Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
30 Cards in this Set
- Front
- Back
|
What is the nature of Pension Plans?
|
1. Provide income to employees during their retirement years.
2. The employer sponsors the plan, incurs the cost, and makes contributions. 3. The plan (a separate legal and accounting entity) receives contributions, administers plan assets, and makes benefit payments. |
|
|
What is the most common pension plan?
|
Defined contributions Plans:
401k Profit sharing |
|
|
What are the characteristics of a defined contribution plan?
|
1. Promises fixed annual contributions
2. Employees choose where the funds are invested and bear the risk of return 3. Employer’s only obligation is to remit an annual contribution. |
|
|
DB/CR for defined contribution plan:
|
Pension Exp XXX
Cash XXX |
|
|
What are the characteristics of a defined benefit plan?
|
1. Promises a fixed amount of benefits – calculated using a pension formula
2. EMPLOYER is accountable for insuring sufficient funds are available |
|
|
A typical pension formula calculates annual retirement benefits based on:
|
1. years of service
2. age 3. annual pay at retirement |
|
|
3 ways to estimate Pension Benefit Obligation
|
1.Accumulated Benefit Obligation (ABO)
2. Vested Benefit Obligation (VBO) 3. Projected Benefit Obligation (PBO) |
|
|
Accumulated Benefit Obligation (ABO) –
|
PV of all retirement benefits using existing compensation levels
|
|
|
Vested Benefit Obligation (VBO)
|
vested portion of the ABO. Part that participants are entitled to regardless of any future service
|
|
|
Projected Benefit Obligation (PBO)
|
PV of all retirement benefits using projected compensation levels. Best because takes into account probably inflation.
|
|
|
Components of a defined benefit pension plan
|
1. Pension Benefit Obligation Estimate
2. Plan Assets 3. Pension Expense |
|
|
Pension Plan Assets
|
used to satisfy the obligations of the plan
|
|
|
A trustee manages the assets of the plan by performing the following:
|
1. Accepts employer contributions.
2. Invests the contributions. 3. Accumulates the earnings on the investments. 4. Pays benefits from the plan assets to retired employees or their beneficiaries. |
|
|
The plan assets can change due to:
|
1. Actual return: dividends, interest, gains, or losses
2. Employer contribution 3. Benefits paid |
|
|
Pension Plan Ending Balance =
|
Beg Bal + Returns - Losses + Employer Contributions - Benefits Paid
|
|
|
Pension Expense
|
Employer's cost of having the plan
|
|
|
Components of Pension Expense
|
1. Service Cost
2. Interest Cost 3. Return on Plan Assets 4. Amortization of Prior Service Costs 5. Amortization of Excess Net Gains/Losses |
|
|
Service Cost are an
|
the increase attributable to another year of service
|
|
|
Interest Costs are an
|
Increase attributable to accrual of interest
|
|
|
Interest Cost =
|
(Beg PBO * Discount Rate (Settlement Rate))
|
|
|
A positive return on plan assets _______ pension expense
|
decreases
|
|
|
Amortization of Prior Service Costs is:
|
a.Cost of making plan amendments retroactive to prior years.
b.Amortized over the average remaining service life of the active employees. |
|
|
Amortization of Excess Net Gains/Losses
|
a. Gains and Losses occur when actuarial estimates change (liability) or when actual return on assets varies from expected return (asset).
|
|
|
Excess of Net Gain/Loss =
|
difference between the net gain/loss and the > of 10% of Beg Plan Assets or 10% of Beg PBO
|
|
|
Amortizing a gain ________ pension expense
|
decreases
|
|
|
What are the reporting issues?
|
1.Funded status of plan
2. Recording the Periodic Expense and Funding of the Plan |
|
|
Underfunded plan =
|
PBO > plan assets, report pension liability
|
|
|
Overfunded plan =
|
PBO < plan assets, report pension Asset
|
|
|
The balance sheet is the
|
funded status of the plan
|
|
|
Record pension expense in the
|
Income Statement
|
