Pensions and Other Postretirement Benefits

1. Pensions and Other Postretirement Benefits Chapter 17

2. Nature of Pension Plans

3. Defined Contribution Pension Plans Plan Characteristics Employer deposits an agreed-upon amount into an employee-directed investment fund. Employee bears all risk of pension fund performance. Contributions are defined by agreement.

4. Defined Benefit Pension Plans Plan Characteristics Employer is committed to specified retirement benefits. Employer bears all risk of pension fund performance. Retirement benefits are based on a formula that considers years of service, compensation level, and age.

5. Pension Expense—An Overview The annual pension expense reflects changes in both the pension obligation and the plan assets.

6. The Pension Obligation Accumulated benefit obligation (ABO) The actuary’s estimate of the total retirement benefits (at their discounted present value) earned so far by employees, applying the pension formula using existingcompensation levels. Vested benefit obligation (VBO) The portion of the accumulated benefit obligation that plan participants are entitled to receive regardless of their continued employment. Projected benefit obligation (PBO) The actuary’s estimate of the total retirement benefit (at their discounted present value) earned so far by employees, applying the pension formula using estimated future compensation levels. (If the pension formula does not include future compensation levels, the PBO and the ABO are the same.)

7. The Pension Obligation

8. Projected Benefit Obligation

9. Pension Plan Assets The pension plan assets are not reported separately in the balance sheet but are netted together with the PBO to report either a net pension asset (debit balance) or a net pension liability (credit balance). The higher the expected return on plan assets, the less the employer must actually contribute. On the other hand, a relatively low expected return means the difference must be made up by higher contributions.

10. OVERFUNDED Market value of plan assets exceeds the actuarial present value of all benefits earned by participants. Funded Status of the Pension Plan UNDERFUNDED Market value of plan assets is below the actuarial present value of all benefits earned by participants.

11. This amount is reported in the balance sheet as a Pension Liability or Pension Asset. Reporting the Funded Status of Pension Plan Projected Benefit Obligation (PBO) - Plan Assets at Fair Value Underfunded / Overfunded Status

12. The Relationship Between Pension Expense and Changes in the PBO and Plan Assets

13. Gains and Losses Only if a net gain or net loss exceeds the “corridor” is a charge to pension expense allowed.

14. Corridor Amount PBO at the beginning of the period. The corridor amount is 10% of the greater of Or Fair value of plan assets at the beginning of the period.

15. Net unrecognized gain or loss at beginning of year Corridor amount ־ Average remaining service period of activeemployees expected to receive benefits under the plan Gains and Losses If the beginning net unrecognized gain or loss exceeds the corridor amount, amortization is recognized using the following formula . . .

16. Comprehensive Income Comprehensive income is a more expansive view of income than traditional net income.

17. Comprehensive Income

18. Postretirement Benefits Other Than Pensions Net Cost of Benefits Many companies also furnish other postretirement benefits to their retired employees. Estimated medical costs in each year of retirement Retiree share of cost Medicare payments Less: Estimated net cost of benefits Equals:

19. Expected Postretirement Benefit Obligation (EPBO) – The actuary's estimate of the totalpostretirement benefits (at their discounted present value) expected to be received by plan participants. Accumulated Postretirement Benefit Obligation (APBO) – The portion of the EPBO attributed to employee service to date. Postretirement Benefit Obligation

20. Accounting for Postretirement Benefit Plans Other Than Pensions Attribute a portion of the accumulated postretirement benefit obligation to each yearas the service cost for that year. Measuring Service Cost

21. End of Chapter 17