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Flashcards in Pensions Deck (23):
1

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.

2

Define Pension VBO

Vested Benefit Obligation (VBO)=if employee QUITS, they get the PV of vested benefits

3

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").

4

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")

5

Acronym for Pension Expense

A-SPIDER::
+SERVICE Cost
+/-PRIOR Service Cost Amortization
+INTEREST Cost
-Actual RETURN of PLAN Assets
+DEFERRED Gain/ -Loss
-EXCESS Amortization of deferred gain/ +loss
+/-AMORTIZATION of Existing Net Obligation or Net Asset at implementation
=PENSION EXPENSE/COST

6

Define Service Cost

Funding the Plan = How much actuary told us to put in

7

Define Prior Service Cost (PSC)

--Time between Hire Date & Measurement Date
--Costs associated w/ service years before plan was implemented.

8

Calculate PSC

Beginning PSC / Average Service Life
OR
Expected Future Years-Of-Service Amortization Method

9

Define & Calc INTEREST Cost

--Change in PBO resulting from passage of time

Interest Cost = Beg. PBO * Discount Rate

Discount Rate = Settlement Rate

10

2 Calcs for Actual RETURN on Plan Assets (PA)

1. Beg FV of PA * Actual Return=Actual Return
OR

Ending PA
-Beg PA
-Contribution Made
+Benefits Paid
=Actual RETURN

11

Calc Expected Return

-Actual RETURN on Plan Assets
+Deferred Gain
=Expected Return

12

Calc Deferred Gain on Pension

Actual RETURN on PA
- (Beg PA * Expected rate of return)
=Deferred Gain

13

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

14

What happens to amortization when PBO>FV of PA?

Net Obligation will INCREASE Pension Exp/Cost

15

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

16

Calculate funded status

Ending PBO @ measurement date
-Ending FV of PA

17

Calc Ending Plan Assets

Beg Plan Assets
+Contributions
-Benefits Paid
+Actual Return (Plug)
=Ending PA

OR
Beg PA * Actual Return

18

Standard JE to Fund an Over-funded Pension Plan

DR Pension Expense
DR Prepaid Pension Cost (when over-funded)
CR Cash

When plan is overfunded, a noncurrent asset is recorded on the BS

19

Standard JE to Fund an Under-funded Pension Plan

DR Pension Expense
CR Cash
CR Accrued Pension Cost (when under-funded)

When plan is underfunded, a current or concurrent liability is recorded on BS

20

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)

21

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
or
(Beg PSC / Avg Serv Life)=PSC This Year

22

Funded Status is Reported in B/S or Stmt of Financial Position if IFRS

Calc & When asset vs liab?

PBO
-FMV PA
=Funded Status

FMV PA > PBO = Net Asset
FMV PA < PBO = Net Liab

23

Calc Ending PBO

+ Beg PBO
+ SC
+ PSC
+ Interest
- Distributions to Employees
+/- Gain or Loss from changes in Actuarial Assump.
=Ending PBO

Distributions to employees=Benefits Paid