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Flashcards in Ch 20 Deck (42):
0

Pension plan

Arrangement where employer provides benefits (payments)
To retired employees for services they provided in their
Working years

1

What are the 2 divisions for pension accounting

1 accounting for employer

2 accounting for the pension fund

2

Pension fund/plan

1 Entity that receives contributions from employer,

2 administersThe pension assets

3 makes benefit payments to retired employees



3

When is a pension plan funded?

When employer makes payments to funding agency

4

Contributory pension plans

Employees bear part of cost of stated benefits or
Voluntarily make payments to increase their benefits

5

Non contributory pension plans

Employer bears entire cost

6

Qualified pension plans

Offer tax benefits

7

What are the tax benefits of qualified pension plans? 2

1 deductibility of employer's contributions

2 tax free status of earnings from pension fund assets

8

What should a pension fund be considered in terms of an entity

As a separate legal and accounting entity

9

What are the 2 most common types of pension plans?

1 defined contribution plans

2 defined benefit plans

10

Defined contribution plan

Example of this kind of plan?

Employer agrees to contribute to a pension trust a certain
Sum, each period based on a formula

Ex. 401k plan

11

Defined contribution plan: what 4 possible factors are considered in the formula for contribution

1 age
2 length of employee service
3 employer's profits
4 compensation level

12

What is the only thing defined in the defined contribution plan?

The amount of the employer's contribution

13

What factors do the size of the pension benefits depend on? 3

1 amounts contributed

2 income accumulated in trust

3 treatment of forfeitures of funds caused by early
termination of employees

14

Independent 3rd party trustee

Assumes ownership of the pension assets and is
accountable for their investment and distribution

15

Defined benefit plan

Outlines benefits employees will receive when they retire

16

Defined benefit plan: how are benefits determined

As function of employee's years of service and
compensation level in years approaching retirement

17

Who are the beneficiaries of the defined benefit trust?

2) who are the beneficiaries of the defined contribution trust?

Defined benefit trust: employers are beneficiaries

Defined contribution trust: employees are beneficiaries

18

What is the primary purpose of the defined benefit plan?

Safeguard and invest assets do there will be enough
To pay the employer's obligation to employees

19

In form the defined benefit trust is a...

Separate entity

20

In substance, the defined trust assets and liabilities...

What does this mean?

Belong to the employer

As long as the plan continues, no matter what happens in
The trust, the employer is responsible for payment of employee
Benefits

21

Actuaries

Individuals trained through rigorous certification program

assign probabilities to future events and their financial effects

22

What do actuaries do relating to pension plans?

Companies hire actuaries to ensure pension plan is
appropriate for the employee group covered

23

Pension obligation

Deferred compensation obligation employer has to
employees under terms of pension plan

24

Vested benefits

Those employee is entitled to receive even if rendering
No additional services to company

25

What do companies use to compute vested benefit obligation?

Vested benefits at current salary levels

Or on years of service

26

Accumulated benefit obligation

Measures vested and no vested benefits based on years
Of service

27

Projected benefit obligation

Pension obligation for vested and nonvested benefits using
Future salaries

Method preferred by FASB

28

How is the projected benefit obligation measured?

Using present value of vested and no vested benefits accrued
To date based on future salary

29

How is overfunded or underfunded status measured on a pension plan?

Difference btw fair value of plan assets and projected
benefit Plan

30

How do companies account for pension cost?

On an accrual basis

31

Service cost AKA projected benefit obligation

Expense caused by increase in pension benefits payable
To employees b/c of their services rendered during the year

32

How do actuaries compute service cost?

Present value of new benefits earned by employees during
Year

33

Interest on liability

Interest expense accrues each year on projected benefit
Just as it does on discounted debt

34

Settlement rate

Interest rate (on liability) computed by actuary

35

Actual return on plan assets

Company adjusts annual pension expense for interest and
Dividends that accumulate within fund

As well as increases and decreases in fair value of assets

36

Amortization of prior service cost

Allocation of prior service cost to pension expense in
Future to remaining service year employees

37

5 components of pension expense

1 service cost for year
2 amortization of prior service cost
3 interest on liability
4 actual return on plan assets
5 gain or loss

38

Interest on liability: discounted basis

Company defers paying liability until maturity

39

Settlement rates

Discount rate that reflects rates at which companies
effectively settle pension benefits

40

How do companies determine settlement rates?

Look at rates of return on high quality fixed income
investments currently available

41

Equation for actual return on plan assets

Actual return =
(plan assets ending balance - plan assets beginning balance)
- (contributions - benefits paid)