Ch 6-1: Pension Flashcards Preview

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Flashcards in Ch 6-1: Pension Deck (24):
1

Pass key: What are the two to three main things that CPA exam questions on for Pensions (US GAAP)?

(1) Income statement:

Finding the net periodic pension cost on the Income statement (use a formula).

(2) Balance sheet: Figuring out these items
a) Funded status between Project benefit obligation and plan assets

b) using the formula to calculate the Project benefit obligation (PBO)

3) Other comprehensive income (OCI) and Accumulated other comprehensive income (AOCI): a) find out what items go in here;
b) how to calculate them via a formula;
c) how to move items out of OCI and AOCI to I/S (net of tax) and determine which accounts to do so via journal entries

2

Formula on Net periodic pension cost (income statement).

 

Hint: SIR AGE (Becker CPA review method)

Service cost (current service cost)
+ Interest cost (Beg. PBO x discount rate %)
- Expected return on assets (% x Beg. FV plan assets)
+ Amortized Prior service cost (PSC)
- Amortized net gain* 
+ Amortized net loss* 
- Amortized transition asset
+ Amortized transition liability 

= Net periodic pension cost

*Amortized net gain or net loss is done via:

 

Beg. net gain or net loss (From AOCI)
- (10% x beg. PBO or beg. FV plan assets (greater of))
= Difference

Difference / Average service years = Amortized Gain amount (leaving AOCI) and going into net pension cost (I/S)

3

Formula on Plan assets (balance sheet)

Beginning amount
+ contributions
+ Actual return on plan assets (usually via %)
- Benefits Paid out
= Ending Amount on Plan assets

4

Formula on Projected benefit obligation (balance sheet)

Beginning PBO amount
+ Interest cost (usually via % interest rate or % discount rate x beginning PBO amount)
+ Current actual service cost (not prior service cost)
+ Prior service cost ONLY on current period PLAN AMENDMENT S
+ actuarial losses (current period)
- actuarial gains (current period)
- Pension benefits Paid out
= Ending PBO amount

5

Formula to calculate the AMORTIZING net loss or net gain (Pension net loss or pension net gain)

 

(Amortizing net gain or net loss inside AOCI to become a part of Net periodic pension cost >> Income statement)

Unrecognized net loss or net gain (beginning amount already in AOCI, net of tax)
- (0.10 x beginning PBO)
or - (0.10 x Beginning Plan assets at FV)
= EXCESS

Then: Excess / average service years
= Amortized net loss or net gain that will go to Net periodic pension cost on income statement.

6

Formula to calculate Funded status on Balance sheet (US GAAP)

FV asset (plan assets)
- Projected benefit obligation (PBO)
= Overfunded (assets > PBO)

or

= Underfunded (assets < PBO)

7

(IFRS) Formula to calculate the Pension Liability / Pension Asset (balance sheet)

FV Assets
- Projected Benefit Obligation 
= Funded Status
+ Unrecognized prior service cost
+ Unrecognized losses
- Unrecognized gains
= Pension liability (if the PBO is greater than FV assents during calculating)

or

= Pension asset (when FV assets > PBO during calculating)

8

What items go into OCI / AOCI?

Prior service cost
Unrecognized net gain
Unrecognized net loss
Transition asset
Transition obligation (liability)

9

Formula to calculate the amount that goes into AOCI (US GAAP)

Unrecognized service cost (or prior service cost)
+ Unrecognized transition obligation (liability)
- Unrecognized transition asset
- Unrecognized net gain
+ Unrecognized net loss
----------------------------------------
= Amount
x (1 - % tax rate)
= After-tax amount in AOCI

Note: FYI - it's very important the need to calculate the after-tax amount to find the answer to questions on "amount reported in AOCI related to its pension plan" It's required by US GAAP to have items in AOCI after tax.

10

Where on the balance sheet does AOCI report under?

Equiity section on the

 

 Balance Sheet
Assets
Liabilities
Equity >> AOCI

11

Formula on net gain that goes to OCI / AOCI

Beginning Plan Assets
+ Contribution
- Benefits Paid
- Ending plan assets 
= Actual return on plan assets
- (% expected return rate x Beg. plan assets)
= Difference
x (1 - % tax rate) 
= Unrecognized Net gain (after tax) to OCI

Note: anything that goes to OCI / AOCI must be "after tax" (or: Amount x ( 1 - % tax rate))

12

Formula to find the Actual return on plan assets when only given the following:

Beginning plan assets
Ending plan assets
contributions
benefits paid out

Net periodic pension cost
Project benefit obligation

Formula to find actual return:

Beginning amount plan assets
+ contributions
- Benefits paid out
- Ending plan assets
= Actual return (it'll come out as negative number, but remember it's always positive)

Or Ending plan assets
- Beginning plan assets
- Contributions
+ Benefits paid
= Actual return

FYI Note: above formula comes from the BASE formula to find ending plan assets (see below)

Beginning Plan assets
+ Contributions
+ Actual return on plan assets (% actual return on plan assets)
- Benefits paid out
= Ending plan assets

Further note: do not use net periodic pension cost (I/S item) and project benefit obligation (liability) to find the Actual return on plan assets. These have nothing to deal with Actual return on plan assets.

13

Rule: amortized net gain does what to retained earnings and AOCI

Amortized net gain >> INCREASE retained earings (after tax) >> DECREASE AOCI (after tax)

14

According to US GAAP: What is Accumulated benefit obligation?

(US GAAP) Accumulated benefit obligation = PV of future retirement payments tied to pension benefit formula to employee services rendered (worker's work in company) prior to a date,

 

BASED ON ACTUAL CURRENT AND ACTUAL PAST COMPENSATION LEVELS

15

According to US GAAP: What is Projected benefit obligation?

(US GAAP) Projected benefit obligation = PV of future retirement payments tied to pension benefit formula to employee services rendered (worker's work in company) prior to a date,

 

BASED on actual current AND actual past compensation levels AND ASSUMPTIONS ON FUTURE COMPENSATION LEVELS

16

IFRS rules:

 

(1) IFRS rules on handling prior service costs and other items in AOCI.

 

(2) IFRS rules on which method under IFRS that account for Defined benefit pension plan. 

(1) Under IFRS: Both prior service costs and current service costs goes inside income statement.

Past service cost does not go into other comprehensive income.

Remeasurements on actuarial gain or loss, interest income, difference between actual return gain or loss and expected return gain or loss stay inside AOCI and not amortized to Income statement.

 

(2) IFRS rules:  Defined benefit pension plan uses Project-unit credit method, which is used to calcualte the PV of the defined benefit obligation (PV-DBO). Also, it uses accrued benefit obligation to means Accumulated Benefit obligation.

FYI - US GAAP uses Benefit of years service method to measure the PV of defined benefit pension plan.

17

(1) How is Defined Benefit reconciled? As in how Beg/End fund status (FV plan assets - PBO) reconcile with the formula to calculate net pension cost.

 

(2) Scenario: Find the required adjustment to Accrued Pension cost (liability)

{note: Accrued pension cost (liability) comes from: Dr. net pension cost (I/S - expense)
     Cr. Pension Benefit (cost) liability
     Cr. Other Comprehensive Income (OCI)} 

with the following information: Heckler Company's defined benefit pension plan is:

Accrued pension cost, Jan 1, 20X1    $2,000
Service cost                                          19,000
Interest cost                                         38,000
Expected & actual ret. plan assets     22,000
Amort. prior svc. cost                          52,000
Employer Contributions                      40,000

Ending FV plan assets is $750,000
Ending Projected benefit obligation (PBO) = $850,000


(3) Scenario: The Tommy-knocker corporation has this defined benefit pension plan started in 20x4 and here are the data as of Dec 31 20x6.

Projected benefit obligation   $600,000
Accum. Benefit obligation         550,000
Plan assets at fair value             420,000
Pension cost for 20x6               180,000
Pension contribution for 20x6  150,000

Assume:  on Jan 1, 20x6 this pension plan is fully funded and there's no pension assets / liabilities on balance sheet.  Assume 40% tax rate.  Find the net effect of required adjustment on accumulated other comprehensive income on Dec 31, 20x6?
 

Beg. Fund Status (FV plan assets - PBO = overfunded or underfunded)
+ Contributions
- Service Cost (current service cost)
- Interest cost (Beg. PBO x discount rate)
+ Expected return on plan assets (Plan assets x expect return rate)
+ Net gains incurred during the current period    (amortized from AOCI to Net pension cost)
- net loss incurred during the current period          (amortized from AOCI to Net pension cost)
= Ending Funded status
    (FV - plan assets - PBO = overfunded or underfudned)

 

(2) Scenario:

Step 1)  $750,000 FV plan assets - $850,000 PBO = $100,000 underfunded
 

Step 2)
+ Service cost                  19,000
+ interest cost                  38,000
- Exp. & actual return       (22,000)
+ Amort. prior svc cost     52,000
= End pension cost         87,000

Then:  $89,000 net pension cost
            - 40,000 contributions
             $47,000 inc. to accrued pension cost

Dr. Pension expense $87,000
    Cr. Cash                                           40,000
    Cr. Accrued pension cost (liability) 47,000

Step 3)
Accrued Pensio cost
$2,000 accrued pension cost (liability)
+ 47,000 inc. to accrued pension cost
$49,000 accured pension cost
+  ????
= $100,000 ending fund status 
   ($850K PBO - $750K FV plan assets)

So: $100,000 end fund status - $49,000 accr. pension cost = $51,000 required adjustment

This $51,000 required adjustment is used to get the $100,000 underfunded status

(3) Scenario:

First:  Fund status:

$600,000 PBO - $420,000 FV plan assets = $180,000 underfunded status

Second: 
     $180,000 pension cost
   - $150,000 contribution
      $30,000 

Third: So: to get to this $180,000 ending funded status (as of Dec 31):

Beg. Fund Status   $0.00
Pension cost          $180,000
Contribution           - 150,000
                              = $30,000
                                + ???????
                               $180,000 underfunded status  

-->  $30,000 - $180,000 = $150,000 Adj.

Fourth:  Adjustment to AOCI:

$150,000 x (1 - 0.40 tax rate) 
= $150,000 x 0.60 
= $90,000 after tax adj. to OCI

FYI - Journal entries
Dr. OCI $90,000
     Cr.  Deferred Tax asset    $60,000
     Cr.  Pension liability          $150,000 underfunded

18

What is prepaid pension cost?

Prepaid pension cost = cumulative excess cost amount over acrrued Pension cost (a.k.a. net periodic pension cost (expense))

19

What are other words for Net Periodic Pension Expense (income statement item)?

Pension cost

Net Pension cost

Net periodic pension cost

20

When amending a defined benefit pension plan in increasing benefits for services to employees in current year, this prior service cost (amended) is reflected in financial statements for?

Current year only
Current year and future year
future year only

 

Current year and future years

21

                     1/1/Y2 Amended          1/1/Y2 after amend.

Acc. B.O.         $950,000                  $1,425,000
PBO                 1,300,000                   $1,900,000

How to find the unrecognized prior service cost to be amortized over future periods from this amendment?

Beg. PBO:    1,300,000   (1/1/Y2 amended)
- End PBO:   1,900,000   (1/1/Y2 after amended)
--------------------------------
=                 $600,000 unrecognized prior service cost to be amortized over time.

22

Overfunded status plans are recognized on balance as:

Current assets or  Non-current assets

Underfunded status plans are recognized on balance sheet as:

Current liabilites only
Non-current liabilties only
Current liabilites or non-current liabilities depending on whether they're paid within 12 months or not

Overfunded status plans are recognized on balance as:

Non-current assets

Underfunded status plans are recognized on balance sheet as:

Current liabilites or non-current liabilities depending on whether they're paid within 12 months or not

 

Current pension liability (underfunded status pensio n plan) is where the plan is going to be paid within 12 months.

Noncurrent pension liability (underfunded pension plan) is not going to be paid within 12 months. It's going to be paid like after 1 year later.  If no payments on these plans are not made within 24 months (2 years), then it's still non-current liability.

23

Disclosures notes: Which of the following not required a disclosure?

Funded status of pension plan with amounts recognzied in balance sheet, showing separately noncurrent assets, noncurrent liabilities, current liabilties recognized.

Rates for assumed discount rate, rate of compensation increase, and expected long-term rate of return on plan assets.

Reconcliation of accrued or prepaid pension cost reported on its balance sheet with the pension expense reported in its income statement.

The recognized amount of net periodic benefit cost with compents shown separately.

Expected long-term rates of return on all employer's assets.

A reconcilation between vested and novnested benefit obligation of its pension plan with the accumulated benefit obligation.

A reconciliation of accumulated benefit obligation of its pension plan with its projected benefit obligation.

An explanation of significant change in plan assets if not apparent from other disclosures.

The amount of any unamortized prior service cost or credit not recognized in the statement of finacial position (balance sheet)

The effect of two-percentage point increase in assumed health care cost trend rate(s)

Reconciliation of beginning and ending balance of projected benefit obligation.

 

 

Disclosures NOT REQUIRED for these items:

Reconcliation of accrued or prepaid pension cost reported on its balance sheet with the pension expense reported in its income statement.

Expected long-term rates of return on all employer's assets.

A reconcilation between vested and novnested benefit obligation of its pension plan with the accumulated benefit obligation.

A reconciliation of accumulated benefit obligation of its pension plan with its projected benefit obligation.

The effect of two-percentage point increase in assumed health care cost trend rate(s)

24

IFRS:

True of false: Under IFRS, project-unit-credit is used on defined benefit pension plan.

 

When are assets and liabilities in pension plans are netted together?

True.  IFRS rules says that project-unit-credit method is used on defined benefit pension plan.

IFRS rules says:  to net Assets and liabilities in one pension plan when have legal enforceable right to use assets in ONE plan to pay off obligations in another separate pension plan.

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