Welcome to module 8.
Module 8 is a review of all the topics we've talked about in
modules 1 through 7 of this course.
This is a quick review just to highlight some of the more
important matters that we've discussed.
Of course, it's a good idea to go back and look at the examples,
if you feel you need to.
So let's start with our introduction to pensions.
Let's start with defined benefit plans.
We talked about how defined benefit plans put the risk with the employer,
with the plan because there's a defined benefit that's paid to the employees.
And this is regardless of the performance of the portfolio of investments that you
may have in a particular account.
So it has two components.
There's a benefit obligation.
And if the plan is funded, there are plan assets.
If the plan is unfunded, there are no planned assets.
Some plans are funded, most pension plans are funded,
at the current time a lot of medical plans are unfunded.
That's a little bit separate,
but pension plans are generally funded to some extent or another.
That's apparently because the benefits are protected by law.
The contributions are tax deductible and there's penalties for
not having a plan sufficiently funded.
So here are some of the fundamental accounting features we talked about,
the three fundamental accounting features.
Net presentation on the state of a financial position, the obligation and
the assets are netted, so you have a net asset or
liability on the statement of financial position.
There's delayed recognition of amounts and earnings.
Some amounts that effect earnings are recognized immediately in both
earnings and on the statement of financial position.
Some are only recognized on the statement of financial position,
the other set of the entry being other comprehensive income.
And then there is net periodic benefit cost.
And that periodic benefit cost means it's net
of the investment performance on the assets.
So you have your service cost,
your interest cost which is non-limiting discount.
And then that's presented net of the investment return.
Now in addition to some items,
that net presentation of the service cost and the return on the plan assets,
there's also delayed recognition in earnings for certain amounts.
And this includes actuarial changes or
sometimes these are called re-measurements of the plan.
This is due to changes in actuarial assumptions such as the discount rate.
It can also be a difference between the expected and actual return on plan assets.
You can have a change in mortality.
All of these are changes in estimates.
And these are recognized in other comprehensive income,
also there are planned amendments that make a change to the plan.
Once upon a time these planned amendments used to be generally increases in pension
benefits.
Lately it's been going in the other direction as there's mainly decreases in
planned assets.
And so you have negative amendments, these are called prior service costs or
prior service credits.
So the net periodic benefit cost aggregates all these separate items.
There's the service costs, the current year's costs of benefits,
the interest cost.
Because it's deferred when you're going to pay it.
These costs are discounted, so there's an unwinding of the discount each period.
It's not truly interest.
The expected results of investing in plan assets, these go into net periodic cost.
Remember, it's not the actual results, it's the expected results.
Why the expected results, this is a long term average.
