FAR 4

pensions are benefits offered to employees. Employers plans on paying employees a certain amount of money once they retire(usually in payments). There are 2 types of pensions:

1. Defined Contribution Plan- employer sets aside money in specific amounts at specific times and at employee retirement they get the funds put aside while they worked.  journal entry

• PENSION EXP X
•     CASH X

• 2. Defined benefit plan- employer guarantees certain benefits to the employee and this causes problems complex problems. 2 big problems exist.
• A)Matching- benefits/pension exp must be recognized while employee works, not at end.
• B)Estimation- hard to estimate costs, because unknowns(lifespan,etc). accountants use actuaries to make these estimates.

to calculate pension expense under the defined benefit plan we use the A-SPIDER mnemonic. lets look at all parts.

1. + SERVICE COST- amount told to set aside to meet the needs by actuary. Increase in PBO for 1yr.

2. + INTEREST COST- this is the interest earnings the PBO would earn for 1yr calculation. (beg pbo x discount rate/settlement rate)

3. +/- PRIOR SERVICE COSTS- Costs associated with years before plan was implemented. calculation is (beg psc/avg service life or expected future yrs of service)

• 4. - ACTUAL RETURN ON THE PLAN ASSETS- earnings on plan during the period. Money earned so don't have to put in as much. Calculation in 2 methods:
• 1. end pa-beg pa-contributions made+benefits paid or
• 2. beg fv pa x actual return

5. +/- DEFERRED GAIN(LOSS)- Actual vs expected return and a gain/loss can occur needs to be deferred. calculation is (return on pa - <beg pa x expected rate of return>)

• 6. -/+ EXCESS AMORTIZATION OF DEFERRED GAIN/LOSS- you amortize over years and deferred gain continuously increases,etc. to benchmark whether the deferred gain/loss is too much is the 10% of larger of
• A) Beg pbo = 500
• B) Beg fv of pa = 600
• so larger is 600 x 10% = 60k deferred allowed.. any extra gets amortized out in the pension expense. The Amortization expense = excess/avg service life

7. + AMORTIZATION OF AN EXISTING NET OBLIGATION- due to FASB 87 transition adjustment for diff between PBO & FV of PA. amortize amount of difference between the two.

*ALL THESE CALCULATE PENSION EXP HERE IS ENTRY

• PENSION EXP X
•     CASH X

like anything pension expense can be overpaid or underpaid and this is what journal entries look like:

• PENSION EXP 50
•     CASH 40
•     ACCRUED EXP 10

• PENSION EXP 50
• PREPAID COST 10
•     CASH 60

SFAS 158 requires funding information to be reported regarding its status meaning if overfunded or underfunded. to calculate whether overfunded or underfunded:

The Diff between PBO vs End FV of PA @ measurement date. If overfunded a non current asset is reported. If underfunded a non current liability is reported. 

EX: PBO(200) vs PA @FV(120)=80 liability

• *THIS IS E IN DENT
• E=EXCESS ADJ OF PBO VS FV OF PA

So at year end we look at what we have accrued pension cost of 80, but if we already have 30 then only accrue 50.

• AOCI 50
•     ACCRUED PENSION COST 50

Remember that pension costs are reported net of tax so actually it would look like this:

• AOCI 105
• DTA 45
•     ACCRUED PENSION COST 150

Calculation of PBO is rather simple

• Beg PBO
• +SERVICE COST
• +INTEREST COST
• +/-PRIOR SERVICE COSTS
• +/-ACTUAL GAINS/LOSSES
• -BENEFITS PAID OUT
• =END PBO

Everything involved in A-SPIDER.

• A-AMORTIZATION ON EXISTING OBLIGATION
• S-SERVICE COST
• P-PRIOR SERVICE COSTS
• I-INTEREST COST
• D-DEFERRED G/L
• E-EXCESS AMORTIZATION OF DEFERRED G/L
• R-RETURN ON PLAN ASSETS

all of the above follow the post-retirement benefit expense chart below. 

• POST RETIREMENT BENEFIT EXPENSE
• +CURRENT SERVICE COSTS
• +INTEREST COSTS ON ACCUMULATED POSTRETIREMENT
• -ACTUAL RETURN ON PLAN ASSETS
• +AMORTIZATION OF PSC
• -GAIN AMORTIZATION FOR CHANGES IN APBO
• =NET POST RETIREMENT EXPENSE

*SAME AS PENSIONS IF OVERFUNDED OR UNDERFUNDED AS TO BE REPORTED. 

entities can still use the defined contribution plan and the defined benefit plan. The defined contribution plan is the same as before, while the defined benefit plan is a little different. 

The pension expense is calculated as such

• +CURRENT SERVICE COSTS
• +INTEREST COSTS
• +POST SERVICE COST AMORTIZATION
• -EXPECTED RETURN ON PA
• +/-ACTUARY G/L
• +/-EFFECTS OF CURTAILMENTS & SETTLEMENTS
• =PENSION EXPENSE. 

*UNDER IFRS DISCOUNT RATE = MARKET RATE, WHILE GAAP DISCOUNT RATE = SETTLEMENT RATE. 

common stock are shares issued by a company on the open market to be bought and they give ownership to a company, and they are always kept @ par value. 

• IF ACQUIRED WITH CASH
• CASH 50
•     CS 30(PAR)
•     APIC 20(PLUG)

• IF ACQUIRED WITH ASSET
• BUILDING 200(FV)
•     CS 30(PAR)
•     APIC 170(PLUG)

• IF ACQUIRED SEVERAL SECURITIES. WE USE THE RELATIVE FMV APPROACH AMONG THE SECURITIES. 
• BUILDING 200
•     CS 40
•     B/P 160