Question

For each of the following, indicate whether the item would increase pension expense for the current year, decrease pension expen current year, or have no effect on pension expense for the current year. Assume a defined benefit pension plan, and that ASPE is fo (a) The discount rate is applied to plan assets. (b) Past service costs granted during the year. (c) Benefits paid to retired employees. (d) Current statistics used by the actuary indicate more employees are retiring at an earlier age and are living longer. (e) Service cost for the current year. (f) Actual interest earned on pension assets was higher than expected. (g) Current statistics used by the actuary indicate that new developments in medical treatments are extending life expectancy. (h) New union contract raises the average anticipated earnings for employees on retirement. (i) The stock market is expected to experience stronger positive gains for the current year and for the next several years than had previously been expected.

Answer 1

Answers to the statements: a Discount rate applied - No Effect on Pension expense. This is because discount rate is just an adjustment required to be done as per law b Past service costs granted during the year- Increase the Pension Expense This is the change in the Present value of defined benefit obligations caused by employee service in prior periods. Since, it is paid, it will increase the cost. cBenefits paid to retired employees-Increase the Pension Expense |Benefits paid means cash paid to employees for their service to the company This will increase the pension expense. d Statistics used- No effect on Pension Expense Where current statistics are used and they suggest that more employees are retiring |at an earlier age than this is just an estimation used to predict the pension expense. This in no way affects the pension expense but only helps in predicting it. The actual pension expense might be totally different than predicted. Service costs for current year - Increase the Pension Expense The service cost represents the present value of projected retirement benefits earned by covered employees in the current year. Service cost refers to the |required amount the emplayer must set aside each year. Hence will increase the cost f Actual interest earned Is higher- Reduce the Pension expense The return on plan assets represents the current year's earnings on invested plan assets Any increase in interest, more then expected will reduce the pension cost. Extending life expectancy-Increase the Pension Expense Life expectany increase means more pension outlfow and hence increase in pension cost h Increase in retirment earnings - Increase the Pension Expense Union contract will increase the earnings of employees on retirement This will surely increase the pension cost at amount to be paid on retirment is bound to increase due to contract in place. Stock Marget Gains- Reduce the Pension expense Pension plan requires to create Pension Plan Assets which consists of stocks, bonds, etc Such stocks are directly affect by stock market and any increase will reduce the cost as value of pension plan assets will increase.