Brilliant Johnny, glad I joined this forum! could you email to me too? caroline.hedges@avivainvestors.com
username at gmail thanks!
i posted this in a separate thread but still didn’t have a clear answer. changes in the discount rate affect current period service cost and interest cost. however, it also say’s it affects changes in actuarial assumptions, so it is amortized on the PBO under +/- actuarial gains and losses on PV of liabilities. which is it?
irregula, acturial assumptions pertain to employee turnover, mortality, retirement dates. discount rate, compensation growth rate and expected return on plan assets as Management assumptions related to pensions. By adjusting these numbers - discount rate increase, lowering compensation growth rate, increasing expected return on plan assets - all of these will increase earnings (by reducing pension expense). If company decided to go the other way - reduce discount rate, increase comp. growth rate, or reduce expected return on plan assets - this will have an effect on the PBO component – and change prior period service costs – and that increase would be amortized provided the value went outside of the 10% corridor limit.
And that 10% corridor limit means that the accumulated gains or losses on comprehensive income exceed 10% of the plan PBO or assets, whichever is lower?
greater, not lower, of either beginning PBO or fair market value of plan assets
map1, if PBO is lower than FV of assets, would I only need to have accumulated gains or losses higher than 10% of PBO (and not FV of assets)? That’s sort of what I meant by “whichever is lower.” Sorry if that isn’t clear.
Johnni, Good text. I memorized all the definations and the little formulas but I am a bit weak in understanding how GAAP and International rules differ, impact of new rules on balance sheet & income, any clue on the type of questions they are going to ask?
TheAliMan Wrote: ------------------------------------------------------- > map1, if PBO is lower than FV of assets, would I > only need to have accumulated gains or losses > higher than 10% of PBO (and not FV of assets)? > That’s sort of what I meant by “whichever is > lower.” Sorry if that isn’t clear. The fair value of assets, not the PBO.
map1 Wrote: ------------------------------------------------------- > greater, not lower, of either beginning PBO or > fair market value of plan assets I just verified, and this statement you wrote is right. So if PBO > FMV of assets, amortization of accumulated gains/losses on comprehensive income only occurs if these gains/losses reach 10% of PBO Conversely, if PBO < FMV of assets, amortization of accumulated gains/losses on comprehensive income only occurs if these gains/losses reach 10% of FMV
CP, So is this statement incorrect? +/- Actuarial G/L on PV of liabilities. Due to changes in discount rates, employee deaths, retirement age, etc.
employee death, retirement age yes, discount rate - do not think so.
BiPolarBoyBoston Wrote: ------------------------------------------------------- > Johnni, > > Good text. I memorized all the definations and the > little formulas but I am a bit weak in > understanding how GAAP and International rules > differ, impact of new rules on balance sheet & > income, any clue on the type of questions they are > going to ask? Thanks. As I said, this is a guide to understanding the material, not mastering it, so you should read through the Schweser stuff… Also, note that I’m a first time L2 candidate, so I cannot speculate as to how the material will be tested… That being said… When I say employers will present smooth expenses, I mean that they will use EXPECTED return on assets as opposed to ACTUAL and will amortize certain changes over many periods on the Income Statement. This will be true under GAAP and IFRS. Ok, like I said, CFAI materials are always a disaster, and Schweser matches CFAI on pensions. So, I have been unable to clearly understand how the numbers are accounted for. But, here is the conceptual framework (which I think will be sufficient on the exam): Under IFRS and OLD GAAP, the unrealized gains and losses would not be taken into account in Liabilities. Which means that if we had a loss, liabilities wouldn’t look too bad, whereas today under GAAP, it would be taken against liabilities increasing that amount (and decreasing equity). I always try to understand what i’m doing (easier to remember), so here is how I view this: On IS you want to smooth income, which is done well by both IFRS and GAAP. On BS you want to get the real picture, which is done well by NEW GAAP. The real picture = taking into account unrealized G/L right away. So (under NEW GAAP) if we have losses, liabilities will increase and Shareholder’s Equity will decrease.
cpk123 Wrote: ------------------------------------------------------- > employee death, retirement age yes, > > discount rate - do not think so. There are only 2 types of changes that could affect the PBO: the amendments to the plan (which result from, say, negotiations with the unions) and changes in actuarial assumptions (that result from changes in all other factors: employment duration, discount rate, mortality, whatever else used in deriving the PBO). Isn’t an assumption made on the discount rate used to PV the liability for the future cash outflows? Wouldn’t a reassessment of this be a change in actuarial assumptions?
map1 Wrote: ------------------------------------------------------- > Isn’t an assumption made on the discount rate used > to PV the liability for the future cash outflows? > Wouldn’t a reassessment of this be a change in > actuarial assumptions? This is clearly correct.
map1, yes.