Intermediate Act II Pensions

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  1. What are the two types of Noncontributory plans?
    Defined contribution plan and defined benefit plan
  2. Public Pension Plan
    a pension Plan sponsored by a government unit
  3. Private pension plan
    a pension Plan sponsored by a business. We concentrate on this one.
  4. Private Pension plans are governed by what federal law?
    ERISA employee retirement income security act
  5. Contributory pension plan
    A plan whereby both the employer and the employees make contributions to the pension fund; contributions do not have to be in equal amounts.
  6. Noncontributory pension plan
    A plan whereby only the employer contributes to the pension fund. We concentrate on this.
  7. What type of pension plan do we concentrate on in this course?
    PRIVATE, NONcontributory, DEFINED benefit, FUNDED pension plan
  8. What are the 4 different types of pension plan groups?
    • 1. PUBLIC or PRIVATE
    • 2. Contributory or NONContributory
    • 3. Defined CONTRIBUTION or defined BENEFITS
    • 4. Funded or UNfunded
  9. Defined CONTRIBUTION plan
    a plan in which the employer specifies the contributions to the plan, but there is no specification of the amount of benefits to be paid to the retirees. The contributions are usually tied to some base and applied at a specified rate (e.g. 5% of an employee's salary)
  10. Defined BENEFIT plan
    a plan whereby the amount of the employer's periodic contribution to the fund is not specified, but the benefits to be paid to retirees are specifically stated. We will concentrate on this type.
  11. In a defined benefit plan contributions are made to the fund by the employer, but
    the amount of the periodic contributions are not specified so long as they at least meet the minimum requirements set by ERISA.
  12. Funded pension plan
    a plan whereby the employer makes funding contributions to an independent funding agent (e.g., a large bank or insurance company). We will be concentrating on this type.
  13. UNfunded pension plan
    a plan whereby the employer retains control of the pension fund. Contributions are still made to the fund except that they are not made to an independent agent.
  14. In a funded pension plan who is responsible for investing and managing the fund assets and making retirement payments?
    the FUNDING AGENT (not the employer)
  15. In an UNfunded pension plan who is responsible for investing and managing the fund assets and making retirement payments?
    the EMPLOYER
  16. If GM motors has a FUNDED, Defined CONTRIBUTION Plan do they have a contingent liability to employees?
  17. If GM motors has a FUNDED, Defined BENEFITS Plan do they have a contingent liability to employees?
  18. A company's pension cost is determined largely by whom?
    How do they do it?
    • Actuaries;
    • They use Present Value techniques to compute the PV of the future benefits expected to be paid the retirees and the funding requirements.
  19. What accounting term represents a contingent liability to the sponsoring company for their Private, concontributory, defined benefit, funded pension plan?
    PBO Projected Benefit Obligation
  20. PBO Projected Benefits Obligation
    the present value of the future retirement benefits to be paid to the employees based on future salary levels expected to be in place when they retire.
  21. What do some of the assumptions deal with that actuaries use to determine pension cost?
    • future interest rates
    • expected salary levels
    • expected rate of inflation
    • current age of employee group
    • number of covered employees
    • composition of covered employees
    • expected retirement dates of employees
    • life expectancy of employees after retirement
    • etc...
  22. What are the two most important concepts in accounting for pensions?
    PBO Projected benefit obligation and Fair value of plan assets
  23. Fair Value of the Plan Assets represents what?
    It represents the current market value of all assets in the pension fund. In essence, it embodies the assets currently available to liquidate the PBO.
  24. Under what code does it address how to account for the funded status of a pension plan?
    How do you account for it?
    • ASC 715-20;
    • Neither the PBO nor the plan assets are recorded in a company's books or financial statements. However, the funded status of a pension plan must be reported in the financial statements as a net asset or liability in the Balance Sheet.
    • An asset if dr balance
    • A Liability if cr balance
  25. Find the Pension asset/liability amount.
    PBO 10,000,000cr.
    FV of Plan assets 8,000,000dr.
    • Pension asset/ liability = 2,000,000 cr.
    • So this would be a Liability
  26. Do most companies that have pension plans have a pension asset or a pension liability at the end of a year?
    Pension liability
  27. How is the funded status of a pension plan reported if it nets to have a
    dr balance?
    cr balance?
    • Asset;
    • Liability
  28. What are the 4 primary components of a company's periodic pension expense and how should they be calculated to find the periodic pension?
    What is the 5th one that Dr. Jordan added?
    • 1. SERVICE cost
    • 2. + INTEREST cost on the PBO
    • 3. - a RETURN on FUND ASSETS
    • 4. + AMORTIZATION of Prior Service Costs (PSC)
  29. Service Cost
    costs (or PV) of the future retirement benefits earned by the employees during the current year
  30. Interest cost on PBO
    the PBO is the PV of all future retirement benefits earned as of a particular date (i.e., the PV of future benefits earned in the past)
  31. IS the PBO formally recorded on the books? What is it similar to in concept?
    • The PBO is not formally recorded in the books;
    • It is similar in concept to a long-term liability in that it represents a present obligation.
  32. How does FASB require that interest expense be recorded on PBO?
    FASB requires that an interest element on this PBO be recognized as a part of the current period's pension expense.
  33. How does the interest element effect PBO?
    It increases the balance of PBO.
  34. Return on fund assets
    Although a company makes yearly funding contributions to the pension plan, the fund assets are not actually recdorded in the books.
Card Set:
Intermediate Act II Pensions
2011-10-20 16:33:30
Pensions Post retirement benefits

Pensions and Post Retirement Benefits
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