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The typical retirement plans are:
o Defined contribution plan
 Contribution is specified and future amount is unknown
 The pension holder bears all the risk
 Accounting treatment is expensed as incurred
o Defined benefit plan
 Employer promises to pay a specified annual payment
o Other benefit
 Life or health insurance
Projected Benefit Obligation
o Definition
 The actuarial present value of all benefits attributes by the plan’s benefit
formula to employee service rendered prior to that date
o Assumption
 Expected future salary increases
 Going concern
 Employee continue service
Balance sheet presentation
o Both IFRS and GAAP require pension plan’s fund status to be reported on the
balance sheet
o F
 The fund status either a surplus or a deficit will be reported on the balance
sheet
 In the case that there is a fund surplus, then it may be subject to a
ceiling where it cannot pass
o
o
Discount rate: the interest rate to compute the PV of benefit obligation and
the current service cost
 Based on a similar duration fix asset discount rate
 Rate of compensation growth: average expected annual growth
 Expected vesting period: refers to a provision in pension plan whereby an
employee gain rights to future benefits only after meeting certain criteria
Periodic Pension Cost (GAAP) is recognized in profit or loss and categorized in OCI
o Current service cost: the present value of benefits earned by the employee during
the current period
o Interest cost: the increase in the PBO due to the passage of time. It is calculated by
multiplying the PBO at the beginning of the period by the discount rate
o Expected return on plan asset: expected return on plan asset reduces pension
expense
o Amortization of actuarial gain and losses:
 An change in the PBO from a change in actuarial assumption
 Difference between the expected return and actual return
 This only applies to the case of fund surplus that had passed the
applied ceiling; the extra section is then amortized.
 The method of the amortization is the corridor approach
Periodic Pension Cost (IFRS)
o Service cost-includes both the current and past:
 Current service cost is the amount by which a company’s pension obligation
increases as a result of employee’ service in the current period

which is used for the prediction Analyst’s view: Disclosures of Pension and Other Post Employment Benefits o Evaluating the disclosure assumptions  Discount rate  Expected compensation growth rate  Expected return on assets o Metric for analysis:  Consistency with other company  Consistency with economic environment . there is the ultimate healthcare trend rate.Past service cost is the amount by which a company’s pension obligation relating to employees’ service in prior period changes as a result of plan amendments or a plan curtailment o Net interest expense/income  Calculated by multiplying the net pension liability or asset by the discount rate  The expected return on plan assets is assumed to be the same as the discount rate used for computation of pension obligation  Net interest expense or income recognized in P&L o Remeasurement:  (a) Actuarial gain and losses  (b) Difference between actual return on plan asset and the amount included for net interest expense / income calculation o Special note:  Actuarial gains and losses are not included in P&L Difference between GAAP and IFRS o Past Service Cost  GAAP: goes into OCI and amortized over service life  IFRS: goes into I/S o Actuarial gain/losses  GAAP: amortized portion in I/S & unamortized in OCI  IFRS: all in OCI and not amortized. And a remeasurement account is created Effect of changing pension assumption o Increase the discount rate  Reduce PBOImprove fund status  Result in lower pension expense  The volume of decrease for PBO offsets the increase in interest rate  Reduce interest cost o Decreasing the compensation growth rate  Reduce PBOImprove fund status  Reduce current service cost and lower interest cost  Pension expense will decrease o Increasing the expected return on plan assets  Reduce pension expense  Not affecting the benefit obligation or the fund status    Effect on Balance sheet liability Pension expense   Increase discount rate Decrease Decrease Decrease rate of compensation growth Decrease Decrease Increase expected rate of return No effect Decrease (GAAP) For health care pension.

OCI  Adjust GAAP company’s P&L so it becomes comparable with IFRS  (a) Include past service cost  (b) Exclude amortization of past service cost arising in pervious period  (c) Including an amount of return on plan assets at the discount rate rather than the expected rate  Or use OCI as the basis for comparison Classification of periodic pension cost  Exclude from operating income the amortization of past service cost and net actuarial gain and losses  Exclude interest expense and the return on plan assets from operating income  Interest expense be added to the company’s interest expense and return on plan asset be treated as non-operating income  Added back the actual return of asset back into other income Cash flow  If sponsoring company’s periodic contribution to a plan exceed the total pension costs of the period. the excess can be viewed as a reduction of pension obligation  Over-contribution (prepayment) o CFO is added o CFF is subtracted  Under-contribution (borrowing) o CFO decreases o CFF is added  A periodic contribution that is less than the total pension cost of the period can be viewed as a source of financing .o o o o o  Consistent internally Net Pension Liability or Asset  The balance sheet discloses only the net amount  Analysts can use the net amount to adjust a company’s asset and liability for the gross amount so it better reflects the company’s true asset and liability  Compare the gross amount with the sponsor company’s asset. Total periodic cost (analyst view of total periodic cost)  Definition: The total periodic cost of a company’s DB pension plan is the change in the net pension liability or asset. excluding the effect of the employer’s periodic contribution into the plan  Net Periodic Pension Cost=Ending fund status – Beginning fund status – employer’s contribution Periodic Pension cost recognized in P&L vs. equity and earnings.