FAR-Pension Foundations

Question 1

Plus or Negative, how do pension activities affect the Pension T-Account?

Answer 1

S - Current Service cost +
I - Interest Cost +
R - Return on plan assets -
A - Amortization of unrecognized prior service cost + or -
G - Gains and losses - or +
E - amortization of Existing net obligation/asset at implementation + or -

Question 2

When is a Net Obligation created and how is it treated?

Answer 2

PBO ‘GREATER THAN’ FV = Obligation; Adds to expense (+)

Question 3

When is a Net Asset created and how is it treated?

Answer 3

PBO ‘LESS THAN’ FV = Net Asset; Reduces to expense (-)

Question 4

How are interests costs calculated?

Answer 4

(Beginning PBO*Discount Rate)

Question 5

The present value of pension benefits accrued to date using assumptions as to future compensation levels is the

Answer 5

Projected benefit obligation

Question 6

What is a Defined Contribution?

Answer 6

When the employer sets aside specific amounts during the time of service, and the retired employee receives whatever sum the contributions and earnings produce. Contributions are typically paid quickly for tax purposes.

Question 7

What is a Defined Benefit?

Answer 7

The employer guarantees certain benefits to be paid to retired employees and is responsible for setting aside sufficient amounts to fulfill these promises. .

*This type of benefit has much more complicated accounting. 14-2

Question 8

What is a VBO?

Answer 8

Vested Benefit Obligation. A vested benefit that you earn and keep. You do not lose if you quit before retirement.

Question 9

What assumptions are used by the actuary when calculating a PBO?

Answer 9

Salary
Life Expectencie
Interest Rates
Years employed
Costs of administering the plan
Turnover rates

Question 10

How are the ‘SIR’ components of SIR-AGE handled?

Answer 10

The SIR components are all current period accounts, which means that they do not go into Accumulated Other Comprehensive Income and are not amortized.

Question 11

How are the ‘AGE’ components of SIR-AGE handled?

Answer 11

The AGE components go into Accumulated Other Comprehensive Income and include amortization.

Question 12

How is the actual return on plan assets calculated?

Answer 12

Beginning Plan Assets * Actual Return

A t-account approach can also be used

Question 13

What is the formula for actual return on plan assets?

Answer 13

Actual Return = Ending plan assets − Beginning plan assets + Benefits − Contributions