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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 plans 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 plans 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
In the case that there is a fund surplus, then it may be subject to a
ceiling where it cannot pass
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
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 companys pension obligation
increases as a result of employee service in the current period

Past service cost is the amount by which a companys 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
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 PBOImprove 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 PBOImprove 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
Pension expense

Increase discount

Decrease rate of
compensation growth

Increase expected
rate of return
No effect
Decrease (GAAP)

For health care pension, there is the ultimate healthcare trend rate, which is used for the
Analysts 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

Consistent internally
Net Pension Liability or Asset
The balance sheet discloses only the net amount
Analysts can use the net amount to adjust a companys asset and
liability for the gross amount so it better reflects the companys
true asset and liability
Compare the gross amount with the sponsor companys asset,
equity and earnings.
Total periodic cost (analyst view of total periodic cost)
Definition: The total periodic cost of a companys DB pension plan is the
change in the net pension liability or asset, excluding the effect of the
employers periodic contribution into the plan
Net Periodic Pension Cost=Ending fund status Beginning fund
status employers contribution
Periodic Pension cost recognized in P&L vs. OCI
Adjust GAAP companys P&L so it becomes comparable with IFRS
(a) Include past service cost
(b) Exclude amortization of past service cost arising in pervious
(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
Interest expense be added to the companys 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 companys 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