Flashcards in Pension & Postemplyment Benefits Deck (18)
What is a pension? Pg. 14-1
An agreement between an employer and employee to give the employee benefits once they retire
Assumptions that must be considered for the actuary to compute pension expense Pg. 14-2
a) Vested benefit obligation (VBO)
b) Accumulated benefit obligation (ABO)
c) Projected benefit obligation (PBO)
*These are ways an actuary computes pension expense
a) If you quit, this is what you get
b) based on salaries received to date (more accurate)
=> faithful representation
c) based on salaries to be received "carrot you chase" (future wage rates) => more relevant
How to do calculate Pension Expense? Pg, 14-3
How do you calculate each component?
A-SPIDER +++++-- (this is only the elements) => you need to know the order
A +/- Amortization of Existing Net Obligation or Net Asset at implementation
S + Service Cost
P +/- Prior Service Cost Amortization (cal: beg PSC/avg service life) => service this year/service in the future
I + Interest Cost (cal: beg PBO x discount rate)
D + Deferred Gain (unrecognized pension gain/ - loss)
(cal: return on PA - beg PA x expected rate of return)
E - Excess amortization of deferred gain/ + loss
R - Actual Return on PLAN assets (cal: end PA - beg PA - contributions + benefits paid)
How to calculate for the change in the Projected Benefit obligation (PBO)? Pg, 14-6
Beg of year PBO
+ Service cost
+ Interest cost
+/- Prior service cost or credit
+/- Acturarial gain or loss
- Benefits paid
= End of year PBO
What do you look for when encountering a prepaid pension cost?
Find the difference of pension expense + prior service cost and pension expense + amortization of prior service cost
What is the target amount regarding pensions, and how do you calculate? Pg. 14-6
It is the amount overfunded or underfunded; its the difference between ending PBO and ending FV
PBO: future value how much you will be paid in the future
a) What is PBO?
b) What is service cost?
c) What is interest cost?
d) What is ABO?
a) The amount that will be owed to the employee assuming the employee continues to work until retirement
b) The increase in PBO over time based on current years service
c) The change in PBO resulting from the passage of time
d) PV of all future retirement payments
What is the significance of finding the target amount for pension? Ending PBO VS ending FV plan asset
Tells you if the pension plan is over/under funded
What is also known as the funded status of a defined benefit pension plan? Pension #21
The differnce between ending PBO and FV plan assets
What is the funded status of a defined benefit pension plan? Pension #21
The difference between ending PBO and FV plan asset; tell you if asset or liability
When a problem asks for an adjustment, think of?
Adjusting numbers within the T-account
A company providing health care benefits should disclose...
1) The assumed health care cost trend rate
For pensions, what will be reported in its statement of stockholders' equity? Pension #43
Difference of unrecognized prior service cost - adjustment
How do you find the funded status relating to pensions? Pension #21
Think of T-account of prepaid/accrued; ending balance: underfunded/overfunded => balance sheet
What do you think of in for the pension journal entry regarding cash?
Cash would include the money FUNDING the service cost (can be amount prior to service cost and actual service cost)
What is unfunded PBO?
Think of journal entry pension; will be under pension expense
Where should the funded status of a defined benefit pension plan for a company should be reported in what financial statements Pg. 14-1
B/S; think of DENT (excess adjustment of PBO and FV of Plan assets at year end)