Postemployment Benefits Flashcards
What is the first fundamental aspect for applying accrual accounting to pensions?
Delaying Recognition of Certain Events - changes in pension obligations and in assets reserved for them are recognized over subsequent periods, not as they occur
What is the second fundamental aspect for applying accrual accounting to pensions?
Reporting Net Cost - pension costs are reported as an aggregate which would be split up if in a different part of the company’s statements
What is the third fundamental aspect for applying accrual accounting to pensions?
Offsetting Liabilities and Assets - the assets contributing to the plan and the liabilities for the pensions are one net amount
What is significant about disclosures for pension and non-pension benefit plans?
They should have uniform disclosures
What should be disclosed for pensions (and other plans)?
- Assets
- Obligations
- Cash flows
- Net periodic benefit cost
Info should be separated for pension and other benefit plans
Significant events should be disclosed
What is a defined contribution plan?
Pension plan which specifies how contributions to an individual account are to be determined (rather than specifying the benefits)
What is a defined benefit plan?
Pension plan which specifies the postretirement benefit for the individual (rather than specifying the preretirement contributions)
What is actuarial present value?
The value of a future series of payments that is not only discounted to PV but also accounts for various uncertainties (e.g. age at retirement, lifespan)
What is an accumulated benefit obligation?
The measure of a company’s pension liability for services rendered up to a specific date
Differs from PROJECTED benefit obligation, which considers future salary increases
What is attribution?
Assigning benefits or costs to periods of employee service
What is a contributory plan?
A pension plan where employees contribute part of the cost
What is a funding policy?
Specifies the amounts and timing of any contributions (and who pays them) to a pension plan
What are retroactive benefits?
Benefits from a plan which is begun or modified, earned by the employee over past periods
Cost of these benefits is called “prior service cost”
What is the unfunded projected benefit obligation?
The excess of the PBO over the FV of plan assets
What is the vested benefit obligation?
The actuarial PV of vested benefits (benefits which the employee has earned regardless of continued employment)
What is the net periodic pension cost (NPPC)?
The amount recognized as the cost of a pension plan for a given period
May be an expense for the period (e.g. pension for marketing personnel) or inventoriable as overhead (e.g. pension for factory personnel)
What are the components of net periodic pension cost?
Service cost
+ Interest cost
- Return on plan assets
+ Prior service cost amort. (- credit amort.)
- Actuarial gain amort. (+ loss amort.)
- Transition asset amort. (+ obligation amort.)
What is service cost?
Actuarial PV of benefits which the employee earned during the period, according to the benefits formula
What is interest cost?
The accumulated interest on the (already-earned) PBO as an employee continues to work
Calculation uses assumed discount rate
What is the return on plan assets?
The gain (or loss) from investments set aside to pay for pensions
Normally called “actual return on plan assets” (ARPA)
What is the formula for actual return on plan assets?
End FV of assets - Beg. FV of assets - Contributions during period \+ Benefits paid during period = ARPA
How are differences between expected and actual RPA accounted for?
NPPC is later adjusted for any difference between actual and expected return, with the difference being reported in OCI and amortized
How does prior service cost get amortized?
The cost of retroactive benefit increases is charged to OCI, and OCI is adjusted each period as prior service cost is amortized
Amortization is equal for each year which each employee is expected to work
What happens if an alternative approach is used to amortize prior service cost?
Method must be disclosed
Example: SL method using the avg. remaining years for the covered employees
How are retroactive reductions in benefits accounted for?
Applied as credits to prior service cost in OCI
If no cost is left to reduce, then the excess credit is amortized, just like cost
What are the two parts of actuarial gains and losses?
(1) difference between actual and expected RPA
+ (2) amortization of (1), as recognized in accumulated OCI
How is expected return on plan assets calculated?
(% increase) x (beginning FV of assets)
For actuarial gains and losses, how is the amortization of the gain/loss in OCI calculated?
Accumulated gain/loss in OCI \+10% of *** = Net gain/loss subject to amort. / Avg. remaining service period for employees =Amort. of gain/loss in OCI
***whichever is greater: PBO or beginning FV of assets
What is the minimum amortization for actuarial gains and losses?
At minimum, amort. must be over the avg. remaining service periods of the employees
Other methods can be used, but amort. cannot be less than above
For actuarial gains and losses, how is the new accumulated gain/loss in OCI calculated?
Acc. gain/loss for previous year
- amortization
+ diff. between actual and expected RPA for current year
= new accumulated gain/loss in OCI
What is a transition asset or obligation?
At the time of adopting FAS 87, the company must subtract their PBO from their plan assets’ FV. The difference is a transition obligation or asset
TO/TA may be amortized SL, either over avg. remaining service period of workers or over 15 years (maximum)
How is projected benefit obligation (PBO) calculated?
All the benefits accrued to this point are discounted to their PV
E.g. if a worker earns $1000 in benefits per year, then after 3 years, discount $3000 to PV to get the PBO at that date (12/31 of that year)
How is service cost calculated?
Take PV of the benefits earned in current year
Similar to PBO, but only for the current year
If a company reserves more or less cash for a pension expense, what is the JE?
12/31 of yr. XX
Either…
Debit: Pension Expense
Debit: Overfunded Pension Asset
Credit: Cash
Or…
Debit: Pension Expense
Credit: Underfunded Pension Liability
Credit: Cash
What are the JEs if a pension cost is overfunded one year and underfunded the next year?
The “overfunded pension asset” is overturned (credited)
Debit: Pension Expense
Credit: Overfunded Pension Asset (prev. yr’s amount)
Credit: Underfunded Pension Liability (new plug)
Credit: Cash
Vice versa for reversals of underfunded pension liabilities
How do you calculate interest cost?
Multiply the interest rate by the PBO from the beginning of the year (i.e. calculated at 12/31 of previous year)
What assets are included in plan assets when calculating RPA?
(at least) cash used to fund the pension cost, and any ARPAs from previous years of the plan
If there are retroactive benefits, how are they applied?
They apply to all the relevant calculations
Example: Interest cost is based on previous year’s PBO. If the benefits earned are altered, then one year’s interest cost will be applied to what the PBO would have been, not to what it actually was before the change in benefits
If there are retroactive benefits, what changes besides new calculations?
The difference becomes Prior Service Cost, which must be amortized
PSC must be discounted at the relevant rate, since it is an alteration of the projected benefits
What are the JEs when a prior service cost is first recorded?
Debit: Pension Expense
Debit: OCI (PSC)
Credit: Cash
The amount for PSC will be the unamortized amount
What are the JEs after a prior service cost has been recorded, when it is amortized?
Debit: Pension Expense
Credit: OCI (PSC)
Credit: Cash
When must a company recognize a liability or asset for pensions?
If the PBO =/= FV of plan assets
Liability = "underfunded PBO" Asset = "overfunded PBO"
How should underfunded and overfunded PBOs be presented on the balance sheet?
All unfunded PBOs and all overfunded PBOs will each be in the aggregate
Underfunded PBOs can be current, noncurrent or a combination
Overfunded PBOs should be noncurrent
When should plan assets and benefit obligations be measured?
Ordinarily at year-end
What is a settlement?
Payment to worker that relieves employer of benefit obligation
Gain/loss must be recognized in earnings, though amount of gain/loss is limited to net gain/loss remaining in OCI plus any transition asset
If only a portion of plan is settled, then gains and losses are recognized pro rata
What is a curtailment?
When the anticipated years of future service for employees become significantly shorter, or a reduction of accruable benefits for their future service
Prior service cost in OCI for years of service that are now worthless, is counted as a loss
Is it possible for both a settlement and a curtailment to occur?
Yes
If a plan is terminated and not replaced by another, then both have occurred (whether or not employees continue to work)
What are the two different types of termination benefits?
Special termination benefits (offered for a short time)
Contractual termination benefits (pending some event, such as a plant closing)
How are termination benefits accounted for?
For special TBs, recognize liability and loss when employee accepts offer and amount is estimable
For contractual TBs, recognize liability and loss when it is probable that employees will be entitled to payments (and amount is estimable)
Discount future payments to PV
What is different about the calculation of the net postretirement benefit cost, as opposed to the net period pension cost?
Amortization for transition assets
- Option to amortize over 20 years, not 15
- Option to immediately recognize (i.e. not amortize at all)
How is the net periodic pension cost affected by a loss of assets due to segment disposal?
Not affected
Loss from the disposal would be reported as a separate event, not within the NPPC calculation
If there is an excess both of PBO over plan assets and of NPPC over the employer’s contribution, what is the total liability to report?
Only the excess of the PBO over the plan assets – that represents the total underfunded pension liability
The excess of NPPC over the contribution is part of the total liability
