Defined Contribution Plan
Employer agrees to make a defined contribution to a pension plan as determined by the provisions of the plan.
No pronouncements on defined contributions plans
Defined Benefit Plan
The employer agrees to provide a benefit at retirement that is defined or fixed by a formula. These amounts require the use of estimates made by actuaries, they are not made by the sponsoring company's accountants.
Funded status of Pension Plan
Overfunded- a non-current asset is recorded on the balance sheet.
Dr. Accrued Pension liability (to bring the bal to 0)
Dr. Prepaid Pension Cost
Cr. Other comprehensive Income
Dr. Other Comp Income
Cr. Deferred Tax Liability
Underfunded- either a current liability, a non-current liability or both are reported on the balance sheet.
Dr. Other comprehensive Income xxx
Cr. Accrued Pension Libability
Dr. Deferred Tax asset (tax rate)
Cr. Other Comp Income
Any additional asset or liability not already recognized as pension expense is recognized in other comprehensive income (net of tax).
Employers with multiple plans
All overfunded plans are aggregated and disclosed as a nooncurrent asset.
All underfunded plans are aggregated and disclosed as a current liability, non current liability or both.
*The fudning status of plans may NOT be netted (overfunded plans may not be netted with underfunded pans)
Compute the interest component of net pension expense (component of net pension expense)
Beginning Projected Benefit Obligation (PBO) x Settlement rate (discount rate)= Interest component.
Compute the "actual return on plan assets" (component of net pension expense)
Defined as the difference in the fair value adjusted for contributions made to the plan and benefits paid.
Beginning FMV of assets+Employer contributions= subtotal - Benefits paid = Total
Compare total number calculated to FMV of assets at the end of the year
If the FMV of assets at EOY > Total number computed = actual return on plan assets.
Calculate the expected return on plan assets
FMV of assets at the beginning of the year x % rate of expected return.
Difference between the actual return and the expected return are actuarial gains and losses.
Unrecognized prior service cost
Retroactive adjustments that are granted recognize services rendered in previous periods.
1. Costs are caused by either an amendment to an existing plan or the initiation of a new plan where a retroactive allowance is made for past services rendered.
2. If, as a result of an amendment to an existing plan, the benefits are increased, then the amount of the plan's projected benefit obligation will increase.
amortize over the average remaining service life of the employees
Unrecognized prior service cost/Average service life
Gain or Loss - Increase or decrease pension expense (component of net pension expense)
The current period difference between the actual and expected return on plan assets
Actual return > expected return = actuarial gain - Reduce pension expense
Actual return < expected return = actuarial loss - Increse pension expense
Unrecognized prior service cost to be amortized over future periods (calc)
Beginning Projected benefit obligation (PBO) - PBO after the amendment = unrecognized prior service cost to be amortized over future periods.
Reconcile the Projected Benefit Obligation (PBO)
Beginning of year PBO
+ Service Costs
+ Interest Cost
+or- Prior service cost or credit (from changes to plan in CY)
+or- Actuarial gain or loss (from changes in actuarial or underlying assumptions from CY)
- Benefits paid
=End of year PBO
Other comprehensive Income (net of tax)
Dr. Deferred tax asset
Cr. Other comprehensive Income
Everytime you credit Other Comp Income for the net of tax effect, the Dr. plug goes to Deferred tax asset
or Dr. to OCI and Cr. to Deferred tax liability
Nonretirement Postemployment Benefits
severance pay, disability...
Criteria for accrual of these benefits are the same as for compensated absences:
1. Obligation relates to services already provided by the employee
2. Rights to compensation vest or accumulate
3. Payment of obligation is probable, and
4. Amount to be paid is reasonably estimable
IFRS Discount rate
Under IFRS the discount rate is determined by the market yields at the end of the reporting period for high-quality corporate bonds having similar term or maturity.
IFRS- Netting Pension Plan assets and Pension Plan liabilities
Netting of plan assets and liability balances is only permissible when there is a legally enforceable right to use the assets of one plan to settle the obligations of another plan.
Under US GAAP - netting is never allowed.
Reconciliation schedule for the benefit obligation related defined benefit pension plans
1. interest costs
2. contributions by plan participants
3. actuarial gains and losses
4. plan amendments
5. divestitures, curtailments, and settlements
6. special termination benefits
Method used in IFRS to account for defined benefit pension plan
Calculating Pension Expense
+Interest (beginning PBOxrate)
-Return on Asset
+Amortization of unrecognized prior service cost
Rates that must be disclosed for defined benefit pension plans
On a weighted-average basis:
rate for assumed discount rate
rate of compensation increase
expected long-term rate of return on plan assets
and the assumptions used to determine benefit obligations and net benefit cost.
Results from the adoption of a defined benefit postretirement plan
1. A transition obligation may be recognized immediately
2. it represents the difference between accumulated postretirement benefit obligation and the fair value of plan assets at the beginning of the year the plan is adopted.
3. obligation may be amortized on a SL basis over a maximum period of 20 years
Discount rate used to calculate the PBO
the assumed discount rate should reflect the rates at which pension benefits could be effectively settled. This rate is sometimes referred to as the "settlement rate."
Special termination benefits
recognize a liability and an expense when the employees accept the offer and the amount can be reasonably estimated. The amount recognized shall include any lump-sum payments and the present value of any expected future payments.
Weighted-average rates disclosed for defined benefit pension plans
(1) the discount rate used to determine the benefit obligation, (2) the expected rate of return on plan assets, and (3) the expected rate of compensation increase.
Accumulated benefit obligation
ASC Topic 715, the present value of future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date is the accumulated benefit obligation, which is based on current salaries.
Projected benefit obligation
The present value of pension benefits accrued to date using assumptions as to future compensation levels.
Discount rate for pension - IFRS
the market yield at the end of the reporting period for high-quality corporate bonds having a similar term or maturity.