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Flashcards in F6: Pension Plans Deck (40):
1

Pension accounting is based on what type of accounting?

Accrual

2

What causes accounting problems with defined benefit plans?

The use of estimates and assumptions

3

Contributory vs Noncontributory

Contributory- employees required to contribute to the plan
Noncontributory- only the employer contributes

4

The term "funding" refers to:

The sponsor company making contributions to the plan

5

The 2 non-GAAP methods of pension plans

1- "Pay-as-you-go" Method
2- "Terminal Funding" Method

6

"Pay-as-you-go" definition

-Cash basis method
-Expenses pension payments after someone has retired

7

"Terminal Funding" definition

-Cash basis method
-Pays entire pension plan liability upon retirement by purchasing an annuity-type insurance policy

8

The 2 GAAP methods of pension plans

1- Defined Contribution Plan
2- Defined Benefit Plan

9

1 example of a Defined Contribution Plan

401K

10

Defined Benefit Plan definition

-Defines the benefits to be paid to employees at retirement
-Calculated by using actuarial assumptions of future benefits

11

4 factors that get looked at for defined benefit plan actuarial assumptions

1- EE's compensation levels near retirement
2- # of years of service
3- # of years until retirement
4- # of years the plan expects to pay benefits after retirement

12

ABO

-Accumulated Benefit Obligation
- use current salary

13

PBO

-Projected Benefit Obligation
- use guess future salary

14

Service cost definition

-Present value of all pension benefits earned by employees in the current year
-Provided by the actuary

15

Interest cost happens because of:

the passage of time

16

Prior service cost definition

-Service prior to initiation of plan that employees retroactively receive credit for
-Subsequent plan amendments

17

Components that INCREASE PBO:

1- Service Costs
2- Interest Costs
3- Prior Service Costs
4- Actuarial loses

18

Components that DECREASE PBO:

1- Actuarial gains
2- Benefit payments

19

How to calculate the PBO

Beginning PBO
+ service cost
+ interest cost
+ prior service cost
+ actuarial losses
- actuarial gains
- benefits paid to retirees
= Ending PBO

20

Plan assets should be reported at:

Fair value

21

To calculate ending value of plan assets

Beginning fair value of plan assets
+ contributions
+ actual return on plan assets (squeeze)
- benefits paid to retirees
= Ending fair value of plan assets

22

Pension expense on I/S AKA (and definition)

"Net periodic pension cost"
-The increase in PBO during the period

23

I/S Expense Formula (SIR AGE)

current Service cost
+ Interest cost
- Return on plan assets
+ Amortization of prior service cost
- Gains and + losses
+ amortization of Existing net obligation or net asset
= Net Periodic Pension Cost

24

Current service cost definition

PV of all benefits earned in current period

25

Interest cost definition and calculation

Increase in PBO due to the passage of time

Beginning of period PBO
X Discount Rate
= Interest Cost

26

US GAAP allows companies to offset pension expense by one of two ways:

Either by:
1- actual return on plan assets
2- expected return on plan assets

27

How to calculate expected return on plan assets

Beginning FV of plan assets
X expected rate of return on plan assets
= Expected return on plan assets

28

How is unrecognized prior service costs recorded? (and calculation)

As unrecognized prior service cost in OCI

Beginning unrecognized prior service cost
/ by the average remaining service life
= amortization of prior service cost

29

Gains/Losses arise from two sources:

1- difference between expected and actual return on plan assets
2- changes in actuarial assumptions

If good for the plan = gain
If bad for the plan = loss

30

Entities have two choices when accounting for gains/losses:

1- recognize on I/S in period incurred
2- recognize in OCI when incurred and then amortize (most often used to smooth earnings)

31

The "corridor approach" definition

Gains/losses can be amortized IF exceeds 10% of the GREATER of beginning year balances of:
1- market related value of plan assets
2- PBO

32

The "corridor approach" calculation

Unrecognized gain/loss
- 10% of PBO OR Market related value (greater of)
= Excess
/ by average remaining service life
= Amortization of unrecognized gain/loss

33

"Funded Status" calculation for B/S

FV of plan assets
- PBO
= Funded status

34

If Overfunded,

Pension plan asset (always noncurrent)
(this is a positive funded status)

35

If Underfunded,

Pension Plan liability (can be current, noncurrent, or both)
(this is a negative funded status)

36

Settlements definition

Sale of assets to buy annuity contracts

37

Curtailments definition

Events that reduce expected remaining years of service or eliminate accrual of defined benefit for a significant # of employees

38

Termination Benefits definition & calculation

When employees are paid to terminate their rights to future pension payments

Lump sum payment
+ PV termination benefits
= Special term benefit

39

2 rules of thumb when it comes to disclosures

1- More disclosure is better than less
2- Disclose as much as reasonably possible

40

Relationship between pension plan and sponsoring company

They are two separate legal entities
(GAAP requires f/s be presented by the pension plan itself)