jan 31 113.pptx - PBO Formulas Through Components 1-3 PBO...

Info icon This preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
1 PBO Formulas Through Components 1-3 PBO at year-end = = actuarial pv of unpaid benefits through the BS date (using future salaries if the benefit formula uses them) = SC to date + interest cost to date – benefits paid to date = PBO beginning of year + SC for year + interest cost for year – benefits paid in year The last one here is the most useful for problem solving.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Continued Note that there is no reference to assets in the PBO formulas. Recall PBO and assets are separate. To this point, PBO changes because of: SC, interest cost, and benefits paid. We will see two additional causes of changes to PBO later.
Image of page 2
3 Reporting Pension Expense We have seen how to compute pension expense for the first 3 components. Even after adding components 4 and 5, we still use one account internally in JEs called “pension expense.” However, for financial reporting, GAAP requires that pension expense components be separated in the income statement. This also applies to postretirement benefit expense.
Image of page 3

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 Continued Service cost (SC) is to be included in other compensation expenses such as salary and wage expense. Only SC can be capitalized in WIP for manufacturing compensation. The other components are reported separately from compensation expenses, in one or more line items. They are not included in "operating income" if that subtotal is reported (it is not a required subtotal).
Image of page 4
5 Continued The rationale for this separation is that only SC is an actual compensation cost. The other components refer to the financing of the plan, and to the effect of changes in the plan or to changes in estimate. This requirement does not affect any JEs illustrated in these notes.
Image of page 5

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6 Why Aren’t We Finished? ??
Image of page 6
7 Why Aren’t We Finished? If management of the sponsoring firm could: perfectly predict the returns on the plan assets (e.g. stock price appreciation), and if plans were never amended, and if actuaries could perfectly predict benefit payment amounts Then accounting for defined benefit pensions would be complete. There would only be 3 components of pension expense. PBO and assets would be fully updated.
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern