FAR Module 13D Flashcards
Under this pension plan the employer agrees to put a defined percentage of an employee’s pay into a pension plan. Consequently plan participants will receive at retirement whatever benefits the contributions can provide
Defined contribution plan
Under this pension plan the employer agrees to provide at retirement a defined or fixed amount
Defined benefit plan
This is what you owe your employees today if they all cashed in their pension. This calculation is based on future salary assumptions
The projected benefit obligation (PBO)
This is what you owe employees today if they cashed in your pension. In this calculation you base what you owe only on current salary levels
Accumulated benefit obligation
Where does the projected benefit obligation appear
This never appears on the financial statements, but you do show your calculations as a disclosure
T/F
The codification requires reporting the funding status of a pension plan. Overfunded and underfunded plans must be reported on the balance sheet as either assets or liabilities
TRUE
T/F
For ease of calculations you can net an overfunded and underfunded pension plan
FALSE
do not net these
If the plan is overfunded how is it recorded on the balance sheet
As a non-current prepaid asset (prepaid pension expense)
If the plan is underfunded how is it recorded on the balance sheet
Either as a current liability, a non-current liability, or both
What are the five factors involved in pension expense for a DBP
1) Service cost
2) interest component
3) actual return on plan assets
4) prior service cost
5) actuarial gains or losses
T/F
The service cost decreases pension expense
FALSE
Service cost increases it
How do you calculate service cost
Generally this will be given to you
T/F
The interest component increases pension expense
TRUE
How do you calculate the interest component
(Beginning projected benefit obligation)
X
(Discount/settlement rate)
In what situations will the actual return on plan assets increase or decrease pension expense
If the actual return is positive this decreases pension expense
if the actual return is negative this increases pension expense
How do you calculate the actual return on plan assets
Beginning fair market value of assets
+ employer contribution
- benefits paid
= ending balance of plan assets at fair value
+/- actual return on plan assets (plug to make equation balance)
Under what situation will you have an actuarial gain
If the actual return is greater than the expected return
Under what situation will you have an actuarial loss
The actual return is less than the expected return
What do you do with an actuarial gain or loss
Amortize it
This is highly complicated and we most likely won’t be asked to do it
What situations cause there to be a prior service cost
1) When the company did not have a pension plan at the beginning but then later got one
2) when a pre-existing pension plan is amended
How do you calculate the prior service cost for the period
Unrecognized prior service cost /
avg # of years before avg employee retires
T/F
prior service cost can increase or decrease pension expense, but generally will increase pension expense
TRUE
An actuarial gain or loss consists of what two factors
1) current period difference between the actual and expected return on plan assets
2) amortization of unrecognized net gain or loss from previous periods
T/F
An actuarial gain will increase pension expense while an actuarial loss will decrease pension expense
FALSE
an actuarial gain will decrease pension expense while an actuarial loss will increase pension expense
