Postemployment Benefits

Question 1

What is the first fundamental aspect for applying accrual accounting to pensions?

Answer 1

Delaying Recognition of Certain Events - changes in pension obligations and in assets reserved for them are recognized over subsequent periods, not as they occur

Question 2

What is the second fundamental aspect for applying accrual accounting to pensions?

Answer 2

Reporting Net Cost - pension costs are reported as an aggregate which would be split up if in a different part of the company’s statements

Question 3

What is the third fundamental aspect for applying accrual accounting to pensions?

Answer 3

Offsetting Liabilities and Assets - the assets contributing to the plan and the liabilities for the pensions are one net amount

Question 4

What is significant about disclosures for pension and non-pension benefit plans?

Answer 4

They should have uniform disclosures

Question 5

What should be disclosed for pensions (and other plans)?

Answer 5

• Assets
• Obligations
• Cash flows
• Net periodic benefit cost

Info should be separated for pension and other benefit plans

Significant events should be disclosed

Question 6

What is a defined contribution plan?

Answer 6

Pension plan which specifies how contributions to an individual account are to be determined (rather than specifying the benefits)

Question 7

What is a defined benefit plan?

Answer 7

Pension plan which specifies the postretirement benefit for the individual (rather than specifying the preretirement contributions)

Question 8

What is actuarial present value?

Answer 8

The value of a future series of payments that is not only discounted to PV but also accounts for various uncertainties (e.g. age at retirement, lifespan)

Question 9

What is an accumulated benefit obligation?

Answer 9

The measure of a company’s pension liability for services rendered up to a specific date

Differs from PROJECTED benefit obligation, which considers future salary increases

Question 10

What is attribution?

Answer 10

Assigning benefits or costs to periods of employee service

Question 11

What is a contributory plan?

Answer 11

A pension plan where employees contribute part of the cost

Question 12

What is a funding policy?

Answer 12

Specifies the amounts and timing of any contributions (and who pays them) to a pension plan

Question 13

What are retroactive benefits?

Answer 13

Benefits from a plan which is begun or modified, earned by the employee over past periods

Cost of these benefits is called “prior service cost”

Question 14

What is the unfunded projected benefit obligation?

Answer 14

The excess of the PBO over the FV of plan assets

Question 15

What is the vested benefit obligation?

Answer 15

The actuarial PV of vested benefits (benefits which the employee has earned regardless of continued employment)

Question 16

What is the net periodic pension cost (NPPC)?

Answer 16

The amount recognized as the cost of a pension plan for a given period

May be an expense for the period (e.g. pension for marketing personnel) or inventoriable as overhead (e.g. pension for factory personnel)

Question 17

What are the components of net periodic pension cost?

Answer 17

Service cost
+ Interest cost
- Return on plan assets
+ Prior service cost amort. (- credit amort.)
- Actuarial gain amort. (+ loss amort.)
- Transition asset amort. (+ obligation amort.)

Question 18

What is service cost?

Answer 18

Actuarial PV of benefits which the employee earned during the period, according to the benefits formula

Question 19

What is interest cost?

Answer 19

The accumulated interest on the (already-earned) PBO as an employee continues to work

Calculation uses assumed discount rate

Question 20

What is the return on plan assets?

Answer 20

The gain (or loss) from investments set aside to pay for pensions

Normally called “actual return on plan assets” (ARPA)

Question 21

What is the formula for actual return on plan assets?

Answer 21

End FV of assets
- Beg. FV of assets
- Contributions during period
\+ Benefits paid during period
= ARPA

Question 22

How are differences between expected and actual RPA accounted for?

Answer 22

NPPC is later adjusted for any difference between actual and expected return, with the difference being reported in OCI and amortized

Question 23

How does prior service cost get amortized?

Answer 23

The cost of retroactive benefit increases is charged to OCI, and OCI is adjusted each period as prior service cost is amortized

Amortization is equal for each year which each employee is expected to work

Question 24

What happens if an alternative approach is used to amortize prior service cost?

Answer 24

Method must be disclosed

Example: SL method using the avg. remaining years for the covered employees

Question 25

How are retroactive reductions in benefits accounted for?

Answer 25

Applied as credits to prior service cost in OCI If no cost is left to reduce, then the excess credit is amortized, just like cost

Question 26

What are the two parts of actuarial gains and losses?

Answer 26

(1) difference between actual and expected RPA | + (2) amortization of (1), as recognized in accumulated OCI

Question 27

How is expected return on plan assets calculated?

Answer 27

(% increase) x (beginning FV of assets)

Question 28

For actuarial gains and losses, how is the amortization of the gain/loss in OCI calculated?

Answer 28

``` Accumulated gain/loss in OCI +10% of *** = Net gain/loss subject to amort. / Avg. remaining service period for employees =Amort. of gain/loss in OCI ``` ***whichever is greater: PBO or beginning FV of assets

Question 29

What is the minimum amortization for actuarial gains and losses?

Answer 29

At minimum, amort. must be over the avg. remaining service periods of the employees Other methods can be used, but amort. cannot be less than above

Question 30

For actuarial gains and losses, how is the new accumulated gain/loss in OCI calculated?

Answer 30

Acc. gain/loss for previous year - amortization + diff. between actual and expected RPA for current year = new accumulated gain/loss in OCI

Question 31

What is a transition asset or obligation?

Answer 31

At the time of adopting FAS 87, the company must subtract their PBO from their plan assets' FV. The difference is a transition obligation or asset TO/TA may be amortized SL, either over avg. remaining service period of workers or over 15 years (maximum)

Question 32

How is projected benefit obligation (PBO) calculated?

Answer 32

All the benefits accrued to this point are discounted to their PV E.g. if a worker earns $1000 in benefits per year, then after 3 years, discount $3000 to PV to get the PBO at that date (12/31 of that year)

Question 33

How is service cost calculated?

Answer 33

Take PV of the benefits earned in current year Similar to PBO, but only for the current year

Question 34

If a company reserves more or less cash for a pension expense, what is the JE?

Answer 34

12/31 of yr. XX Either... Debit: Pension Expense Debit: Overfunded Pension Asset Credit: Cash Or... Debit: Pension Expense Credit: Underfunded Pension Liability Credit: Cash

Question 35

What are the JEs if a pension cost is overfunded one year and underfunded the next year?

Answer 35

The "overfunded pension asset" is overturned (credited) Debit: Pension Expense Credit: Overfunded Pension Asset (prev. yr's amount) Credit: Underfunded Pension Liability (new plug) Credit: Cash Vice versa for reversals of underfunded pension liabilities

Question 36

How do you calculate interest cost?

Answer 36

Multiply the interest rate by the PBO from the beginning of the year (i.e. calculated at 12/31 of previous year)

Question 37

What assets are included in plan assets when calculating RPA?

Answer 37

(at least) cash used to fund the pension cost, and any ARPAs from previous years of the plan

Question 38

If there are retroactive benefits, how are they applied?

Answer 38

They apply to all the relevant calculations Example: Interest cost is based on previous year's PBO. If the benefits earned are altered, then one year's interest cost will be applied to what the PBO *would have been*, not to what it actually was before the change in benefits

Question 39

If there are retroactive benefits, what changes besides new calculations?

Answer 39

The difference becomes Prior Service Cost, which must be amortized PSC must be discounted at the relevant rate, since it is an alteration of the projected benefits

Question 40

What are the JEs when a prior service cost is first recorded?

Answer 40

Debit: Pension Expense Debit: OCI (PSC) Credit: Cash The amount for PSC will be the *unamortized* amount

Question 41

What are the JEs after a prior service cost has been recorded, when it is amortized?

Answer 41

Debit: Pension Expense Credit: OCI (PSC) Credit: Cash

Question 42

When must a company recognize a liability or asset for pensions?

Answer 42

If the PBO =/= FV of plan assets ``` Liability = "underfunded PBO" Asset = "overfunded PBO" ```

Question 43

How should underfunded and overfunded PBOs be presented on the balance sheet?

Answer 43

All unfunded PBOs and all overfunded PBOs will each be in the aggregate Underfunded PBOs can be current, noncurrent or a combination Overfunded PBOs should be noncurrent

Question 44

When should plan assets and benefit obligations be measured?

Answer 44

Ordinarily at year-end

Question 45

What is a settlement?

Answer 45

Payment to worker that relieves employer of benefit obligation Gain/loss must be recognized in earnings, though amount of gain/loss is limited to net gain/loss remaining in OCI plus any transition asset If only a portion of plan is settled, then gains and losses are recognized pro rata

Question 46

What is a curtailment?

Answer 46

When the anticipated years of future service for employees become significantly shorter, or a reduction of accruable benefits for their future service Prior service cost in OCI for years of service that are now worthless, is counted as a loss

Question 47

Is it possible for both a settlement and a curtailment to occur?

Answer 47

Yes If a plan is terminated and not replaced by another, then both have occurred (whether or not employees continue to work)

Question 48

What are the two different types of termination benefits?

Answer 48

Special termination benefits (offered for a short time) Contractual termination benefits (pending some event, such as a plant closing)

Question 49

How are termination benefits accounted for?

Answer 49

For special TBs, recognize liability and loss when employee accepts offer and amount is estimable For contractual TBs, recognize liability and loss when it is probable that employees will be entitled to payments (and amount is estimable) Discount future payments to PV

Question 50

What is different about the calculation of the net postretirement benefit cost, as opposed to the net period pension cost?

Answer 50

Amortization for transition assets - Option to amortize over 20 years, not 15 - Option to immediately recognize (i.e. not amortize at all)

Question 51

How is the net periodic pension cost affected by a loss of assets due to segment disposal?

Answer 51

Not affected Loss from the disposal would be reported as a separate event, not within the NPPC calculation

Question 52

If there is an excess both of PBO over plan assets and of NPPC over the employer's contribution, what is the total liability to report?

Answer 52

Only the excess of the PBO over the plan assets -- that represents the total underfunded pension liability The excess of NPPC over the contribution is part of the total liability