Create an account
defined contribution: pension expense = employer's contribution
defined benefit plan: employer assumes investment risk
difference between other post-employment benefit plans and defined benefit plans
pension plans: funded at some level
other benefits: usually unfunded - expense recognized as benefits earned but no cash flow until actually paid
the equivalent of Projected Benefit Obligation (PBO) in IFRS is
present value of defined benefit obligation (PVDBO)
changes in actuarial assumptions
changes in variables such as mortality, employee turnover, retirement age, discount rate...
reconcile beginning and ending balance
obligation at beginning of period
+ current service cost
+ interest cost
+ unrecognized prior service costs
+- actuarial gains and losses
= obligation at the end of period
what to register in the balance sheet?
US GAAP: funded status
IFRS: option to defer recognition of prior service costs and actuarial gains and losses
B.S. asset (liab) = funded status + unrecognized prior service cost + unrecognized actuarial gains and losses
actuarial gains and losses
result of changing assumptions
differences in expected returns and actual returns
treatment of actuarial gains and losses
recognized on B.S.
also income statement OR comprehensive income (amortized using corridor method)
recognized in F.S.
if in other comprehensive income: never amortized in I.S.
OR off balance sheet (amortized using corridor)
once beginning balance of actuarial gains and losses > 10% of the greater of beginning PBO or plan assets - amortization required
amortization of past service costs
US GAAP: reported in comprehensive income, amortized over remaining service life
vested portion: expense immediately
unvested portion: off balance sheet and amortized over vesting period
current service cost
+ interest cost
- expected return on assets
+- amortization of actuarial gains and losses
+ amortization of past service costs
= net pension expense
1. discount rate: based on interest rates of high quality fixed income
2. rate of compensation growth
3. expected return on plan assets
effects of increasing discount rate
PBO lower, better funded status, lower pension expense, usually reduce interest cost unless plan is mature
effects of decreasing compensation growth rate
reduce pension pmts, PBO lower, better funded status, reduce current service costs, lower interest cost, lower pension expense
effects of increasing expected return
reduce pension expense
NO effect on obligation or funded status
assumptions for other post-employment benefits
similar except compensation growth rate replaced by healthcare inflation rate: taper off and eventually become constant (ultimate healthcare trend rate)
reconciliation of plan assets
fair value beginning of period
+actual returns on assets
+ employer contributions
- benefits paid
=fair value at end of period
under IFRS can companies fully recognize actuarial gains and losses?
yes, in IS or comprehensive income
economic pension expense
= service cost + interest cost + unrecognized prior service costs - actual returns (sum all changes in PBO except benefits paid and subtract actual returns)
= ending funded status - beginning funded status - contributions
adjustments for analytical purposes
only current service cost is operating expense
interest and actual return should be included in non operating items
differences between US GAAP and IFRS for pension expense
single line item under operating expense: US GAAP
various line items in IS: IFRS
if contributions > economic pension expense
difference is reduction of overall pension obligation similar to excess principal repayment
analytical purposes: reclassify difference (net of taxes) from operating to financing CF.
reasons for netting pension assets and liabilities
1. employer largely controls the plan assets and obligations - bears risks and potential rewards
2. decisions influenced by net pension obligation
so: total firms assets and liabilities lower and can affect ratios
changing assumption may have small effect on PBO, but larger effect on net pension amount
accounting treatment of share based compensation
shares not publicly traded: estimate must be used
market price available: value of stock options must be estimated
if granted with contingencies: expense may be spread over a period of time (service period)
accounting treatment of stock options
intrinsic value method: no compensation is ever recognized because most are out of money (no intrinsic value)
now: fair value (observable market price or using option model) of option on the grant date, expense allocated over the grant date and vesting date (first date of possible exercise)
accounting treatment of stock grants
based on the fair value of the stock on grant date, allocated over employee's service period
(without conditions, restricted stock & performance stock)
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