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Welcome back. In this lesson,

Â we'll work through a short example that shows how you would

Â take information in an actuarial report,

Â and then enter it into the financial statements.

Â So, we're going to look in how you validate and record changes in the obligation,

Â and changes in the fair value of the plane assets.

Â Let's start with the assumptions.

Â So, here's our discount rate, our expected return,

Â and salary increases, we'll put that in the disclosure.

Â Because the rate has decreased,

Â the discount rate has decreased,

Â the obligation should increase creating an actuarial loss,

Â but this could be offset by the effects of other changes in other assumptions,

Â such as a change in the expected,

Â versus actual rate of return.

Â We also would expect lower interest costs though in year 20X3 because

Â that ending rate will be used to calculate interest cost next year.

Â The long term expected rate of return has not changed,

Â so it's unlikely there was a significant change in the asset mix.

Â Let's look at activity for the year.

Â Here's the service cost of 100.

Â This will all be coming from the actuary,

Â the interest cost of 94,

Â and expected return and plan assets actuarial gain or loss,

Â plan amendment occurred halfway through the year of 240,

Â it was an average remaining service life of 12 years.

Â So, you would amortize that over 12 years,

Â which would be 20 per year.

Â But since it happened midway through that year,

Â we would expect amortization of 10.

Â There's our actual return on plan assets.

Â You can see that that's less than the expected return on plan assets.

Â So, we're going to expect a loss there.

Â The benefits paid.

Â And the employer contributions.

Â Now, all of this stuff you can as

Â an auditor recalculate or verify from the employer's books of records as well.

Â So, let's prepare the change and the obligation.

Â We're going to add the service cost,

Â the interest cost, we'll subtract that actuarial loss,

Â which in this case is a gain,

Â we'll take the add the amendment in,

Â which increases the obligation,

Â subtract the benefits paid,

Â and now that ending balance should agree with the actuaries calculation.

Â For the change in the assets,

Â we'll take the beginning balance of the plan and assets,

Â we'll add the actual return on plan assets,

Â remember not the expected return, that doesn't go here,

Â we'll add any contributions from the employer,

Â we'll subtract out the benefits paid,

Â notice benefit paid factors into both,

Â the obligation and the assets,

Â because when I pay benefits from plan assets,

Â it reduces both the obligation, and the assets.

Â So, the same number will figure into both roll forwards.

Â And then, the ending funding status is a liability of 352 million.

Â Now, the beginning from that status was a liability of 100 million. What does that mean?

Â That means we need to account for an increase in the liability of 252 million.

Â And that's going to be split actually between three different numbers,

Â one will be in that periodic benefit cost,

Â one will be other comprehensive income,

Â and the third is contributions to the plans,

Â because remember contributions to the plan do reduce the obligation.

Â So, let's start with other comprehensive income.

Â Now, we have to recognize the amendments and

Â any actuarial gains or losses that do not affect earnings.

Â So, there was an actuarial gain on the obligations,

Â so we show that there is an OCI actuarial gain of 22.

Â There was an amendment.

Â So, we showed that as an OCI and loss of 240,

Â because it increased the obligation. What's that third one?

Â That's our difference between the estimated return and the actual rate of return,

Â since the actual rate of return was less than the estimated rate of return.

Â We have an actuarial loss on the assets of 43.

Â So, we've got a pension liability we've accounted so far for $261,

Â net periodic benefit cost.

Â We're going to take our service cost, the interest cost,

Â the unwinding of the discount,

Â we'll take the amortization of the prior service costs.

Â Now, it came in halfway through the year,

Â this is a reclassifying or a recycling entry.

Â So, this is entry number two and three just for

Â that portion of the prior service cost that we're amortizing,

Â it was half a year over 12-year period.

Â So, we're going to amortize 10,

Â that 10 goes into net periodic benefit cost,

Â and the other side of that entry is OCI prior service cost,

Â which reduces the net OCI for the year,

Â that is you're reclassifying entry.

Â And then, there's the pension liability,

Â which increases for 26 which is the net on that,

Â and there's our expected return on assets of course.

Â So, so far we've accounted for 261 plus 26

Â equals $287 worth of changes in the pension liability,

Â that's $35 too much.

Â It only changed by 252.

Â What's the missing entry?

Â Well, the missing entry is the contribution from the employer, which reduces liability.

Â So, it's the viability of the employer to the plan.

Â And so now we've accounted for the entire change in

Â the liability during the period. So, what do we have?

Â On the statement of financial position at the end of the period,

Â we're going to have the filing amounts.

Â We'll have that pension liability of 352,

Â we'll have accumulated other comprehensive income,

Â the prior service cost when we close the other comprehensive income into AOCI,

Â and that will be net 230 because we've already

Â reclassified or recycled 10 of it into income,

Â and we'll also have a net amount in AOCI of gains and losses.

Â This is assuming that we had a zero balance to begin with,

Â of course, of 21,

Â and that will be net of a 43-dollar amount that was a debit,

Â in a 22-dollar amount that was a credit,

Â we end up with a debit of 21.

Â See if you can drive that amount for the gains and losses.

Â So, let's look at what we have now.

Â Let's look first at the statement of comprehensive income.

Â So, here are the filing amounts,

Â we're going to recognize in comprehensive income,

Â remember comprehensive income is both net income and other comprehensive income.

Â So, in that periodic benefit cost,

Â we'll have a total of 36.

Â That was 100 of service cost,

Â 94 of interest cost,

Â 10 of amortization of prior service cost,

Â and then you back out and net it against

Â the expected return on plan assets of 168, total 36.

Â And another comprehensive income,

Â we have that prior service cost which is net at 230,

Â we remember the initial entry was 240, the initiating entry,

Â and then we reclassified 10 of that as we amortize the prior service and

Â cost into income so the net amount of other comprehensive income,

Â this period from prior service cost is 230.

Â The net amount of other comprehensive income from gains and losses is 21, that again,

Â is the net of the actuarial gains and losses on the obligation,

Â and the actuarial gains and losses on the assets,

Â which is the difference between actual and expected return and plan assets,

Â and the total in OCI is 251.

Â It's a little complicated,

Â if you do understand it,

Â and take it step by step,

Â and start out with the amounts that go into other comprehensive income,

Â proceed into periodic benefit cost.

Â Don't forget to pick up any contributions for the poor.

Â You should be able to reconcile the change,

Â and the net benefit obligation for the year,

Â it's a good auditors auditing tool to make sure you've got to correct.

Â But it's also a nice exercise to show that you actually understand what's happened,

Â and that everything has been correctly entered into the books of account. Thank you.

Â