Accounting for pensions and other postretirement benefits.
What is the formula used to reconcile the projected benefit obligation (PBO)?
Change in projected benefit obligation (PBO):
+ Service cost
+ Interest cost
+/- Prior service cost or credit (from changes to plan in current year)
+/- Actuarial gain or loss (from changes in actuarial or underlying assumptions)
- Benefits paid
What is the formula used to reconcile plan assets?
Change in plan assets:
BOY plan assets at fair value
+ Actual return
- Benefits paid EOY plan assets at fair value
What are the components of net periodic pension cost?
(Return on Plan Assets)
Amortization of Prior Service Cost
(Gains) and Losses
Amortization of Existing Net Transition Obligation or Asset
Net Periodic Pension Cost
What is service cost?
A component of net periodic pension cost recognized in a period determined as the actuarial present value of benefits attributed by the pension benefit formula to services rendered by employees during that period.
What is interest cost and how is it calculated?
The amount recognized in a period determined as the increase in the projected benefit obligation due to the passage of time.
Interest cost = Beginning of the year PBO x settlement rate
What is the settlement rate?
The discount rate used to calculate the interest cost component of pension expense.
To determine the settlement rate, it is appropriate to look at rates implicit in current prices of annuity contracts that could be used to settle the obligation under the defined benefit plan.
What is the actual return on plan assets?
The difference between the fair value of plan assets at the end of the period and the fair value at the beginning of the period, adjusted for contributions and benefit payments during the period.
What is the expected return on plan assets?
An amount calculated as a basis for determining the extent of delayed recognition of the effects of changes in the fair value of assets.
Determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets.
What is prior service cost?
The cost of retroactive benefits granted in a plan initiation or amendment.
Increases the PBO in the period of plan initiation or amendment and should be amortized to pension expense over future service periods of affected employees.
What constitutes gains and losses?
Arise from two sources:
(1) Difference between expected and actual return on plan assets when expected return on plan assets is used to calculate pension expense, and
(2) Changes in actuarial assumptions (actuarial gains and losses).
How are gains and losses accounted for under U.S. GAAP?
Under U.S. GAAP, entities have two choices when accounting for gains and losses:
(1) Recognize gains and losses on the I/S in the period incurred, or
(2) Recognize the gains and losses in OCI in the period incurred and then amortize the unrecognized gains and losses to pension expense over time using the corridor approach.
Under the corridor approach how is the amortization of unrecognized gain or loss calculated?
Unrecognized gain or loss (BOY)
(greater of 10% of BOY PBO or BOY FMV of Plan Assets)
÷ Average remaining service life
= Amortization of unrecognized gain or loss
What is the existing net obligation or net asset at implementation and how is it accounted for?
It is he funded status of an employer's pension plan as of the beginning of the first year FASB 87 was applied.
This funded status was required to be amortized over the greater of 15 years or the average remaining job life of the company's employees.
What is the funded status of a pension plan? How is it calculated?
The difference between the fair value of plan assets and the PBO.
Reported on the B/S as an asset or a liability (or both).
Overfunded - Plan assets > PBO; always a noncurrent asset.
Underfunded - Plan assets < PBO; can be a current liability (to extent benefit obligation payable in next 12 months exceeds fair value of plan assets), a noncurrent liability, or both.
What is the formula used to reconcile the funded status of a pension plan?
Change in funded status:
Beginning funded status
- Service cost
- Interest cost
+ Expected return on plan assets
- PSC incurred in current period due to plan amendment
+ Net gains incurred during current period
- Net losses incurred during current period
Ending funded status (pension benefit asset/liability)