Pension Expense, Reporting by Pension Plan

Question 1

What components of Pension Expense occur each year?

Answer 1

The first 3 (Service cost, Interest Cost, Expected Return)

Question 2

When do benefits vest?

Answer 2

If they are not contingent on continued employment

Question 3

Where is the PBO and Fund Assets reported for a Pension Fund?

Answer 3

In the Footnotes

Question 4

What is prior service cost?

Answer 4

An immediate increase in PBO from the retroactive application of an increase in benefits for services already rendered. Ex. Plan changes benefits to be 2.10% instead of 2% and is applied retroactively

Question 5

What are the two types of gains and losses in Pensions?

Answer 5

1. ) Changes in PBO due to estimate changes and experience changes
2. ) The difference between expected and actual return.

Question 6

Are Prior Service Costs and Pension Gains and Losses reported immediately in Pension Expense?

Answer 6

No, they are recognized on a delayed basis by gradually amortizing them as components 4 and 5

Question 7

What are the two methods of amortizing Prior Service Costs in Pension Expense?

Answer 7

1. ) Straight Line Method - Amortize PSC over the average remaining service period of employees covered
2. ) Service Method - Amortize an equal amount of PSC per service-year, more amortization is recognized when employees are working. THIS IS THE PREFERRED METHOD

Question 8

How are gains/losses treated in Pensions?

Answer 8

All gains and losses are merged into one amounts. Gains and Losses cancel each other

Question 9

What are the 2 sources of gains in a Pension Fund?

Answer 9

1. ) Decrease in PBO from increase in expected or actual turnover, decrease in life expectancy, etc.
2. ) Actual Return is greater than expected return

Question 10

What are the 2 sources of losses in a Pension Fund?

Answer 10

1. ) Increase in PBO from decrease in discount rate, decrease in turnover, etc.
2. ) Actual Return is less than expected return.

Question 11

What are the two components of component 5 (Amortization of gain or loss) in Pension Expense?

Answer 11

1. ) Determine amortization of net gain or loss at beginning of current year to include in pension expense. 2 methods of amortization (1)minimum (corridor) amortization (most popular) (2) SL
2. ) Determining the net gain or loss at the end of the current year for amortization the following year.

Ending net gain or loss=beginning net gain or loss-amortization of beginning net gain or loss+-PBO gain or loss for the CY+-Asset gain or loss for current year

Question 12

What is the final PBO formula?

Answer 12

PBO=SC to date+interest cost to date-benefits paid to date + PSC + net PBO gain or loss to date

Question 13

How do we compute projected benefit obligation (PBO) at the balance sheet date?

Answer 13

Service cost to date + interest cost to date - benefits paid to date + prior service cost + or - net PBO gain or loss to date

Question 14

What accounts are prior service cost and pension gains/losses recognized in immediately?

Answer 14

They are recognized in other comprehensive income and pension liability.

Question 15

What immediate changes in projected benefit obligation (PBO) will cause a change in pension liability?

Answer 15

Prior service cost (PSC) and PBO gains and losses