Acc 403-Ch20 Accounting For Pensions And Post Retirement Benefits

Front 1

What is a private pension plan?

Back 1

A private pension plan is an arrangement whereby a company undertakes to provide its retired
employees with benefits that can be determined or estimated in advance from the provisions of a
document or from the company’s practices.

Front 2

How does a contributory pension plan differ from a non-contributory plan?

Back 2

In a contributory pension plan the employees bear part of the cost of the stated benefits whereas
in a noncontributory plan the employer bears the entire cost.

Front 3

Differentiate between a defined contribution pension plan and a defined benefit pension plan. Explain how the employer's obligation differs between the 2 types.

Back 3

A defined-contribution plan specifies the employer’s contribution to the plan usually based on a
formula, which may consider such factors as age, length of service, employer’s profit, or compensation
levels.
A defined-benefit plan specifies a determinable pension benefit that the employee will receive at
a time in the future. The employer must determine the amount that should be contributed now to
provide for the future promised benefits.
In a defined-contribution plan, the employer’s obligation is simply to make a contribution to the
plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed
to the plan is borne by the employee. In a defined-benefit plan, the employer’s obligation
is to make sufficient contributions each year to provide for the promised future benefits.
Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the
promised benefits.

Front 4

Differentiate between "accounting for the employer" and "accounting for the pension fund."

Back 4

The employer is the organization sponsoring the pension plan. The employer incurs the costs
and makes contributions to the pension fund. Accounting for the employer involves:
(1) allocating the cost of the pension plan to the proper accounting periods, (2) measuring the
amount of pension obligation resulting from the plan, and (3) disclosing the status and effects of
the plan in the financial statements.
The pension fund or plan is the entity which receives the contributions from the employer,
administers the pension assets, and makes the benefit payments to the pension recipients.
Accounting for the fund involves identifying receipts as contributions from the employer sponsor,
income from fund investments, and computing the amounts due to individual pension recipients.
Accounting for the pension costs and obligations of the employer is the topic of this chapter;
accounting for the pension fund is not.

Front 5

The meaning of the term "fund" depends on the context in which it is used.
Explain its meaning when used as a noun.
Explain its meaning when it is used as a verb.

Back 5

When the term “fund” is used as a noun, it refers to assets accumulated in the hands of a
funding agency for the purpose of meeting pension benefits when they become due. When the
term “fund” is used as a verb, it means to pay over to a funding agency (as to fund future pension
benefits or to fund pension cost).

Front 6

What is the role of an actuary relative to pension plans? What are actuarial assumptions?

Back 6

An actuary’s role is to ensure that the company has established an appropriate funding pattern to
meet its pension obligations, to make predictions and assumptions about future events and
conditions that affect pension costs, and to assist the accountant in measuring facets of the pension
plan that must be reported (costs, liabilities and assets). In order to determine the company’s
pension obligation, the actuary must first determine the expected benefits that will be paid in the
future. To accomplish this requires the actuary to make actuarial assumptions, which are estimates
of the occurrence of future events affecting pension costs, such as mortality, withdrawals, disablement
and retirement, changes in compensation, and changes in discount rates to reflect the time
value of money.

Front 7

What factors must be considered by the actuary in measuring the amount of pension benefits under a defined benefit plan?

Back 7

In measuring the amount of pension benefits under a defined-benefit pension plan, an actuary
must consider such factors as mortality rates, employee turnover, interest and earnings rates,
early retirement frequency, and future salaries.

Front 8

Name 3 approaches to measuring benefit obligations from a pension plan and explain how they differ.

Back 8

One measure of the pension obligation is the vested benefit obligation. This measure uses only
current salary levels and includes only vested benefits; that is, benefits the employee is already
entitled to receive even if the employee renders no additional services under the plan.
A company’s accumulated benefit obligation is the actuarial present value of benefits attributed
by the pension benefit formula to service before a specified date and is based on employee
service and compensation prior to that date. The accumulated benefit obligation differs from the
projected benefit obligation in that it includes no assumption about future compensation levels.
The projected benefit obligation is based on vested and non-vested services using future
salaries.

Front 9

Identify the 5 components that comprise pension expense.

Back 9

(1) Service cost component—the actuarial present value of benefits attributed by the pension
benefit formula to employee service during the period.
(2) Interest cost component—the increase in the projected benefit obligation as a result of
the passage of time.
(3) Actual return on plan assets component—the reduction in pension cost for actual investment
income from plan assets and the change in the market value of plan assets.
(4) Amortization of prior service cost—the cost of retroactive benefits granted in a plan amendment
(including initiation of a plan).
(5) Gains and losses—a change in the value of either the projected benefit obligation or the
plan assets resulting from experience different from that assumed or expected or from a
change in an actuarial assumption.

Front 10

What is service cost and what is the basis of its measurement?

Back 10

The service cost component of net periodic pension expense is determined as the actuarial
present value of benefits attributed by the pension benefit formula to employee service during the
period. The plan’s benefit formula provides a measure of how much benefit is earned and,
therefore, how much cost is incurred in each individual period. The FASB concluded that future
compensation levels had to be considered in measuring the present obligation and periodic
pension expense if the plan benefit formula incorporated them.

Front 11

In computing the interest component of pension expense, what interest rates maybe used?

Back 11

The interest component is the interest for the period on the projected benefit obligation outstanding
during the period. The assumed discount rate should reflect the rates at which pension benefits
could be effectively settled (settlement rates). Companies should look to rates of return on highquality
fixed-income investments currently available whose cash flows match the timing and
amount of the expected benefit payments.

Front 12

Explain the difference between service cost and prior service cost.

Back 12

Service cost is the actuarial present value of benefits attributed by the pension benefit formula to
employee service during the period. Actuaries compute service cost at the present value of
the new benefits earned by employees during the year. Prior service cost is the cost of retroactive
benefits granted in a plan amendment or initiation of a pension plan. The cost of the retroactive
benefits is the increase in the projected benefit obligation at the date of the amendment.

Front 13

What is meant by "prior service costs" ? When is prior service cost recognized as pension expense?

Back 13

When a defined-benefit plan is either initiated or amended, credit is often given to employees for
years of service provided before the date of initiation or amendment. The cost of these retroactive
benefits are referred to as prior service costs. Employers grant retroactive benefits because they
expect to receive benefits in the future. As a result, prior service cost should not be recognized as
pension expense entirely in the year of amendment or initiation. It is recognized as an adjustment
to other comprehensive income. It should be recognized during the service periods of those
employees who are expected to receive benefits under the plan. Consequently, prior service cost is
amortized over the service life of employees who will receive benefits and is a component of net
periodic pension expense each period.

Front 14

What are the "liability gains and losses" and how are they accounted for?

Back 14

Liability gains and losses are unexpected gains or losses from changes in the projected benefit
obligation. Liability gains (resulting from unexpected decreases) and liability losses (resulting
from unexpected increases) are recognized in other comprehensive income. The accumulated
gains and losses are then amortized, subject to complex amortization guidelines in other
comprehensive income.

Front 15

What is the meaning of corridor amortization?

Back 15

Corridor amortization occurs when the accumulated OCI (G/L) balance gets too large. The gain
or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of
the beginning balances of the projected benefit obligation or the market-related value of the plan
assets. The excess gain or loss balance may be amortized using any systematic method but the
amortization cannot be less than the amount computed using the straight-line method over the
average remaining service-life of active employees expected to receive benefits

Front 16

Describe the accounting for actuarial gains and losses.

Back 16

Actuarial gains or losses arise from (1) asset gains or losses (when the expected return is different
than the actual return on plan assets) and (2) a liability gain or loss (when actuarial assumptions do
not coincide with actual experiences related to computation of the projected benefit obligation.) In the
period that they arise, these gains and losses are not recognized as part of pension expense, but are
recognized as increases or decreases in other comprehensive income. In subsequent periods, these
amounts are amortized into periodic pension expense over the remaining service lives of the
employees, using corridor amortization.