FAR - 14 PENSIONS

Question 1

Vested Benefit Obligation

VBO

Answer 1

VBO - what is owed if an employee is terminated immediately. Benefits that the employee is entitled to.

Question 2

Accumulated Benefit Obligation

ABO

(Reliable)

Answer 2

ABO - what is owed for service to date if employee continues in employment until normal retirement age at current wage rates.

The accumulated benefit obligation is the present value of all future retirement payments that the employee is already entitled to based on services rendered prior to that date.

Question 3

Projected Benefit Obligation

PBO

(Relevance)

Answer 3

PBO - what is owed for service to date if the employee continues in employement under normail retirement age & receives periodic adjustments to pay for increased experience & general inflation based on future wage rates.

Question 4

What are the six factors that an Actuary bases it’s assumptions on?

Answer 4

Salary

Life Expectancies

Interest Rates

Years Employed

Cost of Administering the Plan

Turnover Rates

Question 5

What are the seven factors of Pension Expense?

A - SPIDER

Answer 5

1. Service Cost
2. Prior Service Cost
3. Interest Costs
4. Actual Return on PLAN Assets
5. Deferred Gain
6. Excess Amortization of deferred gains/loss
7. Amortization of Existing Net Obligation or Net Asset at implementation

Question 6

Service Cost (+)

Answer 6

• Acturial PV of benefits attributed to services performed during the period
• Increase PBO for 1 year

Question 7

Prior Service Cost (PSC) Amortization (+/-)

Answer 7

• Cost associated with service years before plan was implemented or amended
• CALCULATION:
  
  • PSC = Beginning PSC / Avg Service Life
• Avg Service Life = Current Yr / Total Yrs

Question 8

Interest Cost (+)

Answer 8

• Change in PBO resulting from passage of time
• CALCULATION:
  • Interest = Beginning PBO x Disc/Settlement Rate

Question 9

Actual Return on PLAN Assets (-)

Answer 9

• Actual earnings of pension plan assets during the period
• CALCULATION = 2 Ways

1. PA = Beg FV of Asset x Actual Interest Ratee
2. PA = Ending PA - Beg PA - Contrib + Benefits Paid

Question 10

Deferred Gain (+)

Unrecognized Gain/Loss

Answer 10

• When Actual investments results differ from long-run Expected returns

+ Return on PA

• (Beginning PA x Expected Rate of Return)

= Deferred Gain

Question 11

Excess Amortization of Deferred Gain (-)

Corridor Approach - 3 Steps

Answer 11

• Unrecognized gains or losses included in OCI
• Amortization if deferrals get too large
  
  • (Corridor Approach)

Corridor Approach Calculation:

+ Deferred Gain or Loss at the Beginning of the YR

• 10% of PA or beg PBO which ever is higher

= Excess

/ Average Service Life (divided by)

= Amortization Amount

Question 12

Amortization of Existing Net Obligation or Net Asset implementation (+ / -)

Question 13

How to account for the change in PBO

Answer 13

+ Service cost

+ Interest Cost

+/- Prior service cost (New PSC added; NOT the Amort)

+/- Acturial gain or loss

• Benefits Paid

= Ending PBO Balance

Question 14

Pension Funding Journal Entry

Prepaid Pension Cost

vs.

Accrued Pension Cost

Answer 14

To Fund the PLan:

DR: Pension Expense (7 steps)

DR: Prepaid Pension Cost (if pmt of cash > pension exp)

CR: Cash (funding)

CR: Accrued Pension Cost (if not enough cash is paid)

NOTE: Accrued/Prepaid Pension Cost are reported on the Balance Sheet

Question 15

New Target Amount for Accrued Pension Cost

Answer 15

1. Calculate Ending PBO - Ending Plan assets
2. Add Current Difference from Pension Expense - Contribution
3. Difference from addition & beggining - ending target = additional liability

Question 16

Uncrecognized Prior Service Cost

Answer 16

Unrecognized prior service cost is the PSC remaining after its yearly amortization is accounted for as part of the current period pension cost.

As such, unrecognized prior service cost is not included in calculating additional pension liability.

Question 17

Key Disclosures of a Defined Benefit Plan

Answer 17

• Reconciliation of the PBO showing the components separately (A-SPIDER)
• Reconciliation of the Planed Assets with components shown separately
• The funded status of the plan
• For defined benefit plans, the accumulated benefit obligation
• Benefits expected to be paid in each of the next five years and in the aggregate.