Terms in Post Employment Benefits Flashcards
What is Current Service Cost
It is the present value of benefits earned by the employees during the current period.
or it is the increase in the present value of defined benefit obligation as a result of employee service in the current period.
What is Interest Cost
It is the increase in the obligation due to the passage of time.
Interest cost increases every year regardless of whether the employee works another year or not. Interest cost is immediately recognized as a component of pension expense.
Interest Cost = Beginning PBO x Discount Rate
Net Interest Expense/Income
A net interest expense represents the following cost of deferring payments related to the plan i.e. if underfunded - liability, then an expense is reported.
A net interest income represents the following income from prepaying amounts related to the plan i.e. if overfunded - asset, then an income is reported.
Net Interest Expense/Income = Beginning Funded Status x Discount Rate
What is Remeasurements
Remeasurements include (a) actuarial gains and losses and
(b) any differences between the actual return on plan assets and the amount included in the net interest expense/income calculation.
Actual Return on Plan Assets = Beginning Plan Assets x Discount Rate
Past (Prior) Service Cost
Is the amount by which a company’s pension obligation relating to employee’s service in prior periods changes as a result of plan amendments or a plan curtailment.
A curtailment occurs when there is a significant reduction by the entity either in the no. of employees covered by a plan or in benefits.
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What is Actuarial Gains and Losses
Occur due to changes in PBO, due to change in actuarial assumptions.
An actuarial gain (e.g. when an employee dies earlier) will decrease benefit obligation and an actuarial loss (e.g. when an employee lives longer) will increase the obligation.
However, there are two components within actuarial gains and losses; the first component is the gain (loss) due to decrease (increase) in PBO occurring on account of changes in actuarial assumptions and the second component is the difference between actual and expected return on plan assets.
What is Expected Return on Plan Assets
Is the assumed long-term rate of return on the plan’s investment. Under
IFRS, the expected rate of return on plan assets is implicitly assumed to be the same as the discount rate used for computation of PBO.
Also, the expected return on plan assets requires estimating in which future
period the benefits will be paid.
Expected Return on Plan Assets = Beginning Plan Assets x Expected Return
What is Amortization of Actuarial Gains and Losses?
Under IFRS, actuarial gains and losses are not amortized.
Under US GAAP, actuarial gains and losses are amortized using the ‘Corridor Approach’.
If Actuarial Gains and Losses > 10% of Beginning PBO or Beginning Plan Assets.
Amortization is required. The excess amount over the corridor is amortized as a component of periodic pension cost in P&L over the remaining service life of the employees.
Companies can choose to amortize actuarial gains and losses more quickly than implied by the corridor method.
However, the application has to be consistent for gains as well as losses over time.
Where Net interest income/Expense recognized in IFRA
P/L
Where is Service cost recognized in IFRS
P/L
Where is Remeasurment recognized in IFRS
OCI (Not P/L)
Where is Current service costs recognized in GAAP
Recognized in P&L.
Where is Interest expense on pension obligation in GAAP
Recognized in P&L
Actuarial gains and losses including differences between the actual and expected returns on plan assets in GAAP
Recognized immediately in P&L or, more commonly, recognized in OCI and subsequently amortized to P&L using the corridor or faster recognition method.
