Reading 15: Employer Contribution Flashcards
Defined Benefit Accounting
Employer
bears the investment risk
Needs to estimate future benefit amount.
Diffcult accounting / analysis issues
Two Types:
Pay Related - related to salary level
Non Pay Related - Unrelated to Salary level.
Projected Benefit Obligations
PV of all future pension payments earned to date based on expected salary increases over time. Assumes employee works till retirement
Estimates Liability on a Going concern basis
Under IFRS PBO = Present Value of Defined Benefit Obligation (PVDBO)
PBO Components
Service Cost - Attributed to employees efforts during the year. The Acuturial PV of pension benefits earned in a year.
Interest Cost - from passage of time = Beginning PBO x Discount Rate
Actuarial Gains and Losses - due to changes in Acturial Assumptions
Past Service Costs - Retroactive impact on past benefits resulting from plan amendments
Benefits Paid - Payments made.
PBO Equation
PBO = Begning PBO + Servcie Cost + Interest Cost +/- Acturial Gains and Losses +/- Past Service Costs - Benefits Paid
Fair Value of Plan Assets
Employer Contributions - Funding policy is a function of Income tax, ERISA rules (US), CF Considerations
Actual Return on Assets - Actal Capital Gain / Dividends / Interest (will fluctutate with Market)
Benefits Paid - Payments made.
Funded Status
Funded Status = Fair Value of Plan Assets - PBO
If FV> PBO = Overfunded , If FV<pbo></pbo>
<p>Funded Status = Economic Position of the Plan. = Balance Sheet Asset / Liab</p>
</pbo>
Periodic Pension Cost
Total Periodic Pension Costs = Contributions - Change in Funded Status
TPPC = I/S Expense + OCI Expense
TPPC is the same under IFRS or USGAAP but differ in where the pension cost is reflected.
Income Statement - USGAAP
Periodic Pension Cost (I/S) = Service Cost + Interest Cost - Expected Return on Plan Assets +/- Amortization of Actuarial Gains / Losses +/- Amort of Past Service Costs
Expected Return on Plan Assets, Amort of Acturial Gains/ Losses and Amort of Past Service Costs are smoothed events
Unamortized Past service cost and acturial gains and losses in OCI.
Income Statement - IFRS
Periodic Pension Cost (I/S) = Service Cost +/- Net Interest Expense +/- Past Service Costs
Remeasurements are reflected in OCI and not amortized.
Net Interest Expense = Beg Funded Status x Discount Rate
IFRS Vs USGAAP - Discount Rate and Expected Return Issue
IFRS
Interest Expense = Opening funded Status x Discount Rate
USGAAP
Expected Return Opening Plan Assets x %Expected Return
Interest Expense = Opening PBO x Discount Rate
Actuarial Pension Plan Assumptions
All plans must make and disclose three assumptions
Discount Rate
Rate of compensation increase
Expected return on plan assets (USGAAP)
Impact of Actuarial Assumptions
Delayed Recognition of Pension Costs
Terminology
IFRS : Remeasurement gains and Losses = Acturial Gains and Losses + (Acutal - Expected) ROA
USGAAP: Acturial Gains and Losses = Acturial Gains and Losses + (Actual-Expected) ROA
Two Main Delayed EventsRemeasurement (IFRS and USGAAP)
Arising from changes in Acturial Assumptions affecting the PBO
From Differences in the acutal and expected return on plan assets (IFRS = Expected Return = Discount Rate)
Past Service Costs
Changes in PBO due to plan amendments Amortized over service life of Plan Participants
Expenses Immediately under IFRS.
Acturial Gains and Losses Corridor Approach
If Beginning Actuarail Gains and Losses exceed 10% of Opening PBO / Opening Plan Assets then it should be AMORTIZED
IFRS Vs USGAAP
Expected Return vs Discount Rate:
USGAAP: Expected Return and Discount Rates may differ
IFRS: Expected Return = Discount Rate
Interest and $Expected Return:
USGAAPL Interest and $Expected Return may differ
IFRS: Netted
Opening OCI Balances
USGAAP: 10% Corridor Approach Amortization
IFRS: No Amortization
Past Service Costs
USGAAP: Past Service Cost taken to OCI and then Amortized
IFRS: Immediately Expensed.
Analyst Adjustments (I/S)
Most Balancesheet would use Full Pension expenses is taken through operating expenses. This is not correct
Service Cost: Only Service Cost is Operating
Pension Expense: Remove Pension Expense from operating expenses
Interest Cost: Add Interest Cost to Interest Expense
Actual Return on Plan Assets: Add actual return on plan assets to non operating income
Amortization; Ignore amortization
Hence Total I/S effect is Service + Interest - Actual Return.
Analyst Adjustment - Cash Flow Statement
Adjust CFO and CFF to represent after tax difference in economic Pension expense and cash contributions.
Contributions > TPPC = Principal PMT [ Contributions-TPPC[((1-T) - Decrease CFF Increase CFO
Contribution < TPPC = Borrowing Contributions = TPPC - Increase CFF Decrease CFO
Share Based Compensation
Disclosures Required
Nature and Extent of share based compensation
How Fair Value is determined
Impact on Income for the period
Accounting
Allocate fair value over service period (the period benefitted by the employees service)
Stock Grants
Compensation Expense equals market value at grant date
Restricted Stock : Ownership returned to Company if conditions are not met. (length of service or performance goals)
Performance Shares : Granted on meeting performance goals
Stock Options
Fair value at grant date = estimated option premium
Service period equals time between grant date and vesting date
Vesting date = first date the option may be exercised
Fair value is expensed over vesting date (i.e RE declines, Paid in Capital Increases - No net change in total equity)
Option Valuation Methods
Fair Value measured “based on observable market price (premium) of an option with the same or similar terms and conditions, if one Is available”
In the absence of a market based instrument, fair value is determined by
Black Scholes Model
Binomial Model
Monte Carlo Simulation
Model Assumptions
Six Assumptions
Exercise Price
Stock Price at grant date
Volatility
Risk Free Rate
Expected Term to expiry
Dividend Yield
