Hey guys, I still have difficulties to solve EOC questions regarding pension plans. Can you help me with the issues below ? - increasing the discount rate : It lowers the present benefit obligations and increase the interest expense ? Am I right ? - What are the differences between US GAAP and IFRS ? (two EOC questions confuse me : q27 et q28 page 250) - What does mean the “economic pension expense” ? (q20 page 255) Thanks for helping me 
Yes you are right about the discount rate, increasing the rate at which you discount a cash flow reduces the figure, therefore it reduces the DBO. It does increase the interest expense but usually the reduction in the DBO offsets the increase in interest Rates, however when the plan is close to maturity the interest usually has the greatest effect. Economic pension expense (Just know how to calculate it) = Employer contributions - change in Funded status. An easy way to calculate the change in funded status is: (FV of Plan Asset end - DBO end) - (FV plan assets beg - DBO beg). Suppose its the true cost of the pension expense for the period, thats what I would assume
There are two differences between GAAP and IFRS. IFRS permits the components of the pension expense to be shown on the IS OR a Single line item. GAAP only permits a single line item. On the balance sheet the ‘pure’ funded status is shown for GAAP, while IFRS subtrats/adds any changes it the items which are usually ammortised, actuarial assumptions is one, cant remember the other at the top of my head, im sure someone else here knows. Gudluck bud
Economics Pension expense = (End Planned Asset - End PBO) - (Beg Planned Asset - Beg PBO ) - employer contribution. Another way around it is : Service + interest + Pland Amend - Actual ROA GAAP = Funded Status IFRS = Funded Status + reconciliation is needed to get to Net Pension Asset or Liability Funded Status ± unreg def gains or losses ± unrecog past service cost ± unrecog trans A/L GAAP Pension Expense = service + interest - expected ROA + amort past serv + amort unrecog loss Correct me if im wrong…
Thank you pedpenny ! Clear and easy explanation to understand it! Are you taking an exam or did you pass them already ? Bilal, shouldn’t it be Economics Pension expense = (End Planned Asset - End PBO) - (Beg Planned Asset - Beg PBO ) + employer contribution ? It would make more sense to add employer contribution and pedpenny is adding it too.
I taking it this year, im pretty sure its employers contribution - change in funded status, i was doing questions last night and i think this is how I was doing it, if you could look at one of the questions in the book, and see if that formula works, let us know if thats the right one cheers
It’s change in funded status - contributions. You are just backing out the contributions because they were added during the plan assets calculations pedpenny Wrote: ------------------------------------------------------- > I taking it this year, im pretty sure its > employers contribution - change in funded status, > i was doing questions last night and i think this > is how I was doing it, if you could look at one of > the questions in the book, and see if that formula > works, let us know if thats the right one cheers
You should deduct the employer contributions … not + 100% sure on this one.
Actually, Andrew is correct on this one. It’s: change(BO) - change(Assets) + Er Contributions You want to not consider the Er contributions, so you take them out of the subtracted assets (resulting in a positive adjustment). If you want to deduct them from EOY plan assets, you get the same result.
Could you somebody clarify why in the pension expense we are using Expected Plan Return instead of real return? At the time of reporting, the real result is already known, so why use the Expected value? Thanks!
I have found a wonderful article on the subject. Take a look at it: http://www.investopedia.com/university/financialstatements/financialstatements9.asp
SeesFA Wrote: ------------------------------------------------------- > Actually, Andrew is correct on this one. > > It’s: change(BO) - change(Assets) + Er > Contributions > > You want to not consider the Er contributions, so > you take them out of the subtracted assets > (resulting in a positive adjustment). > > If you want to deduct them from EOY plan assets, > you get the same result. True … if you deduct it you will get a negative number ie End PA - End PBO - Beg PA + Beg PBO - Employer contribution (Negative figure) However if you want to start with PBO and deduct the rest, ull add employer contribution which will give you a positive figure. Both the same
kyrylo Wrote: ------------------------------------------------------- > Could you somebody clarify why in the pension > expense we are using Expected Plan Return instead > of real return? At the time of reporting, the real > result is already known, so why use the Expected > value? > > Thanks! I believe its because it allows the company to smooth out their reporting instead of being at the mercy of the volatility of the markets. The Real Returns - the Expected return is an actuarial g/l and for IFRS carried in Equity instead of the income statement. Then the company can amortise it resulting less volatile reporting.
You have real returns for this year, what about returns on your pension assets for next 40 or 50 years that you must consider to arrive at PV of PBO. Expected return is an actuarial assumption. kyrylo Wrote: ------------------------------------------------------- > Could you somebody clarify why in the pension > expense we are using Expected Plan Return instead > of real return? At the time of reporting, the real > result is already known, so why use the Expected > value? > > Thanks!
Another confusion point : - What do they call obligation ? The payment due to the employee net of the plan asset or just the payment ? I guess it is just the payment because payment net of the plan asset is funded status. But when you calculate the obligation at the end of period you do -/+ actuarial gains and losses. Why do you do this calculation instead of amending the plan ? Beg Obligation + current service cost + interest + plan amendments +/- actuarial gain/losss - benefit paid = End Obl - Is an obligation discounted or not ? thanks !
Yes, the PBO is discounted. If a company were to start a pension plan, they would determine the PV of future benefits, considering the actuarial assumptions getting there (retirement, death, disability, etc). After the plan is set up, this original discounted (beginning obligation) is adjusted to get to the next year. Service cost is the additional liability created because another year has elapsed, for which all current employees get another year’s credit for their service. Interest cost is the additional liability created because these employees are one year nearer to their benefit payouts. Plan amendments refer to changes to the pension plan and they could have a positive or negative impact on cost. Actuarial gain/loss, or experience gain/loss refers to additional costs created because the changes in actuarial estimates changes made during the year, which are more fluid and don’t require plan amendments. Plan amendments need approvals, etc, and it doesn’t make sense for every assumption to be hard-coded.
Thank you SeesFA. Another question : IFRS vs GAAP Let’s say a change in the estimates increase the PBO. How would you report this ? Schwezer states you do Amortization in IFRS and GAAP. In this post http://www.analystforum.com/phorums/read.php?12,1142038 johnnyblazini wrote : “If assumptions change (discount rate, employee compensation growth, etc) or if we find differences between actual and expected returns, we may not wish to expense the full difference in the current year. We may smooth these differences over a few years, which is fine. GAAP obliges companies to account for these costs on the Balance Sheet as part of the funded status. IFRS does the opposite.” Can someone help me to understand this ? I am looking into CFAI book.
OK, let’s see if I remember this correctly: Two effects 1) Pension Expense: This occurs if there is a difference b/w expected and actual return on plan assets (among other factors). If the actuarial gains/losses exceed 10% of the greater of PBO or Plan Assets (10% corridor), they need to be amortized. Amounts upto 10% recorded in OCI, those above 10% form a component of Pension expense - deferred gains reduce and deferred losses increase pension expense. 2) Service Cost (prior years): this occurs if the company changes its plan either by reducing the number of service years required or increasing them, etc. Mostly results in increased PBO. this increase is amortized in OCI. This amortization smoothes reporting. Under IFRS Reduced volatility due to amortization. FMV of Plan Assets +Unrecognized deferred losses - Unrecognized deferred gains + Unrecognized Past service cost = Net Pension Asset (Liability) on BS Under US GAAP No Amortization, more volatile reporting. Net Funded Status reported on BS. Reconciliation from IFRS: IFRS Net Pension Asset (Liability) on BS - Unrecognized Past service cost - Unrecognized deferred losses + Unrecognized deferred gains = Net Funded Status OR Plan Assets - PBO = Net Funded Status on BS. Hopefully this helps.
According to Ernst & Young you can amortize deferred gains and losses. http://www.ey.com/US/en/Services/Assurance/Accounting-and-Financial-Reporting/US-GAAP-vs--IFRS--the-basics--March-2010---Employee-benefits-other-than-share-based-payments. Why does Iginla2010 write you cannot amortize under US GAAP. Is that something else ? I am totally confused… PS : what is FMV ? Fair Market Value ? Iginla2010 writes: "FMV of Plan Assets +Unrecognized deferred losses - Unrecognized deferred gains + Unrecognized Past service cost = Net Pension Asset (Liability) on BS "
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