Section 14 - Pensions and Post Employment Benefits

Question 1

What is a Defined Contribution Plan?

Answer 1

When the employer set aside specific amounts during the time of service.

401K is a Defined Contribution Plan

J/E
Pension Expense
Cash

Question 2

What is a Defined Benefit Plan

Answer 2

Employer guarantees certain benefits to be paid to retired employees and is responsible for setting aside sufficient amounts to fullfill these promises.

Question 3

What is Projected Benefit Obligation (PBO)?

Answer 3

Reflects FUTURE compensation levels

Question 4

What is Accumulated Benefit Obligation (ABO)?

Answer 4

PV of Pension Benefits accrued based on PRESENT compensation levels

Question 5

How do you calculate Pension Expense?

Answer 5

Pension Expense Formula

A - SPIDER

+ Service cost
+- Prior Service Cost (PSC) Amortization
+ Interest cost
- (actual Return on plan assets)
+ Deferred gain (unrecognized pension gain/ -loss)
-(Excess amortization of deferred gain/ +loss)
+- Amortization of Existing Net Obligation (+) or Net Asset (-) at implementation

Question 6

Does Service Cost increase or decrease PBO?

Answer 6

INCREASE by 1 year

Question 7

How do you calculate Prior Service Cost (PSC) Amortization?

Answer 7

Beginning PSC/ Average service life or expected future years of service amortization method

Question 8

How do you calculate Interest Cost?

Answer 8

Beginning PBO x Discount Rate (Settlement Rate)

Interest Cost is the change in PBO resulting from passage of time (INCREASE)

Question 9

How do you calculate Actual Return on Plan Assets?

Answer 9

Two ways

Ending plan asset -Beginning plan asset - Contribution Made + Benefits Paid

OR

Beginning FV of Plan assets X Actual Return Rate

This is the actual earnings of pension plan during the period.

Question 10

How do you calculate Deferred Gain (unrecognized pension gain/ - loss)?

Answer 10

Return on Plan asset - beginning PA x Expected rate of return

When the actual investment results differ from long-run expected returns.

Question 11

How do you calculate Excess Amortization of deferred gain/ +loss)?

Answer 11

Minimum amortization calcualtion:

• Deferred gain and loss at beginning of each year
• Minus 10% of Plan Assets or beg PBO, whichever is higher
• Excess / Average Service Life

Unrecognized gains or losses included in OCI (B/S)

Question 12

How do you calculate “the change in PBO”?

Answer 12

Beginning of the year PBO
\+ Service Cost
\+ Interest Cost
\+- Prior Service Cost
\+- Actuarial gain or loss
- Benefits paid out
=End of year PBO

**amortization of PSC, gains/losses and transition amounts don’t affect the PBO in the current year, however, they do affect pension expense/cost for the year

Question 13

Under IFRS, how is the cumulative cost for Defined Benefits Plan calculated?

Answer 13

Calculated using the Projected Unit Credit Method (an actuarial technique).