Pensions

Question 1

Pension Expense components

Answer 1

1. • Service cost - given
2. • Interest (beg. PBO x discount/settlement rate)
3. = or - Prior service cost amortization -
   PCC beg / average service life
   - benefits before the plan started
   - amortize over average service life
4. • Actual return on plan assets
     = PA FV beg + contribution - benefits paid -
     PA FV end
     OR
     = Beg FV PA x actual return rate
5. • or - Deferred or Unrecognized pension
     gain/loss
     = Actual return - Expected return(expected ret.
     rate x Beg FV PA)

                      AR > ER =  + gain
                      AR < ER =   -  loss

6. • or - Excess amortization of deferred gain/loss
     + Gain - Loss

Note: DO NOT include no. 5 in this computation!!!

      Deferred gain/loss beginning    xx
       Larger of 10% of:
             Beg. PBO
              Beg PA                             xx
       Excess to be amortized (+ gain - loss)

7. Amortization of net existing obligation or
   existing net asset at implementation
   PBO > PA = Gain + obligation
   PBO < PA = Loss - asset

Question 2

Calculation of PBO end

SIPA - B

Answer 2

PBO beginning
\+ service cost
\+ interest cost
\+ actuarial gain or loss for changes
           in  assumptions for the the current year
\+ PSC change to plan for the current year
- benefits paid
= PBO end

Contributions is NOT INCLUDED in this computation

Question 3

In defined benefit pension plan, the discount/settlement rate is determined by the

Answer 3

implicit rate on current prices of annuity contacts that could be used to settle the obligation

the actual return or expected return doesn’t affect or is not considered in the discount/settlement rate

Question 4

Calculation of PA end

CAB

Answer 4

PA beginning - CAB
\+contributions
\+ actual return on PA
- benefits paid
PA ending balance

Question 5

Excess pension adjustment to OCI computation

Answer 5

Ending PBO - Ending PA

1. PBO > PA = liability (underfunded)
   = TARGET LIABILITY
   Get the adjustment amount using the Pension liability T account. Do not forget to account for the journal entry on pension costs for the current year.

Entry:

Other comprehensive income
Deferred tax asset
Pension liability

2. PBO < PA = asset (overfunded) TARGET
   ASSET
   Get the adjustment amount using the Pension asset T account. Don’t forget the beg. pension asset account and the pension asset journal entry for the year.

Pension asset
Other comprehensive income
Deferred tax liability

Question 6

Computation of current year pension cost liability

Answer 6

total pension cost
minus contributions to the plan
= balance to pension liability account

Question 7

+ - of Prior service cost - change of plan for the current year.

Answer 7

If added this year, this will be amortized in the next year.

The entire PSC change is debited/credited to the OCI account.

Addition to PBO - pension liability

Journal entry:

Excess Adjustment of PBO and PA at year end-
OCI
Pension liability

Question 8

Current year actuarial gain or loss from changes in actuarial assumptions

Answer 8

Gain - addition to PBO

Loss - deduction

Question 9

Presentation of pension accounts in BS

Answer 9

Add all plans with Non current asset balance
Add all plans with Non current liabilities balance

DO NOT NET ASSET FROM LIABILITIES

Question 10

SHORT CUT WAY OF COMPUTING EXCESS ADJUSTMENT TO OCI

journal entry
compute target - PBO end-PA end
T account
adjust to target

JE:

Excess adjustment of PBO and PA @ year end
- OCI
Pension liabiltiy

Answer 10

1. Write journal entry for pension cost

pension expense
cash (contributions paid)
pension liability

2. check if there is a beginning pension liability
3. T account:
   beginning pension liab
   add: this year liab (JE)
   total
4. compute the target liability
   PBO end - PA end
   = target liability
5. finish #3 - compute adjustment amount

Question 11

Projected PBO GAAP vs IFRS

Answer 11

GAAP PBO - benefit years of service method

IFRS - projected unit credit method