Pensions and
Other
Postretirement
Benefits
17
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
17-2
Nature of Pension Plans
I agree to make payments
into a fund for future
retirement benefits for
employee services.
Sponsor
I am the employee for
whom the pension plan
provides benefits.
Participant
17-3
Nature of Pension Plans
1.
2.
3.
4.
5.
For a pension plan to qualify for special tax
treatment it must meet the following
requirements:
Cover at least 70% of employees.
Cannot discriminate in favor of highly
compensated employees.
Must be funded in advance of retirement through
a trust.
Benefits must vest after a specified period of
service.
Complies with timing and amount of contributions.
17-4
Nature of Pension Plans
The right to receive earned pension
benefits vest (vested benefits) when it is
no longer contingent on continued
employment.
17-5
Learning Objectives
Explain the fundamental differences between a
defined contribution pension plan and a
defined benefit pension plan.
17-6
Defined Contribution
Plans
Contributions are
established by
formula or
contract.
Employer deposits
an agreed-upon
amount into an
employee-directed
investment fund.
Employee
bears all risk of
pension fund
performance.
17-7
Defined Benefit
Pension Plans
Employer is
committed to
specified
retirement
benefits.
Retirement
benefits are based
on a formula that
considers years of
service,
compensation
level, and age.
Employer bears
all risk of
pension fund
performance.
17-8
Defined Benefit Plan
Pension expense is measured by
assigning pension benefits to periods
of employee service as defined by the
pension benefit formula.
A typical benefit formula might be:
1% × Years of Service × Final year’s salary
So, for 35 years of service and a final salary of $80,000,
the employee would receive:
1% × 35 × $80,000 = $28,000 per year
17-9
Pension Expense – An Overview
Components of Pension Expense
+
Service cost ascribed to employee service this period
+
Interest accrued on pension liability
+ or - Return on plan assets
+
Amortized portion of Prior Service Cost
+ or - Losses or gains from revision of pension liability and plan assets
=
Pension expense
17-10
Learning Objectives
Distinguish among the vested benefit
obligation, the accumulated benefit obligation,
and the projected benefit obligation.
17-11
Pension Obligation
Present value of
additional benefits
related to projected
pay increases.
Present value of
nonvested benefits
at present pay
levels.
Present value of
benefits at present
pay levels.
Projected Benefit
Obligation
Accumulated
Benefit Obligation
Vested Benefit
Obligation
VBO ABO PBO
17-12
Learning Objectives
Describe the five events that might change the
balance of the PBO.
17-13
Projected Benefit Obligation
The PBO changes as a result of:
Cause
Service Cost
Interest Cost
Prior Service
Cost
Loss or Gain on
PBO
Retiree Benefits
Paid
Effect
+
+
+
+ or -
Frequency
Each period
Each period (except the first period of
the plan)
Only if the plan is amended (or initiated)
that period
Whenever revisions are made in the
pension liability estimate
Each period (unless no employees have
yet retired under the plan)
17-14
Pension Obligation
The PBO changes as a result of:
Cause
Service Cost
Effect
+
Frequency
Each period
Each period (except the first period of
Interest
Cost
Service
cost
+ is the increase
the plan)in the
Prior
Service
the plan is amended
(or initiated)
PBO
attributableOnly
toif employee
service
Cost
+
that period
performed
during
the
period.
Loss or Gain
on
Whenever
revisions
are made in the
PBO
+ or pension liability estimate
Retiree Benefits
Each period (unless no employees have
Paid
yet retired under the plan)
17-15
Pension Obligation
The PBO changes as a result of:
Cause
Service Cost
Effect
+
Frequency
Each period
Each period (except the first period of
Interest Cost
+
the plan)
Prior Service
Only if the plan is amended (or initiated)
Interest cost
is the interest
on the
Cost
+
that period
Loss or Gain on
Whenever
revisions are made in the
PBO during
the period.
PBO
+ or pension liability estimate
Retiree Benefits
Each period (unless no employees have
Paid
yet retired under the plan)
17-16
Pension Obligation
The PBO changes as a result of:
Cause
Service Cost
Effect
+
Frequency
Each period
Each period (except the first period of
Interest Cost
+
the plan)
Prior Service
Only if the plan is amended (or initiated)
Cost
+
that period
Loss or Gain on
Whenever revisions are made in the
Prior
result
from
PBO service
+ or -cost effects
pension liability
estimate
Retiree changes
Benefits
Eachpension
period (unlessbenefit
no employees have
in the
Paid
yet retired under the plan)
formula or plan terms.
17-17
Pension Obligation
The PBO changes as a result of:
Cause
Service
Costor
Loss
Effect
Frequency
+ on PBO results
Each period
gain
from
Each period (except the first period of
Interest
Cost revisions of estimates used
required
+
the plan)
Prior Service to determine
Only if the plan
is amended (or initiated)
PBO.
Cost
+
that period
Loss or Gain on
Whenever revisions are made in the
PBO
+ or pension liability estimate
Retiree Benefits
Each period (unless no employees have
Paid
yet retired under the plan)
17-18
Pension Obligation
The PBO changes as a result of:
Cause
Service Cost
Effect
+
Frequency
Each period
Each period (except the first period of
Interest Cost
plan)the
Retiree+benefits paidtheare
Prior Service
Only if the plan is amended (or initiated)
result of paying
benefits
retired
Cost
+
thatto
period
Loss or Gain on
Whenever revisions are made in the
employees.
PBO
+ or pension liability estimate
Retiree Benefits
Each period (unless no employees have
Paid
yet retired under the plan)
17-19
Learning Objectives
Explain how plan assets accumulate to provide
retiree benefits and understand the role of the
trustee in administering the fund.
17-20
Pension Plan Assets
Pension plan assets (like the PBO) are not
formally recognized on the balance sheet.
A trustee manages the pension plan assets.
17-21
Pension Plan Assets
OVERFUNDED
Market value of plan
assets exceeds the
actuarial present value
of all benefits earned by
participants.
UNDERFUNDED
Market value of plan
assets is below the
actuarial present value
of all benefits earned by
participants.
17-22
Learning Objectives
Describe how pension expense is a composite
of periodic changes that occur in both the
pension obligation and the plan assets.
17-23
Pension Expense
Pension expense is the net cost of:
 Service cost
 Interest cost
 Return on plan assets
 Amortization of prior service costs
 Gain or loss recognized.
17-24
Defined Benefit Plan
You go to work for Matrix, Inc. on 1/1/06. You are eligible to participate
in the company's defined benefit pension plan. The benefit formula is:
×
×
Annual salary in year of retirement
Number of years of service
1.5%
Annual retirement benefits
You are 25 years old when you start work and may accumulate 40 years
of service before retiring at age 65. If your salary is $200,000 during
your last year of service, you will receive the following annual benefits:
$200,000
×
40
×
1.5%
$120,000
You are not required to make any contributions. The plan vests at the
rate of 20% per year. The plan actuary estimates that upon reaching
age 65, you will receive payments for 15 years. The actuary uses an
8% discount rate in all present value computations.
17-25
Defined Benefit Plan
At December 31, 2006, the end of your first year of service, the
actuary must calculate the present value of the pension benefits
earned by you during 2005. Remember that you will not receive
pension benefits until you are 65 and the actuary estimates
payments will be made for 15 years after you retire. After one year
of service you will have earned $3,000 in pension benefits:
Pension benefits = .015 × 1 yr of service × $200,000
Pension benefits = $3,000
Service cost is the present value of these benefits and is calculated
as follows:
Service cost = $3,000 × 8.559481 × .0497132
Service cost = $1,277
1Present
value of an ordinary annuity at 8% for 15 years.
2Present value of $1 at 8% for 39 years.
17-26
Defined Benefit Plan
Based on the given information, the actuary calculates
your accumulated benefit obligation (ABO) as follows:
Retirement benefits = .015 × 1 yr × $25,000
Retirement benefits = $375
ABO = $375 × 8.55948 × .049713
ABO = $160
Your vested benefit obligation (VBO) is calculated as
follows:
Vested benefits = .015 × 1 × $25,000 × .2
Vested benefits = $75
VBO = $75 × 8.55948 × .049713
VBO = $32
17-27
Defined Benefit Plan
A reconciliation of the VBO, ABO and PBO would look like this:
VBO
$
32
Non-vested benefits
128
ABO
Adjustment for future salary
PBO
$
$
160
478
638
The adjustment for future salary of $478, is determine by the
plan actuary. If you are the only employee at Matrix, the
computations would be similar for future years. Let’s assume
Matrix funds $500 of its pension costs with the plan trustee on
December 31, 2006. The journal entry to record the pension
costs and funding would be:
Pension expense
Accrued pension cost
Cash
638
138
500
17-28
Defined Benefit Plan
Let’s look at an example for Matrix, Inc.
Components of Pension Expense
+
Service cost ascribed to employee service this period
+
Interest accrued on pension liability
+ or - Return on plan assets
+
Amortized portion of prior service cost
+ or - Losses or gains from revision of pension liability and plan assets
=
Pension expense
17-29
Defined Benefit Plan
Actuaries have determined that Matrix, Inc.
has service cost of $150,000 in 2006 and
$155,000 in 2007.
We can begin the process of determining
pension expense for the company.
17-30
Service Cost
1. Service Cost
2006
$ 150,000
2007
$ 155,000
Total Pension Expense
$ 150,000
$ 155,000
17-31
Interest Cost
Interest cost is the growth in PBO
during a reporting period.
Interest cost is calculated as:
PBOBeg × Discount rate
17-32
Interest Cost
Actuaries determined that Matrix, Inc.
had PBO of $500,000 on 1/1/06, and
$640,000 on 1/1/07.
The actuary uses a discount rate of 10%.
17-33
Interest Cost
1. Service Cost
2. Interest Cost
2006
$ 150,000
50,000
2007
$ 155,000
64,000
Total Pension Expense
$ 200,000
$ 219,000
2006: PBO 1/1/06 $500,000 × 10% = $50,000
2007: PBO 1/1/07 $640,000 × 10% = $64,000
17-34
Return on Plan Assets
Actual
Return
Expected
Return
The dividends, interest,
and capital gains
generated by the fund
during the period.
Trustee’s estimate of
long-term rate of
return.
17-35
Return on Plan Assets
The plan trustee reports that plan
assets were $450,000 on 1/1/06,
and $600,000 on 1/1/07.
The trustee uses an expected return
of 9% and the actual return is 10%
in both years.
17-36
Return on Plan Assets
2006
Beginning value of plan assets
Rate of return
Return on plan assets
Beginning value of plan assets $ 450,000
Adjustment (10% - 9%)
1%
Adjusted for gain on plan assets
Expected return on plan assets
$
$
450,000
10%
45,000
4,500
40,500
2007
Beginning value of plan assets
Rate of return
Return on plan assets
Beginning value of plan assets $ 600,000
Adjustment (10% - 9%)
1%
Adjusted for gain on plan assets
Expected return on plan assets
$
$
600,000
10%
60,000
6,000
54,000
17-37
Return on Plan Assets
1. Service Cost
2. Interest Cost
3. Return on Plan Assets
2006
$ 150,000
50,000
(40,500)
2007
$ 155,000
64,000
(54,000)
Total Pension Expense
$ 159,500
$ 165,000
17-38
Amortization of Prior Service Cost
Prior service cost (PSC) results from plan
amendments granting increased pension
benefits for service rendered before the
amendment.
PSC is the present value of the retroactive
benefits, and increases PBO.
17-39
Amortization of Prior Service Cost
Benefits attributable to prior service are
assumed to benefit future periods by:
Improving employee productivity.
Improving employee morale.
Reducing turnover.
Reducing demands for pay raises.
17-40
Amortization of Prior Service Cost
PSC is amortized over the remaining service period
of those employees active at the date of the
amendment who are expected to receive benefits
under the plan.
If most of a plan’s participants are inactive, then
amortize PSC over the participants’ remaining life
expectancy.
17-41
Amortization of Prior Service Cost
Two approaches to amortizing PSC:
Straight-line method
Amortize PSC over the average remaining
service period.
Service method
Amortize PSC by allocating equal amounts to
each employee’s service years remaining.
17-42
Amortization of Prior Service Cost
Effective 1/1/07, Matrix, Inc. amends the retirement
plan to provide increased benefits attributable to
service performed before 1/1/03, for all active
employees.
The present value of the increased benefits (PSC) at
1/1/07, is $60,000.
The average remaining service life of the active
employee group is 12 years.
17-43
Amortization of Prior Service Cost
Since the amendment was not effective
until the beginning of 2007, pension
expense for 2006 is not affected.
2007: $60,000 PSC ÷ 12 = $5,000
17-44
Amortization of Prior Service Cost
1. Service Cost
2. Interest Cost
3. Return on Plan Assets
4. Amortization of PSC
2006
$ 150,000
50,000
(40,500)
0
2007
$ 155,000
64,000
(54,000)
5,000
Total Pension Expense
$ 159,500
$ 170,000
17-45
Gains and Losses
Higher than
Expected
Lower than
Expected
Projected
Benefits
Obligation
Return on
Plan Assets
Loss
Gain
Gain
Loss
17-46
Corridor Amount
Amortization is not required if the net
unrecognized gain or loss at the
beginning of the period is a minimum
amount (corridor amount).
17-47
Corridor Amount
The corridor
amount is 10% of
the greater of . . .
PBO at the
beginning of the
period.
Or
Fair value of plan
assets at the
beginning of the
period.
17-48
Gains and Losses
If the beginning net unrecognized gain or
loss exceeds the corridor amount,
amortization is recognized as . . .
Net unrecognized gain or loss
Corridor
—
at beginning of year
amount
Average remaining service period of active employees
expected to receive benefits under the plan
17-49
Gains and Losses
There was no gain or loss amortized in 2006.
Amounts at January 1, 2007
PBO
Fair value of plan assets
Net gain for 2007
Average service life
$ 640,000
600,000
73,000
9
Let’s determine the amortization of the
net gain in 2007.
17-50
Gains and Losses
Corridor amount ($640,000 x 10%)
Net gain for 2007
Gain in excess of corridor
$ 64,000
73,000
$ 9,000
$9,000 ÷ 9 years = $1,000 per year.
17-51
Pension Expense
1. Service Cost
2. Interest Cost
3. Return on Plan Assets
4. Amortization of PSC
5. Gain Amortized
Total Pension Expense
2006
$ 150,000
50,000
(40,500)
0
0
$ 159,500
2007
$ 155,000
64,000
(54,000)
5,000
(1,000)
$ 169,000
17-52
Pension Expense
Matrix contributed $200,000 to the plan
trustee at the end of 2007. The journal entry
to record the pension expense is:
GENERAL JOURNAL
Date
Description
Dec 31 Pension Expense
Prepaid Pension Cost
Cash
Debit
Credit
169,000
31,000
200,000
17-53
Learning Objectives
Understand the interrelationships among the
elements that constitute a defined benefit
pension plan.
17-54
Reconciliation of Pension Amounts
Four “off-balance sheet” accounts:
PBO
Plan Assets
Unamortized PSC
Unamortized Gain or Loss
17-55
Reconciliation of Pension Amounts
The four amounts shown on the
previous slide combine to account for
the one pension account that is
reported on the balance sheet:
prepaid pension asset or pension
liability.
17-56
Minimum Liability
To discourage underreporting of
pension liability, SFAS No. 87
requires recognition of an additional
minimum pension liability under
certain circumstances.
17-57
Measurement Issue
Accumulated Benefit Obligation (ABO)
- Plan Assets at Fair Value
Minimum Pension Liability
This amount is also called the
underfunded ABO.
17-58
Offsetting
SFAS No. 87 requires offsetting of the
pension liability and the plan assets
when determining the minimum liability.
17-59
Additional Liability
An additional pension liability is recognized if total
minimum liability exceeds accrued pension cost.
Total minimum liability
– Accrued pension cost balance (liability)
Additional pension liability balance
Total minimum liability
+Prepaid pension cost balance (asset)
Additional pension liability balance
17-60
Learning Objectives
Describe how pension disclosures fill a
reporting gap left by the minimal disclosures in
the primary financial statements.
17-61
Pension Disclosures – A Compromise
The pension information actually reported in the financial
statements falls short of the conceptual ideal and even shy
of the FASB’s own preferences. Here are the items
included in the income statement and balance sheet.
Income Statement
Pension expense
Balance Sheet
Assets:
Intangible pension asset
Liabilities:
Pension liability
Shareholders' equity:
Accumulated other comprehensive income:
Unrealized pension cost
17-62
Settlements and Curtailments
Pension plan settlements
Reduce PBO and are viewed as the realization of a
portion of the net unrecognized gain or loss and a
portion of the unrecognized transition asset.
Pension plan curtailments
Often reduce PBO, resulting in a gain, which reduces
accrued pension cost.
17-63
Learning Objectives
Describe the nature of postretirement benefit
plans other than pensions and identify the
similarities and differences in accounting for
those plans and pensions.
17-64
Postretirement Benefit Plan
Encompass all types of retiree health and
welfare benefits including . . .
Medical coverage,
 Dental coverage,
 Life insurance,
 Group legal services, and
 Other benefits.

Postretirement Health Benefits and
Pension Benefits Compared
Pension Plan Benefits
Usually based on
years of service.
Identical payments
for same years of
service.
Cost of plan usually
paid by employer.
Vesting usually
required.
Postretirement Health
Benefits
Typically unrelated to
service.
Payments vary
depending on
medical needs.
Company and retiree
share the costs.
True vesting does not
exist.
17-65
17-66
The Net Cost of Benefits
Estimated medical
costs in each
year of retirement
Less:
Equals:
Retiree
share of
cost
Medicare
payments
Estimated net
cost of benefits
17-67
The Net Cost of Benefits
Estimating postretirement health care benefits is
like estimating pension benefits, but there are
some additional assumptions required:
 Current
cost of providing health care benefits (per
capita claims cost).
 Demographic characteristics of participants.
 Benefits provided by Medicare.
 Expected health care cost trend rate.
17-68
Learning Objectives
Explain how the obligation for postretirement
benefits is measured and how the obligation
changes.
17-69
Postretirement Benefit Obligation
Expected (EPBO)
The actuary’s estimate of the total
postretirement benefits (at their
discounted present value) expected
to be received by plan participants.
Accumulated (APBO)
The portion of the EPBO
attributed to employee
service to date.
17-70
Measuring the Obligation
On December 31, our actuary estimates that the
present value of the expected benefit obligation for
your postretirement health care costs is $10,250.
You have worked for the company for 6 years and
are expected to have 30 years of service at
retirement. The actuary uses a 6% discount rate.
Let’s calculate the APBO.
17-71
Measuring the Obligation
EPBO
×
Fraction
attributed to
APBO
=
service to
date
$10,250 ×
6
30
= $2,050
APBO at the beginning of the year.
17-72
Measuring the Obligation
To calculate the APBO at the end of the year,
we start by determining the ending EPBO.
EPBO
Beginning
of Year
×
(1 + Discount Rate)
=
EPBO
End
of Year
$10,250 × 1.06 = $10,865
7
$10,865 ×
= $2,535
30
APBO End
of Year
17-73
Measuring the Obligation
APBO may also be calculated like this:
APBO beginning of the year
Interest cost ($2,050 × 6%)
Service cost ($10,865 × 1/30)
APBO end of the year
$ 2,050
123
362
$ 2,535
The APBO increases because of interest
and the service fraction (service cost).
17-74
Attribution
The process of assigning the cost of
benefits to the years during which
those benefits are assumed to be
earned by employees.
17-75
Learning Objectives
Determine the components of postretirement
benefit expense.
17-76
Postretirement Benefit Expense
Component
Service Cost
Interest Cost
Return on Plan Assets
Prior Service Cost
Losses or Gains
Transition Amount
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
passage of time.
Earnings on plan investments, if
plan is funded.
Amortization of compensation cost
from amending the plan. Often a
negative amount.
Amortization of unexpected
changes in either the obligation or
plan assets.
Amortization of the APBO existing
when SFAS 106 was adopted.
17-77
Postretirement Benefit Expense
Component
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
Interest Cost
passage of time.
Earnings on plan investments, if
Return
on
Plan
Assets
Interest accrues onplan
theisAPBO
as time passes.
funded.
APBO at the beginning
of theofyear
times thecost
Amortization
compensation
assumed
discount from
rate amending
equals the
cost.a
Prior
Service Cost
theinterest
plan. Often
negative amount.
Amortization of unexpected
Losses or Gains
changes in either the obligation or
plan assets.
Amortization of the APBO existing
Transition Amount
when SFAS 106 was adopted.
Service Cost
17-78
Postretirement Benefit Expense
Component
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
Interest Cost
passage of time.
Earnings on plan investments, if
Return on Plan Assets
plan is funded.
Amortization of compensation cost
Unlike pension plans,
many postretirement benefit
Prior Service Cost
from amending the plan. Often a
plans are not funded currently. For funded plans, the
negative amount.
earnings on plan assets
reduce postretirement
Amortization of unexpected
benefit
expense.
Losses or Gains
changes
in either the obligation or
plan assets.
Amortization of the APBO existing
Transition Amount
when SFAS 106 was adopted.
Service Cost
17-79
Postretirement Benefit Expense
Component
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
Interest Cost
passage of time.
Earnings on plan investments, if
Return on Plan Assets
plan is funded.
Amortization of compensation cost
Prior Service Cost
from amending the plan. Often a
negative amount.
Amortization of unexpected
Prior service cost is
allocated over the average
Losses or Gains
changes in either the obligation or
time from the date of the amendment to the date
plan assets.
for active employees,
not the
expected
Amortization
of the
APBO existing
date.
Transition Amount retirement
when SFAS
106 was adopted.
Service Cost
17-80
Postretirement Benefit Expense
Component
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
Interest Cost
passage of time.
The amount subject to amortization
is the
net gain or
Earnings on plan
investments,
if loss at
Return on Plan Assets
plan
is funded.
the beginning of the year
in excess
of 10% of the APBO or
cost the
10% of the plan assets.Amortization
The excessofiscompensation
amortized over
Prior Service
Cost
from amending
plan.employees.
Often a
average
remaining
service
period ofthe
active
negative amount.
Amortization of unexpected
Losses or Gains
changes in either the obligation or
plan assets.
Amortization of the APBO existing
Transition Amount
when SFAS 106 was adopted.
Service Cost
17-81
Amortize Net Losses or Gains
APBO
Return on
Plan Assets
Higher Than Expected
Loss
Gain
Lower Than Expected
Gain
Loss
17-82
Postretirement Benefit Expense
Component
Postretirement Benefit Expense
Portion of the EPBO attributed to
the current period.
Increase in APBO due to the
Interest Cost
passage of time.
Earnings on plan investments, if
Return on Plan Assets
plan is funded.
Amortization of the transition
amount is part of expense in the
Amortization of compensation cost
current
period.
reporting,
Prior
ServiceFor
Costfinancial
from
amendingthe
the amortization
plan. Often a reduces
current earnings. For income
tax amount.
purposes, income is reduced
negative
when actual payments are
made. This
creates a temporary
Amortization
of unexpected
difference
financial
and taxable
income.
Losses
or Gainsbetweenchanges
in either
the obligation
or
plan assets.
Amortization of the APBO existing
Transition Amount
when SFAS 106 was adopted.
Service Cost
17-83
Amortization of Transition Amount
An employer may choose to recognize:
The entire transition obligation immediately,
or
Amortize the transition obligation on a straightline basis over the plan participants’ future
service periods (or 20 years if that is longer).
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Determining the Expense
Recall our example of postretirement benefits.
APBO beginning of the year $ 2,050
Interest cost ($2,050 × 6%)
123
Service cost ($10,865 × 1/30)
362
APBO end of the year
$ 2,535
Let’s calculate postretirement benefits expense.
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Determining the Expense
Service cost
$
362
Interest cost
123
Because
most
healthNone
plans
Actual return
onpostretirement
plan assets
are
not funded,
there
arecost
no fund assets,
Amortization
of prior
service
None
noAmortization
credit for of
prior
service, and no net
loss.
net loss
None
Amortization of transition liability
85
Postretirement benefit expense
$
570
The beginning APBO ($2,050) is the initial transition liability.
Your service life is 24 years (30 - 6). The amortization amount
is $85 rounded ($2,050 ÷ 24 years).
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Pension Disclosures
The disclosure requirement of pension plans and
postretirement benefits are very similar. On this and the
next three screens are the disclosures for FedEx in the
Appendix to Chapter 1.
• Description of the pension plan.
• Estimates of the obligations PBO, ABO, vested benefit
obligation, EPBO, and APBO).
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Pension Disclosures
• The percentage of total plan assets for each major
category of assets (equity securities, debt securities, real
estate, other) as well as a description of investment
strategies, including any target asset allocations and risk
management practices.
• A breakdown of the components of the annual pension and
postretirement benefit expenses for 2004, 2003, and 2002.
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Pension Disclosures
• A reconciliation of the changes in the plans’ benefit
obligation and fair value of assets over a two year period
ended May 31, 2004, and a statement of the funded
status.
• The discount rates, the assumed rate of compensation
increases used to measure the PBO, the expected longterm rate of return on plan assets and the expected rate
of increase in future medical and dental benefit costs.
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Pension Disclosures
• Estimated benefit payments presented separately for
years 2005-2009 and in the aggregate for years 20102014.
• Estimate of expected contributions to fund the plan for
2005.
• Other information to make it possible for interested
analysts to reconstruct the financial statements with plan
assets and liabilities included
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Service Method of
Allocating Prior
Service Cost
Appendix 17
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The Service Method
The allocation approach that reflects the declining
service pattern of employees is called the service
method. The method requires that the total number of
service years for all employees be calculated. This
calculation is usually done by the actuary.
Assume Matrix, Inc. has 2,000 employees and the
company’s actuary determined that the total number of
service years of these employees is 30,000. We would
calculate the following amortization fraction:
30,000
2,000
= 15 average service years
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End of Chapter 17