Flashcards in Pensions Deck (23):
Define 2 types of pension plans
1. Defined Contribution=employer sets aside $ & retired employee receives
2. Defined Benefit=Based on ASSUMPTIONS made by an Actuary (Salary, Life expectancy, Interest rates, Years employed). Employer is responsible for setting aside sufficient funds to be paid to retirees.
Define Pension VBO
Vested Benefit Obligation (VBO)=if employee QUITS, they get the PV of vested benefits
Define Pension ABO
Accumulated Benefit Obligation (ABO)=Funds owed to an employee that retires at normal retirement age based on Current Wages.
SALARIES RECEIVED TO DATE ("RELIABILITY").
Define Pension PBO
Projected Benefit Obligation (PBO)=Funds owed to an employee that retires at a normal retirement age based on Future Wages using Benefits-Years-Of-Service Method.
SALARIES TO BE RECEIVED ("RELEVANCE")
Acronym for Pension Expense
+/-PRIOR Service Cost Amortization
-Actual RETURN of PLAN Assets
+DEFERRED Gain/ -Loss
-EXCESS Amortization of deferred gain/ +loss
+/-AMORTIZATION of Existing Net Obligation or Net Asset at implementation
Define Service Cost
Funding the Plan = How much actuary told us to put in
Define Prior Service Cost (PSC)
--Time between Hire Date & Measurement Date
--Costs associated w/ service years before plan was implemented.
Beginning PSC / Average Service Life
Expected Future Years-Of-Service Amortization Method
Define & Calc INTEREST Cost
--Change in PBO resulting from passage of time
Interest Cost = Beg. PBO * Discount Rate
Discount Rate = Settlement Rate
2 Calcs for Actual RETURN on Plan Assets (PA)
1. Beg FV of PA * Actual Return=Actual Return
Calc Expected Return
-Actual RETURN on Plan Assets
Calc Deferred Gain on Pension
Actual RETURN on PA
- (Beg PA * Expected rate of return)
Define Corridor Approach
Amortization if deferrals get too large.
Deferred gain/loss at Beginning of Year
- 10% of PA or Beg. PBO [whichever is higher]
then take Excess / Average Service Life
=Minimum amortization calc
What happens to amortization when PBO>FV of PA?
Net Obligation will INCREASE Pension Exp/Cost
What happens to amortization when PBO
Net Asset amortization will DECREASE Pension Exp/Cost. This s/b amortized over the LARGER of Average Remaining 15 years OR average remaining service life
Calculate funded status
Ending PBO @ measurement date
-Ending FV of PA
Calc Ending Plan Assets
Beg Plan Assets
+Actual Return (Plug)
Beg PA * Actual Return
Standard JE to Fund an Over-funded Pension Plan
DR Pension Expense
DR Prepaid Pension Cost (when over-funded)
When plan is overfunded, a noncurrent asset is recorded on the BS
Standard JE to Fund an Under-funded Pension Plan
DR Pension Expense
CR Accrued Pension Cost (when under-funded)
When plan is underfunded, a current or concurrent liability is recorded on BS
How are gains/losses not already recognized as pension expense recognized on financials?
Funding status of plans may NOT be netted.
Excess PBO Pension Unrecognized Gains/Losses are reported as Accumulated OCI on BS (net of tax)
Prior Service Costs= Costs associated with service years before plan was implemented.
2 way to calc
(Service Yrs This Yr / Total Future Serv. Yrs) * PSC=PSC This Yr
(Beg PSC / Avg Serv Life)=PSC This Year
Funded Status is Reported in B/S or Stmt of Financial Position if IFRS
Calc & When asset vs liab?
FMV PA > PBO = Net Asset
FMV PA < PBO = Net Liab