benefit pension plan for its employees

Pension

benefit pension plan for its employees

Concept Financial has a defined benefit pension plan for its employees. The following were the

balances for the
pension plan as of January 1, 2015:

Annual Benefit Obligation  $3,500,000

Pension Benefit Obligation 3,900,000
Deferred pension gain 420,000

Fair value of the pension fund 3,300,000
Market-related value of the pension fund (
five-year weighted average)

2,850,000

The pension plan would earn 12% of the market-related value of the pension fund in 2015. The

actual return on the

pension fund was $315,000. The company has elected to amortize the deferred pension gains and

losses over 10
years.

Answer the following questions:

1. Compute the amount of deferred gain or loss for 2015.
2. Compute the amount of amortization of deferred pension gain or loss for 2015.

Pension 2

3. Computed pension expense is $ 534,000. However, this computation ignores any deferred

gains or

losses for the year (in other words, actual, not expected return on the pension fund was included
in the computations) as well as any amortization of deferred gains or losses from prior years.

What

is pension expense after considering the impact of deferred gains and losses and their

amortization?

4. What is the deferred pension gain or loss that Concept will carry forward to 2016?

Pension

Asset gains, benefits or losses are the real difference between the actual pensions and the
amounts expected or the pensions expected on the plan assets (Garrison, Noreen & Brewer,
2009). The expected pension return includes the changes that have taken place in the related

Pension 3
value of the plan asset’s market value. The actual cost of the market related value of the
pension’s plan asset is used to calculate the pensions expected return (The Pensions Board
Annual Report, 2010). The market value is $315,000 while the actual interest expense is 12% of
$3,900,000 = $468,000.
The greater or larger of the two i.e. corridor or 12% the PBO is taken to be amortized, in these
case it’s the 12% of PBO.

2. Annual Benefit Obligation = $3,500,000
   Pension Benefit Obligation = $ 3,900,000
   Deferred pension gain = $420,000
   Fair value of the pension gain = $3,300,000
   Market related value of the pension
   fund five year weighted average = $2,850,000
   1). The amount deferred gain for 2015 = 12% of the higher value between PBO and the Market
   value of the pension rate = 12% of $3,900,000 = 468,000 (Cannon and Tonks, 2012).
   The actual return is $315,000 hence it’s a gain.
   2). The amortization the deferred pension gain = ($468,000 – $315,000) 10% = 153,000 * 10%
   = $15,300.
   3) 534,000 + 48,000-4800 = 577,200
   The total deferred pension for the previous year was 420,000 while the actual gain was 468,000
   hence a balance of 48,000. To amortize the amounts for 10 years then 48,000 is divided by 10
   years. This equals to 4,800.

Pension 4
4 The deferred pension gain to be carried to 2016 will be the greater of the fair value and the
market value = 468,000 + 153,000 – $15,300 = 605,700 The deferred gain that the concept will
carry to 2016 is $605,700

Pension 5

References

Cannon, E. and Tonks, I. (2012). “The Value and Risk of Defined Contribution Pension
Schemes: International Evidence” . Journal of Risk and Insurance.
Garrison, R., Noreen, W. & Brewer, P. (2009) Managerial Accounting , New York, NY:
McGraw-Hill Irwin. 65 -70
The Pensions Board Annual Report (2010) –