MiniMe7

I will take a crack at this since I am actually studying it now.

A) Let's say your employer promise to pay you $60K per year now instead of their original promise to pay $50K, but this new $10K add'l benefit doesn't kick in until 2015 (i.e. they tell you there's a vesting period). What's happened is the employer has changed the existing DB plan that's already in place. Companies can "smooth" that $10K add'l amount over the vesting period. If the vesting period is 5 years, then after year 1, you'd have $8K of unrecognized past service cost.

B) This is another "smoothing" type deal. Actuarial assumptions can be related to things like the assumed plan return or the discount rate. If the plan had originally assumed that it would earn a 20% return, it was putting in less cash than another plan that had assumed an 8% return (since it assumed it could make up the unfunded difference over the long-term via market appreciation of its assets). Suddenly, they change their assumption and now only think they can earn a 15% return on their plan assets instead of 20%. That the dollar amount of that difference associated with 5% now becomes a loss and can also be smoothed over a period of time (see readings on Corridor Method and Faster Recognition Method). At any point during the "smoothing" period, there will be a portion of that 5% loss that's unrecognized.

I'm not sure about what book you're referring to regarding page 200.

ppls

ssr123456 Wrote:

>
> I'm not sure about what book you're referring to
> regarding page 200.

Take a guess which book I am referring to. CFAI FRA Book 2. pg #200.

Also no one is contesting smoothing etc. Question is, if at present your employer has a liability of 50k showing on his B/S. if your employer promises you 60K today, his liability has gone up by 10k. so his B/S should show 50K+10K = 60k. Not 50K-10K (unrecognized costs) = 40k.

busterbluth

I'VE HAD AN EUREKA MOMENT. Just figured out why unrecognized actuarial losses need to be added back to DBO.

The reason is that unrecognized actuarial losses are those losses which have still not hit the I/S. where as "projected" DBO includes all your obligations. so to figure out the funded/underfunded status as of today, you must exclude those expenses which are not part of DBO until a later date.



Edited 1 time(s). Last edit at Friday, May 27, 2011 at 11:35PM by pepp.

luda002

From my notecard:

Corridor method - if net cumulative act. gain/loss > 10% of the DBO or 10% of the fair value of plan assets, amortize the amount above the 10% threshold over the expected average remaining working lives of people in the plan.

Faster recognition method - same criteria, but recognized over a shorter time period.


As for the book, there's a million damn CFAI, Schweser, etc. books we have to study not to mention practice tests and I'm not going to look through all of them to figure out where your problem is.

The $10K is an additional expense on the prior service costs (you already recognized the $50). $10K can now be smoothed over the vesting period of 5 years. In year 1, you recognized $10K/5 yrs = $2K. Year 1: Expense = $2K, unrecognized past service cost = $8K. Year 2, you expense another $2K; expense = $2K, unrecognized past service cost = $6K.