Pensions & Postemployment Benefits

Question 1

What type of pension plan sets aside specific amounts during the time of service, and the retired employee receives whatever sum these contributions and earnings produce?

Answer 1

Defined Contribution plan

Question 2

What type of pension plan guarantees certain benefits to be paid to retired employees, and is responsible for setting aside sufficient amounts to fulfill these promises?

Answer 2

Defined Benefit plan

Question 3

What are the two special problems that make defined benefit plans more complicated than defined contribution plans?

Answer 3

1) Matching – pension expense must be recognized at the time of employee service, not when benefits are paid to retired employees
2) Estimation – costs are difficult to determine since they depend on the lifespan of the employees, changes in their wage rates, and the rates of return on pension investments

Question 4

What defined benefit plan element refers to the annual increase in the PBO?

Answer 4

Service Cost

Question 5

Between what two time periods would the prior service cost (PSC) fall for defined benefit plans?

Answer 5

Between the Hire date and the Measurement (Initiation) date

Question 6

With regard to defined benefit plans, between what two time periods does service cost fall?

Answer 6

Between the Measurement (Initiation) date and the Retirement date

Question 7

With regard to defined benefit plans, what does service cost refer to?

Answer 7

The increase in PBO that results from employee service in the current period. Specifically, it is the actuarial present value of benefits attributed to services performed during the period. It represents the funding increase in PBO for 1 year.

Question 8

Between what two time periods does the payout period fall for defined benefit plans?

Answer 8

After retirement date until date of actuarial termination (or death)

Question 9

What is the accumulated benefit obligation for defined benefit plans?

Answer 9

Actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using current wage rates.

Question 10

What is the vested benefit obligation for defined benefit plans?

Answer 10

What is owed to the employee regardless of their continued employment (if terminated immediately). Comprised of the actuarial present value of vested benefits.

Question 11

What is the projected benefit obligation (PBO) for defined benefit plans?

Answer 11

Actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using estimated future compensation levels.

Question 12

With regard to defined benefit plans, what is the actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using existing compensation levels?

Answer 12

Accumulated Benefit Obligation (ABO)

Question 13

With regard to defined benefit plans, what is the amount owed to the employee regardless of their continued employment referred to?

Answer 13

Vested Benefit Obligation (VBO)

Question 14

With regard to defined benefit plans, what is the actuary’s estimate of discounted present value of the total retirement benefits earned so far by employees, applying the pension formula using estimated future compensation levels?

Answer 14

Projected Benefit Obligation (PBO)

Question 15

What is the benefits-years-of-service method used for?

Answer 15

To determine the present value of the projected benefit obligation (PBO)

Question 16

How is the present value of the projected benefit obligation (PBO) determined?

Answer 16

Under the benefits-years-of-service method

Question 17

Which defined benefit obligation amount most satisfies Faithful Representation?

Answer 17

Accumulated Benefit Obligation (ABO)

Question 18

Which defined benefit obligation amount most satisfies Relevance?

Answer 18

Projected Benefit Obligation (PBO)

Question 19

With regard to defined benefit plans, if the pension formula doesn’t include future compensation levels, is there a difference between the ABO and PBO?

Answer 19

No

Question 20

What is a flat-benefit (pension) plan?

Answer 20

Defined Benefit plan whose benefits aren’t affected by changes in future compensation. As employees’ compensation increases over time, benefits earned after the change in compensation are calculated using the new compensation rate(s).

Question 21

What type of defined benefit plans do not adjust previously earned benefits to new compensation rates?

Answer 21

Flat-benefit (or non-pay-related) plans

Question 22

What is a pay-related, final-pay, average-pay, or career-average-pay pension plan?

Answer 22

Defined Benefit plan whose benefits are affected by changes in future compensation. As employees’ compensation increases over time, both benefits earned after the change in compensation as well as benefits already earned are calculated using the new compensation rate(s).

Question 23

What type of pension plans adjust previously earned benefits to new compensation rates?

Answer 23

Pay-related, final-pay, average-pay, or career-average-pay plans

Question 24

With regard to defined benefit plans, what does interest cost refer to?

Answer 24

Change in PBO from the passage of time. Calculation = Beginning PBO x discount rate (aka settlement rate)

Question 25

With regard to defined benefit plans, what does prior service cost (PSC) amortization refer to?

Answer 25

Cost associated with service years before plan was implemented or amended. Calculation = Beginning PSC/Average Service Life (expected future years of service amortization method)

Question 26

What defined benefit plan element refers to the change in the PBO from the passage of time? How is it calculated?

Answer 26

Interest Cost. Calculated as:

Beginning PBO x discount rate (or settlement rate)

Question 27

What are the two ways the Actual Return on Pension Plan Assets is calculated?

Answer 27

1) Beginning Plan Assets + Contributions – Benefits paid out – Ending Plan Assets
2) Beginning Fair Value of Plan Assets x Actual Return

Question 28

How is the Expected return on pension plan assets calculated?

Answer 28

Beginning Plan Assets x Expected Rate of Return (also the difference between actual return on plan assets and deferred gain/loss)

Question 29

What is it called when the Actual Return on pension Plan Assets differs from Expected returns on pension Plan Assets?

Answer 29

Usually referred to as a Deferred Gain (although can be a loss). Often referred to as Unrecognized Pension Gain/Loss

Question 30

How is a Deferred Gain/Loss (Unrecognized Pension Gain/Loss) on Pension plan Assets calculated?

Answer 30

Actual Return on Plan Assets – [Beginning Plan Assets x Expected Rate of Return]

Question 31

In calculating Annual Pension Expense on defined benefit plans, what is the intent behind netting actual return on plan assets and the deferred (unrecognized) pension gain/loss amounts?

Answer 31

In order to arrive at an expected rate of return (per actuarial assumptions) which helps keep annual pension expense constant every year.

Question 32

What happens when the deferred gain (unrecognized pension gain) gets too large?

Answer 32

Use the corridor approach to determine if there is an “Excess” that needs to be amortized over the pension’s average remaining service life

Question 33

With regard to annual defined benefit pension plan expense, what is the corridor approach? How is it calculated?

Answer 33

1) Take the larger of 10% of:
a. FMV of plan assets
b. Beginning PBO
2) Subtact this amount to the deferred gain (or loss) at beginning of year
3) Take this “Excess” and amortize it over the average remaining service life of the plan

Question 34

What does amortization of net obligation do to pension expense?

Answer 34

Increases pension expense

Question 35

What does amortization of net asset do to pension expense?

Answer 35

Decreases pension expense

Question 36

For defined benefit plans, what is the journal entry that records the funding of the plan?

Answer 36

Dr. Pension Expense
Cr. Cash
Dr. Prepaid Pension Cost (PLUG) – OR –
Cr. Accrued Pension Cost (PLUG)

Question 37

What pension funding circumstance results in a prepaid pension cost?

Answer 37

When the cash paid to fund the plan exceeds the annual pension expense

Question 38

What pension funding circumstance results in an accrued pension cost?

Answer 38

When the cash paid to fund the plan is less than the annual pension expense

Question 39

What pension funding circumstance results from annual pension expense exceeding the cash funded on the plan for the year?

Answer 39

Accrued pension cost (liability)

Question 40

What pension funding circumstance results from annual pension expense being less than the cash funded on the plan for the year?

Answer 40

Prepaid pension cost (asset)

Question 41

What results in the difference between the ending projected benefit obligation and the ending fair value of plan assets?

Answer 41

The funded status of the plan

Question 42

What circumstance gives arise to an overfunded plan?

Answer 42

Ending value of plan assets > ending PBO

Question 43

What circumstance gives arise to an underunded plan?

Answer 43

Ending value of plan assets

Question 44

Can the funding status of pension plans be netted? (i.e., overfunded against underfunded)

Answer 44

No

Question 45

What is the measurement date for a defined benefit plan?

Answer 45

Employer’s fiscal year-end statement of financial position

Question 46

How are gains or losses not already recognized as pension expense recognized?

Answer 46

They are recognized in Accumulated OCI

Question 47

What are some examples of post-retirement benefits other than pensions?

Answer 47

1) Health care benefits
2) Life insurance coverage
3) Legal services
4) Day care
5) Tuition assistance and housing subsidies

Question 48

How does one reconcile from beginning of year PBO to end of year PBO?

Answer 48

Beginning of year 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 assumptions)
- Benefits paid

Question 49

Under IFRS, what method is used to calculate the cumulative cost of defined benefit plans?

Answer 49

Projected unit credit method

Question 50

Under IFRS, what is the projected benefit obligation referred as?

Answer 50

Defined benefit obligation (DBO)

Question 51

Under IFRS, is it permissable to net pension plan assets and liability balances?

Answer 51

Only when there is a legally enforceable right to use the assets of one plan to settle the obligations of another plan.