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Flashcards in Pensions and Other Postretirement Benefits Deck (18):

When is the service cost recognized?

1. At the end of each year.
2. Therefore, no interest is recognized in year 1.


interest cost recognized in defined benefit plan

discount rate * annual service cost


pension liability

projected benefit obligation - plan asset amount


plan asset amount

add (total plan asset amount * plan asset growth rate every year to standard funding amount every year)


projected benefit obligation amount

annual service cost * # of years for problem and add interest for year 2 and all subsequent years.


How are plan assets and the PBO recorded for the defined contribution plan?

They are not recorded at all.


Is a defined benefit obligation more difficult to estimate than a health care insurance obligation?

No, the accounting for both are similar, though the defined benefit obligation is more likely to be funded and it tends to grow in a more steady fashion.


defined contribution plan

money is contributed to some type of investment service and the employee owns the final amount regardless of whether value has increased or decreased


defined benefit plan

Benefit can always be determined based on set variables such as length of time worked and salary level. Such variables do not fluctuate with the stock market or other outside factors.


pension expense

Service cost
- Expected return on plan assets
+ Interest on PBO
+/- Amortization of prior service cost
+ when it increases PBO
- when it decreases PBO
+Amortization of net loss (when applicable)


Is actual or expected return on plan assets used in pension expense calculations?

Expected, in order to avoid severe fluctuation in pension expense.


Does a prior service cost to be amortized affect pension expense?

No. Only the amortization of a prior service cost does.


How is a deferred G/L arising from the differences in actual and expected earnings on plan assets handled?

1. Only the amount of the deferral in excess of 10% of the larger of the PBO and plan assets is used.
2. The excess of the deferral over 10% of that larger balance is amortized over the service life in question in Year 2.


How is a prior service cost recorded?

1. It starts in AOCI.
2. Once amortized, it is moved to pension expense.


AOCI & amortization

1. Prior service costs are recorded in AOCI and amortized to pension expense over the expected service life.


comprehensive income

NI - prior service cost expense in AOCI = CI.


prior service cost

change in the PBO resulting from either amending or creating a plan


actuarial changes to PBO

not amortized in the first year but treated as deferred G/L in the first year.