Post-Employment Benefits

Defined Contribution Plans

• Only thing “defined” is what the employer is required to contribute to the plan in any given
year.
• Example: 401(k)
• Example: The company is obligated to contribute $850K to the plan

Pension Expense 850K

Cash 850K
*Fully funded

Pension Expense 850K

Cash 200K
U/F Pension Liab 650K
*Underfunded

Pension Expense 850K

O/F Pension Asset 100K
Cash 950K
*Overfunded

Defined Benefit Plan – CPA exam will most likely test this!!!
• What is “defined” is the pension benefits that are paid out at retirement
• Example: Social Security
• FASB 87 – Six elements make up “pension expense”
1. (+) Service Cost – Discounted PV of all benefits earned by EE’s this period
2. (+) Interest on PBO (projected benefit obligation)
a. Discount back to Jan 1
b. Adjust at 12/31 due to passage of time (interest)
3. (-) Actual Return on Plan Assets
4. (+) Prior Service Cost Amortization – Discounted PV of all benefits earned by EE’s in
periods prior to the plan

a. Almost always (+), can be (-) if credit exists (rare)

5. (+/-) Actuarial Gains (-) or Losses (+)
6. (+/-) FASB 87 Adjustment @ adoption date
a. (-) Overfunded = Transition asset = Good, lowers pension expense
b. (+) Underfunded = Transition obligation = Bad, increases expense

Memory pneumonic to remember the 6 elements = SIPP A FASB

Service costs (+)
Interest on PBO (+)
Plan asset actual return (-)
Prior service cost amortization (+)

Actuarial gain (-) / loss (+)

FASB – Transition asset (-) or transition obligation (+)
*NOTE: Make sure to calculate beginning PBO balance before SIPP A FASB

Booking Unamortized PSC @ plan start date

OCI xx
U/F Pension Liab xx

Booking Actuarial Loss

OCI xx [full amount of loss]
U/F Pension Liab xx

How much Actuarial Loss to Amortize???

• Consider: 1) PBO, 2) Market related value of plan assets
• Take 10% of higher of PBO or MKT value = “Threshold”
• Excess of “Actuarial Loss” over “Threshold”= Amt to amortize over average remaining
service period
Entry
Pension Expense xx
OCI xx

Amortizing PSC
Pension Expense xx
OCI xx

**NOTE: When starting a defined benefit plan, on 1/1/yr 1, PBO = Prior Service costs

12/31/yr 1
Pension expense 480K [using SIPP A FASB]
U/F Pension Liab 20K [PLUG]
Cash 500K [cash paid to trustee]

PBO calculation Schedule:

PBO, 1/1/yr 1 = (+) 480K
Interest on PBO, yr 1 (+) 48K
Service cost, yr 1 (+) 400K
Less: benefits paid, yr 1 (-) 0
PBO, 1/1/yr 2 928K

Calculating Actual Return on Plan Assets

FV of Assets EOY
(-) FV of Assets BOY
Plan Asset growth
(-) Contributions
(+) Benefits paid out
Actual Return on Plan Assets

Booking “Initial Transition Obligation” – FASB 87 Adjustment

OCI xx
 U/F Pension Liab xx

Amortization of FASB 87 Adjustment

RULE: If average remaining service period is less than 15 years, amortization is available over 15
years!!! (minimizes hit on the I/S)

Pension Expense xx [Transition obligation / 15 yrs]

OCI xx

SFAS 158
• A company must recognize, on the B/S, the funding status of a defined benefit pension plan!!!

Example: End of yr: PBO = 100K, FV plan assets = 80K, U/F pension liab = 5K
• Result: 20K underfunded, must make AJE

OCI 15K
U/F Pension Liab 15K [must report on B/S @ 20K]

Post-Retirement Benefits – FASB 106

• Use when there’s a defined benefit plan for “fringe benefits”
• Usually health care
• Journal Entries are the same as FASB 87
• ONLY DIFFERENCE between FASB 106 and FASB 87
• Allowed to amortize FASB 106 adjustment over 20 years instead of 15
• Attribution Period:
• Starts upon hire date, ends @ full eligibility date

Accumulated Benefit Obligation (ABO) = present value of all future retirement payments attributed
by the pension benefit formula to employee services rendered prior to that date only

Unexpected Loss on Plan Assets (e.g. disposal of a subsidiary)

• Do NOT INCLUDE in pension expense computation

Average Remaining Service Life Computation

• = (Total expected years of service left for all participants combined) / (# of participants)

Special Termination Benefits

• Separate from accrued pension liability. Do not combine or net

Amendment to Improve Benefits for post-retirement plan

• Increases APRBO, not PBO!