Journal Entry to set up a defined contribution plan.(Both accrued expense and payment)
Debit Pension Expense Credit Accrued pension cost Debit Accrued Pension Cost Credit: Cash
What is a Defined Contribution?
When the employer sets aside specific amounts during the time of service, and the retired employee receives whatever sum the contributions and earnings produce. Contributions are typically paid quickly for tax purposes.
What is a Defined Benefit?
The employer guarantees certain benefits to be paid to retired employees and is responsible for setting aside sufficient amounts to fulfill these promises. . *This type of benefit has much more complicated accounting. 14-2
What is a VBO?
Vested Benefit Obligation. A vested benefit that you earn and keep. You do not lose if you quit before retirement.
What is a ABO?
Accumulated Benefit Obligation. What is owed for service to date and is calculated at current wage rates. Benefit is lost of employee leaves before retirement.
What is a PBO?
Projected Benefit Obligation. Is like a ABO, but uses projected future wages and then is stated at the present value using the benefits-years-of-service method. PBO is the most realistic of pension costs of a going concern. The PBO is measured using assumptions as to future compensation levels.
What assumptions are used by the actuary when calculating a PBO?
Salary Life Expectencie Interest Rates Years employed Costs of administering the plan Turnover rates
How are the 'SIR' components of SIR-AGE handled?
The SIR components are all current period accounts, which means that they do not go into Accumulated Other Comprehensive Income and are not amortized.
How are the 'AGE' components of SIR-AGE handled?
The AGE components go into Accumulated Other Comprehensive Income and include amortization.
Are Current service costs (SIRAGE), added or subtracted?
Service costs are always added.
Are prior service costs (SIRAGE), added or subtracted?
Plus or minus. Are to give benefits for periods prior to when there were service costs. Increase if benefits are retroactively given; decreased if benefits are retroactively taken away. Prior service costs are amortized over the remaining service life. They ARE NOT added in one lump sum.
Are interests costs (SIRAGE), added or subtracted?
They are added. Are interest earnings that the service costs are projected to earn for the year. (Beginning PBO*Discount Rate)
Are return on plan assets (SIRAGE), added or subtracted?
They are subtracted. They are subtracted because it is money that is earned and does not need to be set aside to meet estimates. 12:30 in Lecture 14.02
How is the actual return on plan assets calculated?
Beginning Plan Assets * Actual Return A t-account approach can also be used
Are Deferred gain/losses (SIRAGE), added or subtracted?
Deferred gains are added, deferred losses are subtracted. Gains and losses result from differences in expected return on plan assets.
What is the corridor approach?
When judging if deferred gains and losses have become too big, they are compared to the larger of 10% of two numbers: Beginning PBO, or Beginning FV of Plan Assets. If deferred loss or gains are larger than 10% of beginning PBO or beginning Plan Assets, the the difference is ammortized over the average remaining service life
If it has been judged that a planned benefit has a differed gain that is too large, what course of action is taken?
After using the corridor approach, the amount that has caused the gain to be too large is amortized over the average service life.
Is the excess amortization of differed gain or loss (SIRAGE), added or subtracted?
Is the excess amortization of existing net obligation or net asset at implementation (SIRAGE), added or subtracted?
Plus or Minus. If PBO GREATER than FV = obligation; increase pension expense if PBO LESS than FV = Net Asset; decrease pension expense If there is a net asset, it will be amortized over the larger of 15 years and the average remaining service life.
Plus or Negative, how do pension activities affect the Pension T-Account?
S - Current Service cost + I - Interest Cost + R - Return on plan assets - A - Amortization of unrecognized prior service cost + or - G - Gains and losses - or + E - amortization of Existing net obligation/asset at implementation + or -
What are the disclosure requirements for post-retirement plans?
That companies disclose the status of overfunded and underfunded postretirement plans on their balance sheets and any adjustment is also made ot OCI.
What is an APBO?
Accumulated Post-retirement Benefit Obligation
When do you accrued for an APBO (Accumulated Postretirement Benefit Obligation)?
What it is probable or estimable Accumulated or vests Servics have already been performed
Which of the following weighted-average rates should be disclosed for defined benefit pension plans?
(1) the discount rate used to determine the benefit obligation (2) the expected rate of return on plan assets (3) the expected rate of compensation increase.
How is the net net periodic pension cost is measured?
Using the actuarial present value of benefits, also know as the projected benefit obligation.
What is the interest costs?
The interest expense on the projected benefit obligation is defined as the increase in the amount of the projected benefit obligation due to the passage of time.
The present value of pension benefits accrued to date using assumptions as to future compensation levels is the
Projected benefit obligation.
What is the formula for actual return on plan assets?
Actual Return = Ending plan assets − Beginning plan assets + Benefits − Contributions
An employer’s obligation for postretirement health benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the
Employee is fully eligible for benefits.
For a defined benefit pension plan, what is used to determine the discount rate?
To determine the settlement rate, it is appropriate to look at rates implicit in current prices of annuity contracts that could be used to settle the obligation under the defined benefit plan. Example: Bonds are used to determine discount rate.
Under IFRS, how is the discount rate for pensions determined?
It is determined by the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.
What are service costs?
The present value of the future benefits earned by the employee in the current period.
What is the interest cost?
The increase in the PBO from the passage of time. Determined by multiply the beginning PBO by the discount rate.
What is the change in the value of the PBO or plan assets arising from experience different from that assumed or from a change in an actuarial assumption?
Gain or Loss. *TBS 4 from Gleim Employee Benefits
What is the T-Account approach to calculate return on Plan Assets
How is the calculation of the deferred gain or loss calculated?
It is the difference between the expected return on plan assets, and the actual return on plan assets
Return on Plan Assets - Expected Return on Plan Assets
Positive = gain; Negative = loss