Present Value 13D - Pensions

Question 1

What are the two types of pension plans?

Answer 1

1. Defined Pension Plans

2. Defined Benefit Plans

Question 2

What is a Defined Contribution Plan?

Answer 2

1. Does not require the service of an actuary

2. Employer contributes a specific percentage of employees salary

Question 3

What is a Defined Benefit Plan?

Answer 3

1. Defines the benefit the employee wishes to receive when they retire
2. Requires the service of an actuary

Question 4

What are the two types of benefit accounts?

Answer 4

1. Financial Statement Accounts

2. Actuary Accounts (Not posted to FS)

Question 5

Can pension expense be a product cost?

Answer 5

Yes

Question 6

What are the 5 factors that compose pension expense?

Answer 6

1. Service Cost
2. Interest on the projected benefit obligation
3. Return on plan assets
4. Amortization of unrecognized prior service cost or credit
5. The effect of gains/losses

Question 7

What is service cost?

Answer 7

Credit to the pension cost based on present value for each year of service for that employee

Note: Future Salaries must be taken into account by the actuary

Question 8

What is the interest on the projected benefit obligation?

Answer 8

Actuarial Account
Increase in the PBO due to the passage of time.

This cash out would be based on Future Salary Levels

Question 9

How do you compute interest on the projected benefit obligation?

Answer 9

Beginning Projected Benefit Obligation x Settlement Rate = Interest Component to add back to Benefit Obligation

Question 10

What is the Return on Plan Assets?

Answer 10

Interest earned on assets in pension account.

Question 11

If actual return is positive, what happens to pension expense?

Answer 11

It decreases because it is less money the employer has to contribute the the pension fund

Question 12

If actual return is negative, what happens to pension expense?

Answer 12

Pension expense increases because it is more money the employer much contribute to make up the lost money from investing

Question 13

How do you calculate the actual return?

Answer 13

Beg FMV of Asset
\+ Employer Contributions
- Benefits Paid (to the employee for retire)
\+/- Actual Return
=End FMV Asset

+ Actual Return-> Deduct from pension exp
- Actual Return-> Subtract from pension exp

Question 14

What is amortization of unrecognized prior service cost?

Answer 14

Actuarial Account
Difference between pension plan changes for employees with benefits under the old and new pension plans

Will normally increase pension expense if the pension plan is made more attractive for employees

Will normally decrease pension expense if the pension plan decreases the benefits

Question 15

How is the amortization of unrecognized prior service cost calculated?

Answer 15

Unrecognized Prior Service Cost/Average Remaining Service Period = Amortization Cost per Year to Add/subtract to Pension Expense

Question 16

What are Gains/Losses on Pension Expense?

Answer 16

Actual Return on pension fund is not know until the end of the year so an Expected Return is recognized interim

The difference between the Expected Return and the Actual Return is either an Actuarial Gain or Actuarial Loss

Actuarial Losses-> Will increase Pension Expense
Actuarial Gains-> Will Decrease Pension Expense

Question 17

What must be disclosed of the Beg. PBO to the End PBO?

Answer 17

The reconcilation process used

Question 18

What formula is used to reconcile PBO for disclosure?

Answer 18

Beg PBO
\+ Service Cost
\+ Interest Cost
\+/- Prior Service Cost
\+/- Actuarial Gain/Loss
- Benefits Paid
= END PBO for Disclore

Question 19

What formula is used to reconcile PBO for Over/Underfunded status?

Answer 19

Beg PBO
\+ Service Cost
\+ Interest Cost
- Benefits Paid
= End PBO for Over/Underfunded Status

Question 20

What formula is used to calculate whether your pension fund is over/underfunded?

Answer 20

End PBO vs FMV of Assets at EOY

Question 21

If pension fund is underfunded, what has to happen?

Answer 21

An accrual must be posted to Accrued Pension Liability

Question 22

What are some examples of post-employment benefits?

Answer 22

After an employee retires, the company continues to pay:

1. Life Insurance
2. Health Insurance
3. Etc…

Question 23

What is the formula to calculate Ending FMV of assets?

Answer 23

Beg FMV
\+ Employer Contributions
- Benefits Paid
\+ Actual Returns on Assets
= End FMV

Question 24

What is the Accumulated Benefit Obligation?

Answer 24

Actuarial Account
Present value of future retirement payments attributed by the pension benefit formula to employee services prior to that date
Based on Current Salary Levels

Question 25

Unrecognized gain/losses for pensions are recognized where?

Answer 25

OCI

Question 26

What is based on current salary levels vs future salary levels?

Answer 26

Current Salary Levels

1. Accumulated Benefit Obligations
2. Accumulated Post Retirement Benefit Obligations

Future Salary Levels

1. Service Cost
2. Interest on Projected Benefit Obligations

Question 27

What are the steps to record Pension Expense?

Answer 27

1. Calculate the Ending Bal in Accrued Pension Liability Account
2. Calculate the Over/Underfunded balance by comparing Ending FMV Asset value to Ending PBO

NOTE: The Ending Balance in the Accrued Pension Liability Account must then be matched to the difference between Step 2 above

Question 28

If a pension plan is overfunded, where is the overfunded amount captured on the Balance Sheet?

Answer 28

Prepaid Pension Costs - always considered non-current

Question 29

When recroding Pension Assets & Liabilities on the BS, do you net these amounts if a single company has both Assets & Liabilities?

Answer 29

No

Question 30

When are Pension Liabilities on the BS considered Non-current?

Answer 30

When they will not be paid in the next 12 months

Question 31

If the Expected & Actual rate of Return are the same, will there be an Actuarial Gain/Loss?

Answer 31

No

Question 32

For IFRS, Accumulated Benefit Obligation is?

Answer 32

Accrued Benefit Obligation

Question 33

Within IFRS, the settlement rate or Discount Rate, what is used to figure this rate?

Answer 33

Corporate Bonds with similar maturities and yield

Question 34

What method is used by IFRS to account for defined benefit pesion plans?

Answer 34

Projected-unit-credit method

Question 35

When must an employer accrue post-employment benefits?

Answer 35

When the employee is fully eligible

Question 36

What is a transition obligation?

Answer 36

1. The difference between the accumulated post-retirement benefit obligation and the fair value of the plan assets
2. May be recognized immediately
3. May amortize over a max period of 20 years