Present Value 13D - Pensions Flashcards
What are the two types of pension plans?
- Defined Pension Plans
2. Defined Benefit Plans
What is a Defined Contribution Plan?
- Does not require the service of an actuary
2. Employer contributes a specific percentage of employees salary
What is a Defined Benefit Plan?
- Defines the benefit the employee wishes to receive when they retire
- Requires the service of an actuary
What are the two types of benefit accounts?
- Financial Statement Accounts
2. Actuary Accounts (Not posted to FS)
Can pension expense be a product cost?
Yes
What are the 5 factors that compose pension expense?
- Service Cost
- Interest on the projected benefit obligation
- Return on plan assets
- Amortization of unrecognized prior service cost or credit
- The effect of gains/losses
What is service cost?
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
What is the interest on the projected benefit obligation?
Actuarial Account
Increase in the PBO due to the passage of time.
This cash out would be based on Future Salary Levels
How do you compute interest on the projected benefit obligation?
Beginning Projected Benefit Obligation x Settlement Rate = Interest Component to add back to Benefit Obligation
What is the Return on Plan Assets?
Interest earned on assets in pension account.
If actual return is positive, what happens to pension expense?
It decreases because it is less money the employer has to contribute the the pension fund
If actual return is negative, what happens to pension expense?
Pension expense increases because it is more money the employer much contribute to make up the lost money from investing
How do you calculate the actual return?
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
What is amortization of unrecognized prior service cost?
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
How is the amortization of unrecognized prior service cost calculated?
Unrecognized Prior Service Cost/Average Remaining Service Period = Amortization Cost per Year to Add/subtract to Pension Expense
What are Gains/Losses on Pension Expense?
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
What must be disclosed of the Beg. PBO to the End PBO?
The reconcilation process used
What formula is used to reconcile PBO for disclosure?
Beg PBO \+ Service Cost \+ Interest Cost \+/- Prior Service Cost \+/- Actuarial Gain/Loss - Benefits Paid = END PBO for Disclore
What formula is used to reconcile PBO for Over/Underfunded status?
Beg PBO \+ Service Cost \+ Interest Cost - Benefits Paid = End PBO for Over/Underfunded Status
What formula is used to calculate whether your pension fund is over/underfunded?
End PBO vs FMV of Assets at EOY
If pension fund is underfunded, what has to happen?
An accrual must be posted to Accrued Pension Liability
What are some examples of post-employment benefits?
After an employee retires, the company continues to pay:
- Life Insurance
- Health Insurance
- Etc…
What is the formula to calculate Ending FMV of assets?
Beg FMV \+ Employer Contributions - Benefits Paid \+ Actual Returns on Assets = End FMV
What is the Accumulated Benefit Obligation?
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
Unrecognized gain/losses for pensions are recognized where?
OCI
What is based on current salary levels vs future salary levels?
Current Salary Levels
- Accumulated Benefit Obligations
- Accumulated Post Retirement Benefit Obligations
Future Salary Levels
- Service Cost
- Interest on Projected Benefit Obligations
What are the steps to record Pension Expense?
- Calculate the Ending Bal in Accrued Pension Liability Account
- 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
If a pension plan is overfunded, where is the overfunded amount captured on the Balance Sheet?
Prepaid Pension Costs - always considered non-current
When recroding Pension Assets & Liabilities on the BS, do you net these amounts if a single company has both Assets & Liabilities?
No
When are Pension Liabilities on the BS considered Non-current?
When they will not be paid in the next 12 months
If the Expected & Actual rate of Return are the same, will there be an Actuarial Gain/Loss?
No
For IFRS, Accumulated Benefit Obligation is?
Accrued Benefit Obligation
Within IFRS, the settlement rate or Discount Rate, what is used to figure this rate?
Corporate Bonds with similar maturities and yield
What method is used by IFRS to account for defined benefit pesion plans?
Projected-unit-credit method
When must an employer accrue post-employment benefits?
When the employee is fully eligible
What is a transition obligation?
- The difference between the accumulated post-retirement benefit obligation and the fair value of the plan assets
- May be recognized immediately
- May amortize over a max period of 20 years
