Bottom Line Chptr 17 Flashcards
Pension plans
are arrangements designed to provide income to individuals during their retirement years. Defined contribution plans promise fixed annual contributions to a pension fund, without further commitment regarding benefit amounts at retirement. Defined benefit plans promise fixed retirement benefits defined by a designated formula. The employer sets aside cash each year to provide sufficient funds to pay promised benefits.
The accumulated benefit obligation
is an estimate of the discounted present value of the retirement benefits earned so far by employees, applying the plan’s pension formula to existing compensation levels. The vested benefit obligation is the portion of the accumulated benefit obligation that plan participants are entitled to receive regardless of their continued employment. The projected benefit obligation estimates retirement benefits by applying the pension formula to projected future compensation levels.
The PBO can change due to
The PBO can change due to the accumulation of service cost from year to year, the accrual of interest as time passes, making plan amendments retroactive to prior years (prior service cost), and periodic adjustments when estimates change (gains and losses). The obligation is reduced as benefits actually are paid to retired employees.
The plan assets consist of
The plan assets consist of the accumulated balance of the annual employer contributions plus the return on the investments less benefits paid to retirees.
The difference between an employer’s obligation (PBO for pensions, APBO for other postretirement benefit plans) and the resources available to satisfy that obligation (plan assets)
The difference between an employer’s obligation (PBO for pensions, APBO for other postretirement benefit plans) and the resources available to satisfy that obligation (plan assets) is the funded status of the pension plan. The employer must report the “funded status” of the plan in the balance sheet as a net pension liability if the obligation exceeds the plan assets or as a net pension asset if the plan assets exceed the obligation.
The pension expense is a
The pension expense is a composite of periodic changes in both the projected benefit obligation and the plan assets. Service cost is the increase in the PBO attributable to employee service and is the primary component of pension expense. The interest and return-on-assets components are financial items created only because the pension payment is delayed and the obligation is funded currently. Prior service cost is recognized over employees’ future service period. Also, neither a loss (gain) on the PBO nor a loss (gain) on plan assets is immediately recognized in pension expense; they are recognized on a delayed basis to achieve income smoothing.
Recording pension expense causes
Recording pension expense causes the net pension liability/asset to change by the service cost, the interest cost, and the expected return on plan assets. Any amortization amounts included in the expense will reduce the accumulated other comprehensive income balances being amortized, e.g., net loss—AOCI and prior service cost—AOCI. Similarly, the plan assets are increased by the annual cash investment. New losses and gains (as well as any new prior service cost should it occur) are recognized as other comprehensive income.
The various elements of a pension plan
The various elements of a pension plan—projected benefit obligation, plan assets, prior service cost, gains and losses, pension expense, and the funded status of the plan—are interrelated. One way to see how each element relates to the other is to bring each part together in a pension spreadsheet.
Accounting for postretirement benefits is similar in most respects to accounting for pension benefits.
Accounting for postretirement benefits is similar in most respects to accounting for pension benefits. Like pensions, other postretirement benefits are a form of deferred compensation. Unlike pensions, their cost is attributed to the years from the employee’s date of hire to the full eligibility date.
The expected postretirement benefit obligation (EPBO)
The expected postretirement benefit obligation (EPBO) is the actuary’s estimate of the total postretirement benefits (at their discounted present value) expected to be received by plan participants. The accumulated postretirement benefit obligation (APBO) is the portion of the EPBO attributed to employee service to date.
The components of postretirement benefit expense are
The components of postretirement benefit expense are essentially the same as those for pension expense.
Under both U.S. GAAP and IFRS we report all changes in the obligation and in the value of plan assets as they occur. The ways the changes are determined and reported are different, though, for some of the changes.
Under both U.S. GAAP and IFRS we report all changes in the obligation and in the value of plan assets as they occur. The ways the changes are determined and reported are different, though, for some of the changes. The changes that constitute the components of the net pension cost are reported separately as (a) the service cost, (b) the net interest cost/income, and (c) remeasurement gains or losses. Under IFRS, past service cost is combined with current service cost and reported as service cost within the income statement rather than as a component of other comprehensive income as it is under U.S. GAAP. Under IFRS, gains and losses are not recycled from other comprehensive income as is required under U.S. GAAP (when the accumulated net gain or net loss exceeds the 10% threshold). Also, the interest cost and return on plan assets are replaced by net interest cost/income (interest rate times the difference between the DBO and plan assets).
