FAR Ch 6 - FAR - Notes Chapter 6 http:/cpacfa.blogspot.com...

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FAR - Notes Chapter 6 http://cpacfa.blogspot.com Pension Plans The pension plan (trust that handles the fund) and the sponsoring company are two separate legal entities 2 main pension plan methods allowed by GAAP - Defined contribution plan – defines the amount contributed to the plan - Defined benefit plan – defines the benefits to be paid to employees upon retirement Accumulated benefit obligation (ABO) – PV of benefits using current salary levels Projected benefit obligation (PBO) – PV of benefits using future/projected salary levels Prior Service Cost (PSC) – cost of benefits based on past service; granted when - service prior to the initiation of the pension plan that retroactively receive credit - subsequent plan amendments PSC should be amortized over future periods benefited (avg expected future service life) F6-5 be able to redraw graph I/S expense formula S Current s ervice cost I I nterest cost (R) (Expected r eturn on plan assets) A A mortization of unrecognized PSC G G ains/losses E Amortization of e xisting net obligation or net asset Net pension expense To record net pension expense for period Net pension expense xx Accrued pension cost xx (current liability on the B/S) To record payment of cash to pension plan Accrued pension cost xx Cash/prepaid pension xx S Current s ervice cost = PV of all benefits earned this period (an increase in PBO from employee services this period I I nterest cost = beginning period PBO * settlement rate [rate agreed upon by stakeholders, not market or prime rate] (R) (Expected r eturn on plan assets) – actual return adjusted for the diff btwn actual and expected return Expected return on plan assets = beg FV of plan assets * expected rate of return on plan assets or Beg FV of PA + contributions + actual return on PA – benefits paid = End FV of PA A A mortized of unrecognized PSC – increase in PBO amortized straight line over future periods G G ains/losses – arise from either - differences between expected and actual return on PA and - changes in actuarial assumptions If its material we record it, and anything over 10% amortize over the average remaining service period Unrecognized gain/loss (greater of 10% of PBO or market related value of PA) = excess 1
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FAR - Notes Chapter 6 http://cpacfa.blogspot.com ÷ avg remaining service life = minimum recognized amount to be reported [excess of 10% is amortized] E Amortization of e xisting net obligation = PBO – FV of PA At transition date if PBO > FV of assets, amortization of difference in increase pension expense If PBO < FMV, means overfunded, amortization of difference will decrease pension expense
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FAR Ch 6 - FAR - Notes Chapter 6 http:/cpacfa.blogspot.com...

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