pension plan guarantees certain benefits to be paid to retired employees, and is responsible for setting aside sufficient amounts to fulfill these promises?
Defined Benefit plan
What are the two special problems that make defined benefit plans more complicated than defined contribution plans?
1) Matching – pension expense must be recognized at the time of employee service, not when benefits are paid to retired employees
2) Estimation – costs are difficult to determine since they depend on the lifespan of the employees, changes in their wage rates, and the rates of return on pension investments
What defined benefit plan element refers to the annual increase in the PBO?
Service Cost
Between what two time periods would the prior service cost (PSC) fall for defined benefit plans?
Between the Hire date and the Measurement (Initiation) date
With regard to defined benefit plans, between what two time periods does service cost fall?
Between the Measurement (Initiation) date and the Retirement date
With regard to defined benefit plans, what does service cost refer to?
The increase in PBO that results from employee service in the current period. Specifically, it is the actuarial present value of benefits attributed to services performed during the period. It represents the funding increase in PBO for 1 year.
Between what two time periods does the payout period fall for defined benefit plans?
After retirement date until date of actuarial termination (or death)
What is the accumulated benefit obligation for defined benefit plans?
Actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using current wage rates.
What is the vested benefit obligation for defined benefit plans?
What is owed to the employee regardless of their continued employment (if terminated immediately). Comprised of the actuarial present value of vested benefits.
What is the projected benefit obligation (PBO) for defined benefit plans?
Actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using estimated future compensation levels.
With regard to defined benefit plans, what is the actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using existing compensation levels?
Accumulated Benefit Obligation (ABO)
With regard to defined benefit plans, what is the amount owed to the employee regardless of their continued employment referred to?
Vested Benefit Obligation (VBO)
With regard to defined benefit plans, what is the actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using estimated future compensation levels?
Projected Benefit Obligation (PBO)
What is the benefits-years-of-service method used for?
To determine the present value of the projected benefit obligation (PBO)
How is the present value of the projected benefit obligation (PBO) determined?
Under the benefits-years-of-service method
Which defined benefit obligation amount most satisfies Faithful Representation?
Accumulated Benefit Obligation (ABO)
Which defined benefit obligation amount most satisfies Relevance?
Projected Benefit Obligation (PBO)
With regard to defined benefit plans, if the pension formula doesn’t include future compensation levels, is there a difference between the ABO and PBO?
No
What is a flat-benefit (pension) plan?
Defined Benefit plan whose benefits aren’t affected by changes in future compensation. As employees’ compensation increases over time, benefits earned after the change in compensation are calculated using the new compensation rate(s).
What type of defined benefit plans do not adjust previously earned benefits to new compensation rates?
Flat-benefit (or non-pay-related) plans
What is a pay-related, final-pay, average-pay, or career-average-pay pension plan?
Defined Benefit plan whose benefits are affected by changes in future compensation. As employees’ compensation increases over time, both benefits earned after the change in compensation as well as benefits already earned are calculated using the new compensation rate(s).
What type of pension plans adjust previously earned benefits to new compensation rates?
Pay-related, final-pay, average-pay, or career-average-pay plans
With regard to defined benefit plans, what does interest cost refer to?
Change in PBO from the passage of time. Calculation = Beginning PBO x discount rate (aka settlement rate)
With regard to defined benefit plans, what does prior service cost (PSC) amortization refer to?
Cost associated with service years before plan was implemented or amended. Calculation = Beginning PSC/Average Service Life (expected future years of service amortization method)
What defined benefit plan element refers to the change in the PBO from the passage of time? How is it calculated?
Interest Cost. Calculated as:
Beginning PBO x discount rate (or settlement rate)
What are the two ways the Actual Return on Pension Plan Assets is calculated?
1) Beginning Plan Assets + Contributions – Benefits paid out – Ending Plan Assets
2) Beginning Fair Value of Plan Assets x Actual Return
How is the Expected return on pension plan assets calculated?
Beginning Plan Assets x Expected Rate of Return (also the difference between actual return on plan assets and deferred gain/loss)
What is it called when the Actual Return on pension Plan Assets differs from Expected returns on pension Plan Assets?
Usually referred to as a Deferred Gain (although can be a loss). Often referred to as Unrecognized Pension Gain/Loss
How is a Deferred Gain/Loss (Unrecognized Pension Gain/Loss) on Pension plan Assets calculated?
Actual Return on Plan Assets – [Beginning Plan Assets x Expected Rate of Return]
In calculating Annual Pension Expense on defined benefit plans, what is the intent behind netting actual return on plan assets and the deferred (unrecognized) pension gain/loss amounts?
In order to arrive at an expected rate of return (per actuarial assumptions) which helps keep annual pension expense constant every year.
What happens when the deferred gain (unrecognized pension gain) gets too large?
Use the corridor approach to determine if there is an “Excess” that needs to be amortized over the pension’s average remaining service life
With regard to annual defined benefit pension plan expense, what is the corridor approach? How is it calculated?
1) Take the larger of 10% of:
a. FMV of plan assets
b. Beginning PBO
2) Subtact this amount to the deferred gain (or loss) at beginning of year
3) Take this “Excess” and amortize it over the average remaining service life of the plan
What does amortization of net obligation do to pension expense?
Increases pension expense
What does amortization of net asset do to pension expense?
Decreases pension expense
For defined benefit plans, what is the journal entry that records the funding of the plan?
Dr. Pension Expense
Cr. Cash
Dr. Prepaid Pension Cost (PLUG) – OR –
Cr. Accrued Pension Cost (PLUG)
What pension funding circumstance results in a prepaid pension cost?
When the cash paid to fund the plan exceeds the annual pension expense
What pension funding circumstance results in an accrued pension cost?
When the cash paid to fund the plan is less than the annual pension expense
What pension funding circumstance results from annual pension expense exceeding the cash funded on the plan for the year?
Accrued pension cost (liability)
What pension funding circumstance results from annual pension expense being less than the cash funded on the plan for the year?
Prepaid pension cost (asset)
What results in the difference between the ending projected benefit obligation and the ending fair value of plan assets?
The funded status of the plan
What circumstance gives arise to an overfunded plan?
Ending value of plan assets > ending PBO
What circumstance gives arise to an underunded plan?
Ending value of plan assets
Can the funding status of pension plans be netted? (i.e., overfunded against underfunded)
No
What is the measurement date for a defined benefit plan?
Employer’s fiscal year-end statement of financial position
How are gains or losses not already recognized as pension expense recognized?
They are recognized in Accumulated OCI
What are some examples of post-retirement benefits other than pensions?
1) Health care benefits
2) Life insurance coverage
3) Legal services
4) Day care
5) Tuition assistance and housing subsidies
How does one reconcile from beginning of year PBO to end of year PBO?
Beginning of year PBO
+ Service cost
+ Interest cost
+/- Prior service cost or credit (from changes to plan in current year)
+/- Actuarial gain or loss (from changes in actuarial assumptions)
- Benefits paid
Under IFRS, what method is used to calculate the cumulative cost of defined benefit plans?
Projected unit credit method
Under IFRS, what is the projected benefit obligation referred as?
Defined benefit obligation (DBO)
Under IFRS, is it permissable to net pension plan assets and liability balances?
Only when there is a legally enforceable right to use the assets of one plan to settle the obligations of another plan.
