Term
| accumulated benefit obligation |
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Definition
| Compensation rights that employees can carry forward to future periods if not used in the period in which earned. Measure of benefits to be paid at retirement based on current salary levels. (p. 1213). |
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Term
| actual return on plan assets |
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Definition
| The increase in pension funds from interest, dividends, and realized and unrealized changes in the fair value of the plan assets. If the actual return on the plan assets is positive (a gain) during the period, a company subtracts it when computing pension expense; if the actual return is negative (a loss) during the period, the company adds it when computing pension expense. (p. 1217). |
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Term
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Definition
| The additional benefits, predicted by an actuary, that an employer must pay under the plans benefit formula as a result of the employees current years service, discounted back to their present value. The actuarial present value is the projected benefit obligation a company recognizes for its pension plan in a given year. (p. 1214)(n). |
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Term
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Definition
| Individuals trained through a long and rigorous certification program to assign probabilities to future events and their financial effects. (p. 1213). |
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Term
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Definition
| The difference between the expected return and the actual return on a pension plan assets. Also referred to as an unexpected gain or loss. Asset gains occur when actual return exceeds expected return; asset losses occur when the actual return is less than expected return. (p. 1223). |
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Term
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Definition
| Hybrid plans that combine features of defined benefit and defined contribution plans; the accounting is similar to a defined benefit plan because employers bear the investment risk. Adoption of this plan usually results in a lower future benefit obligation to employees. (p. 1238)(n). |
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Term
| components of pension expense |
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Definition
| The components that make up a companys pension expense: service cost, interest on the liability, return on plan assets, amortization of prior service cost, and gain or loss. (p. 1216). |
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Term
| contributory pension plan |
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Definition
| A pension plan in which the employees bear part of the cost or voluntarily make payments to increase their benefits. (p. 1210). |
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Term
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Definition
| Invented by the FASB to limit the growth of the Accumulated OCI account. If the beginning of the year balance is above the limit of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets, the Accumulated OCI account related to gains and losses is considered too large and must be amortized. (p. 1224). |
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Term
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Definition
| A pension plan that outlines the benefits that the employee will receive at the time of retirement. These benefits typically are a function of the employees years of service and compensation level when he or she nears retirement. (p. 1211). |
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Term
| defined contribution plan |
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Definition
| A pension plan that defines only the employers contribution. The employer agrees to contribute to a pension trust a certain sum each period, based on a formula that considers factors such as length of employee service, employers profits, and compensation level. A common form is a 401(k) plan. (p. 1211). |
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Term
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Definition
| The Employee Retirement Income Security Act of 1974, which attempts to safeguard employees pension rights by mandating many pension plan requirements, including minimum funding, participation, and vesting. (p. 1236). |
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Term
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Definition
| The percentage growth rate that actuaries expect when they develop a funding pattern to pay future pension-plan benefits. They multiply the expected rate of return by a weighted asset value, to determine an expected return on plan assets, and they use that return to determine the plans funding pattern. (p. 1223). |
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Term
| expected return on plan assets |
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Definition
| The expected rate of return (the percentage growth rate that actuaries expect when they develop a funding pattern to pay future pension-plan benefits) multiplied by a weighted asset value. The expected return on plan assets is used to determine the expense effect (decrease) associated with the return on the plan assets. (p. 1223). |
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Term
| fair value of plan assets |
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Definition
| Used to compute the value of plan assets; the actual return on plan assets is the difference between the fair value of the plan assets at the beginning of the period and at the end of the period, adjusted for contributions and benefit payments. (p. 1217). |
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Term
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Definition
| A pension plan in which the employer makes payments to a funding agency. (p. 1210). |
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Term
| funded status (overfunded or underfunded) |
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Definition
| The overfunded or underfunded status of a defined benefit pension plan, measured as the difference between the fair value of the plan assets and the projected benefit obligation. Companies recognize on the balance sheet the net (overfunded or underfunded) status of the pension plan as a pension asset (overfunded) or pension liability (underfunded). (p. 1215). |
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Term
| interest on the liability (interest expense) |
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Definition
| A component of pension expense. Because a company defers paying the pension liability until maturity, it records the liability on a discounted basis and accrues interest. The interest on the liability (interest expense) is the interest for the period on the projected benefit obligation outstanding during the period, using a settlement rate as the discount rate. (p. 1217). |
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Term
| liability gains and losses |
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Definition
| Unexpected gains or losses from changes in the projected benefit obligation of a pension. Such changes result from the difference between actual experience and actuarial predictions about such items as mortality rate, retirement rate, turnover rate, disability rate, and salary amounts. Companies defer recognition of liability gains (resulting from unexpected decreases in the liability balance) and liability losses (resulting from unexpected increases). They combine the liability gains and losses in the Other Comprehensive Income (G/L) account and accumulate them from year to year. (p. 1224). |
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Term
| market-related asset value |
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Definition
| Either the fair value of plan assets or a calculated value that recognizes changes in fair value in a systematic and rational manner. (p. 1223). |
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Term
| noncontributory pension plan |
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Definition
| A pension plan in which the employer bears the entire cost. (p. 1210). |
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Term
| Other Comprehensive Income (G/L) |
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Definition
| Account in which companies record unexpected gains or losses from changes in the projected benefit obligation of a pension plan and the unexpected asset gains and losses. This account nets gains and losses from the current year. (p. 1223). |
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Term
| Other Comprehensive Income (PSC) |
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Definition
| Account in which companies record amortization of prior service cost. When a company initiates or amends a defined benefit plan, it often credits employees for years of service provided before the start of, or amendment to, the plan. The company records the PSC as an adjustment to other comprehensive income and then amortizes that amount over future service periods. (p. 1222). |
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Term
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Definition
| The difference between the projected benefit obligation and the fair value of the plan assets, which is shown in the balance sheet. If the projected benefit obligation is greater than the plan assets, a pension liability occurs; if the projected benefit obligation is less that the plan assets, a pension asset occurs. (p. 1218). |
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Term
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Definition
| An arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years. (p. 1210). |
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Term
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Definition
| A multi-column form that companies use to record pension-related information. It is not a permanent accounting record (neither a journal nor part of the general ledger), but merely a tool to make it easier to prepare entries and the financial statements. (p. 1218). |
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Term
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Definition
| The pension costs related to years of service credited to employees before the start of a defined-benefit pension plan or at the time of plan amendments. The company records the PSC as an adjustment to other comprehensive income and then amortizes that amount over future service periods. (p. 1220). |
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Term
| projected benefit obligation |
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Definition
| Pension benefits payable to employees because of their services rendered during the current year. Measure of benefits to be paid at retirement based on salary levels at retirement. Companies use the projected benefit obligation as an input in determining service cost of a pension plan. (p. 1214). |
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Term
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Definition
| Pension plans that offer tax benefits, by permitting deductibility of the employers contributions to the pension fund and tax-free status of earnings from pension fund assets. (p. 1210). |
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Term
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Definition
| A financial statement disclosure of pension obligations, showing how the projected benefit obligation and the fair value of the plan assets changed from the beginning to the end of the period. (p. 1232). |
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Term
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Definition
| Benefits to a company from its employees prior services. Companies do not recognize retroactive benefits as pension expense entirely in the year in which a pension plan is adopted or amended, but instead initially record these prior service costs as an adjustment to other comprehensive income and then recognize that cost as a component of pension expense in future years. (p. 1220). |
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Term
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Definition
| A component of pension expense; it reflects the actuarial present value of new pension benefits earned by employees services during the period. (p. 1216). |
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Term
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Definition
| The rate at which a pension plan obligation could be effectively settled if the company sponsoring the plan wished to terminate its pension obligation (liability). To estimate this rate, companies determine a rate of return on high-quality fixed-income investments currently available, whose cash flows match the timing and amount of expected benefit payments, that would provide the necessary future cash flows to pay the pension benefits when due. (p. 1217). |
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Term
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Definition
| The difference between the expected return and the actual return on a pension plan. The FASB uses the term asset gains and losses. (p. 1223). |
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Term
| vested benefit obligation, |
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Definition
| Compensation rights that exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Vested rights are not contingent on an employees future service. (p. 1213). |
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Term
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Definition
| Compensation rights that exist when an employer has an obligation to make payment to an employee even after terminating his or her employment. Vested rights are not contingent on an employees future service. (p. 1213). |
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Term
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Definition
| Method of amortizing prior service cost in a pension plan, based on the average remaining service of employees in the plan. (p. 1220). |
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Term
| accumulated postretirement benefit obligation (APBO) |
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Definition
| Actuarial present value of future benefits attributed to employees services rendered to a particular date. (p. 1244). |
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Term
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Definition
| The period of time over which the postretirement benefit cost accrues. (p. 1243). |
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Term
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Definition
| Invented by the FASB to limit the growth of the Accumulated OCI account. If the beginning of the year balance is above the limit of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets, the Accumulated OCI account related to gains and losses is considered too large and must be amortized. (p. 1247). |
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Term
| expected postretirement benefit obligation (EPBO) |
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Definition
| The actuarial present value of a particular date of all benefits a company expects to pay after retirement to employees and their dependents. (p. 1244). |
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