Really stuck in the defined benefit plans accounting

CFA Level I FRA
#1

Hi guys,

please would you help me out with the defined benefit plan? i am not sure i understand what is required, what should be expensed and what should be capitalised? i am confused, please help - thanks

#2

Are you taking level 1 and studying level 2 books? That might be part of your problem.

#3

There are five components to pension expense (on the income statement):

  • Service cost : This is the additional benefit that the employees have earned by working for the company for a year. The present value of this benefit is added to the benefit obligation (liability) on the balance sheet, and is added to the pension expense on the income statement.
  • Interest cost : This is the increase in present value of the benefit obligation because the company is one year closer to having to pay. The interest is added to the benefit obligation on the balance sheet, and is added to the pension expense on the income statement.
  • Expected return on plan assets : This is subtracted from the pension expense on the income statement, and the difference between the expected return and the actual return is accumulated in OCI; if the accumulated difference reaches a given threshold, then it must be amortized, and the amortization will be included in pension expense.
  • Actuarial gains and losses : These are amounts that arise when the assumptions used in the pension calculations are changed; these assumptions include the discount rate, the expected return rate, the rate of salary growth, and so on. These amounts are accumulated in OCI and amortized; the amortization is included in pension expense.
  • Prior service costs : These are amounts that arise when the provisions of the pension plan change; e.g., if the formula to calculate the amount of pension earned changes, then the pension obligation will change when this formula is applied retroactively. These amounts are accumulated in OCI and amortized; the amortization is included in pension expense.
#4

They now expect Level I candidates to know the components of pension expense. They don’t have to do the Level II calculations, but they have to know what’s included and what’s not.

#5

thanks S2000magician, really helpful

#6

My pleasure.

#7

Ah. Okay.

Level 1 just got a bit harder then.

#8

i just realized this is the first time in 4 years i dont have to study for the cfa from feb to jun…feeels so good

#9

Let’s not be smug.

#10

not being smug

#11

Good to hear.

(Not that I’d have expected you to feel smug. I always tell my students, “Thank God I don’t have to take these tests any more.” It’s a sense of relief.)