FRA lvl 2 - Reading 19 (Pension)

Question 1

define a defined-contribution plan

Answer 1

employee takes investment risk

Question 2

pension expense for defined-cont. plan

Answer 2

pension expense = employee contribution

Question 3

define defined-benefit plan

Answer 3

employer takes investment risk

Question 4

define funded status of the plan

Answer 4

“difference in the benefit obligation and the plan assets”

Question 5

what are other post-employment benefits

Answer 5

post-employment healthcare. usually unfunded plans and recognizes expense in inc. statement

Question 6

Define PBO (projected benefit obligation) or PVDBO (PV of defined benefit obligation)

Answer 6

actual PV of all future pension benefits earned based on EXPECTED FUTURE salary increases

Question 7

What are the 5 inputs/changes in PBO?

Answer 7

Current service cost, interest cost, past (prior) service cost, change in actuarial assumptions, benefits paid

Question 8

define current service cost

Answer 8

PV of benefits earned by employees during the current period

Question 9

define interest cost

Answer 9

increase in obligation due to passage of time.

Question 10

how to calculate interest cost

Answer 10

beg. pension obligation x discount rate

Question 11

define past/prior service costs

Answer 11

retroactive benefits awarded to employees when a plan is initiated or amended.

Question 12

how does GAAP vs. IFRS treat past service costs?

Answer 12

IFRS = expensed immediately, GAAP= amortized over average service life of employees

Question 13

define changes in actuarial assumptions (aka remeasurements)

Answer 13

gain/loss from change in variables like turnover, retirement age, discount rate.

Question 14

how does gain/loss in actuarial assumption affect the PBO?

Answer 14

gain = decreases the obligation and loss = increases the obligation

Question 15

Define benefits paid

Answer 15

they reduce the PBO

Question 16

when plan assets > PBO, is plan overfunded or underfunded?

Answer 16

overfunded

Question 17

when plan assets

Answer 17

underfunded

Question 18

formula for funded status

Answer 18

fair value of plan assets - PBO

Question 19

IFRS vs GAAP, funded status listed where on balance sheet?

Answer 19

both list it as a liability if negative and asset if positive

Question 20

what is short TPPC (total periodic pension cost) under DBP?

Answer 20

employer contribution - change in funded status, (end-beg)

Question 21

what is long TPPC (total periodic pension cost) under DBP?

Answer 21

current service cost + interest cost - actual return on plan assets +/- actuarial loss/gain + prior service cost

Question 22

What financial statement is current service cost in for IFRS and GAAP?

Answer 22

recognized immediately in income statement

Question 23

What financial statement is past service cost in for IFRS and GAAP

Answer 23

GAAP = OCI, amortized over life, IFRS = income statement

Question 24

What financial statement is interest cost in for IFRS and GAAP

Answer 24

Income statement for both

Question 25

What financial statement is expected return in for IFRS and GAAP

Answer 25

Income statement for both

Question 26

What financial statement is actuarial gain/losses in for IFRS and GAAP

Answer 26

GAAP = amortized portion in income statement, unamortized in OCI. IFRS = all in OCI, called remeasurements

Question 27

what are 2 components of actuarial gain/loss?

Answer 27

change in PBO and difference btwn actual and expected returns on plan assets

Question 28

Explain corridor approach

Answer 28

GAAP only, amortization required once PBO exceeds 10% (gain or loss)

Question 29

describe GAAP presentation of pension expense

Answer 29

all components reported in income statement can be aggregated but disclosure of total periodic pension cost is in the notes to financial statements

Question 30

describe IFRS presentation of pension expense

Answer 30

all components may be presented seperately but disclosure of total periodic pension cost is in the notes to financial statements

Question 31

what are three assumptions a firm will disclose?

Answer 31

discount rate, rate of compensation growth and expected return on plan assets

Question 32

define the discount rate for the benefit obligation

Answer 32

interest rate used to compute the PV of the benefit obligation. it is NOT the RFR

Question 33

Does increasing or decreasing the discount rate improve the reported results?

Answer 33

increasing

Question 34

Does increasing or decreasing the compensation growth rate improve the reported results?

Answer 34

reducing/decreasing

Question 35

Does increasing or decreasing the expected return on plan assets improve the reported results?

Answer 35

increasing, on GAAP

Question 36

When you increase the discount rate, what happen to the PBO?

Answer 36

PBO is lower, which improves the funded status of the plan

Question 37

when the discount rate increases, what happens to total periodic pension cost?

Answer 37

periodic pension cost is reduced, which also reduces the PV of the future sum for the current service cost

Question 38

when decrease compensation growth rate, what happens to PBO?

Answer 38

PBO is lower, which improves the funded status of the plan

Question 39

What happens to service cost when compensation growth rate decreases?

Answer 39

current service costs is reduced and therefore total periodic pension cost is decreased

Question 40

What happens to periodic pension costs and total periodic pension cost with increased expected return?

Answer 40

periodic pension costs goes down but total periodic pension cost unaffected

Question 41

what happens to the benefit obligation and funded status of the plan with increased expected return?

Answer 41

no affect on either