Pension help

Can someone calculate the pension expense and whether it is overfunded or underfunded. What is the value (netted) showing up on the balance sheet. I’m having trouble with this. Thanks. CFA Dummy Inc,. began operations on January 1, 1985 and adopted a defined benefit pension plan for all of its full-time employees on January 1, 1995. The pension plan is noncontributory and will provide eligible employees with an annual pension of 70% of their salary at retirement date. At the plan adoption date, the actuary estimated there was a \$1,200,000 liability for the employees past service. The discount rate on January 1, 2005 was 7.5% but decreased to 7.0% on December 31, 2005 January 1, 2005: Projected benefit obligation (PBO) \$1,200,000 Fair value of pension plan 1,400,000 Service cost – for year 2005 300,000 Company Contributions – for year 2005 150,000 Remaining average service life 15 year At December 31, 2005: Fair value of pension plan assets \$1,500,000 Benefits paid 250,000

help

Fair value of asset is given, so we need to calculate PBO to get funded status which will be on balance sheet. end PBO = begin PBO + service cost + interest cost + actuarial gain/loss + prior service cost from plan amendment - benefit paid. interest cost = service cost * discount rate. Everything else is given. I think it is a bit hard to calculate actuarial gain here.

How does one caculate acturial gain/loss?

beg value plan assets = 1.4 mil + contributions 150k + actual return (squeeze) - benefits paid 250k = ending plan assets of 1.5 mil so actual return = 200k knowing that, under new standard, to get PBO you’d take old PBO of 1.2 mil, add service cost 300k, add interest cost which is BEGINNING PBO x interest (is it beg or end int, i don’t know- someone confirm- i’m going to guess end here) so 1.2 mil x 7% = 84k - that 200k return on the assets = 1,384,000 so the 1.5 mil fair value - 1.384 PBO i’d have you at an asset at the end. am i close? is that interest beginning or end amount in your answer- i know it’s beg PBO but not sure on the int.

The difference between 1.5m and 1.384 is netted on the balance sheet?

January 2005 Funded Status = PBO- FV = 1,200,000-1,400,000 = 200K overfunded Pension Expense = SC+ IC - Expected Return - Amort. prior service = 300,000 + (1,200,000 *.075) - (1,400,000 * .075) - (1,200,000/15) = 205 At this moment you’re underfunded by 5K (January 2005) December 2005 (same year but at the end of the year… adjusted for the added factor of benefits paid and revised FV of assets). Funded Status = January PBO - (new actual-benfit paid) =(1,605,000) - (1,500,000-250,000) = 145K underfunded (Dec. 2005) Am I right?

that’s what i’d think… but you tell me (tell me please that you have the answer) pensions are hard

It is always FV-PBO on balance sheet. I think actuarial gain will be given on the exam. Otherwise I will try to calculate a original future value using old discount rate and then discounted it by 7% to get new liability. I am not sure this is right.

I’m not sure how transition obligation of 80k was calculated? Return on plan Assets Beginning of Period 1,400,000 Company Contributions 150,000 Benefits Paid ( 250,000) Assets End of Period ( 1,500,000) Actual Return 200,000 Pension Expense: Service Cost \$300,000 Interest Cost 84,000 Return on Plan Assets (\$200,000) Amortization of: Transition Obligation ( 80,000) Pension Expense \$104,000 PBO ending = PBO-Beginning \$1,200,000 Interest Cost-2000 84,000 Service Cost-2000 300,000 PBO-Ending \$1,584,000

the 80k is the 1.2mil PBO/15 yrs- it’s a smoothing event. ok, i can see that. but PBO end don’t you minus out the returns, so PBO + service + interest - returns? don’t know why the PBO end would be 1.584 not 1.384…

Ok nice. It is basically ignored in this year. Also ending discount rate is used here. interest = beginning PBO * end rate. I think we need to use expected plan return instead of actual plan return here for pension expense. So I do not agree pension expense calculation. Thanks for a good review. I am reading this part again now.

no wait- returns don’t affect the PBO side, they hit up on the value of the assets. sh&t on me, thank you for posting this q actually. yeah, that looks right above. that actually they ask a lot in questions- like will upping the discount rate up/down the PBO and will upping the returns on the plan drop/no effect on PBO. it’s no effect. ok, i’m happy. so it’s right at 1.584 PBO, so you’d have a 84k liability if doing fair - PBO

This is when I pick C after my allocated time expires.

I’m going to pick C for the swap questions