Welcome back. In this lesson,

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

take information in an actuarial report,

and then enter it into the financial statements.

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

and changes in the fair value of the plane assets.

Let's start with the assumptions.

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

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

Because the rate has decreased,

the discount rate has decreased,

the obligation should increase creating an actuarial loss,

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

such as a change in the expected,

versus actual rate of return.

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

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

The long term expected rate of return has not changed,

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

Let's look at activity for the year.

Here's the service cost of 100.

This will all be coming from the actuary,

the interest cost of 94,

and expected return and plan assets actuarial gain or loss,

plan amendment occurred halfway through the year of 240,

it was an average remaining service life of 12 years.

So, you would amortize that over 12 years,

which would be 20 per year.

But since it happened midway through that year,

we would expect amortization of 10.

There's our actual return on plan assets.

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

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

The benefits paid.

And the employer contributions.

Now, all of this stuff you can as

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

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

We're going to add the service cost,

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

which in this case is a gain,

we'll take the add the amendment in,

which increases the obligation,

subtract the benefits paid,

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

For the change in the assets,

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

we'll add the actual return on plan assets,

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

we'll add any contributions from the employer,

we'll subtract out the benefits paid,

notice benefit paid factors into both,

the obligation and the assets,

because when I pay benefits from plan assets,

it reduces both the obligation, and the assets.

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

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

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

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

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

one will be in that periodic benefit cost,

one will be other comprehensive income,

and the third is contributions to the plans,

because remember contributions to the plan do reduce the obligation.

So, let's start with other comprehensive income.

Now, we have to recognize the amendments and

any actuarial gains or losses that do not affect earnings.

So, there was an actuarial gain on the obligations,

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

There was an amendment.

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

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

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

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

We have an actuarial loss on the assets of 43.

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

net periodic benefit cost.

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

the unwinding of the discount,

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

Now, it came in halfway through the year,

this is a reclassifying or a recycling entry.

So, this is entry number two and three just for

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

it was half a year over 12-year period.

So, we're going to amortize 10,

that 10 goes into net periodic benefit cost,

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

which reduces the net OCI for the year,

that is you're reclassifying entry.

And then, there's the pension liability,

which increases for 26 which is the net on that,

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

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

equals $287 worth of changes in the pension liability,

that's $35 too much.

It only changed by 252.

What's the missing entry?

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

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

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

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

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

we're going to have the filing amounts.

We'll have that pension liability of 352,

we'll have accumulated other comprehensive income,

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

and that will be net 230 because we've already

reclassified or recycled 10 of it into income,

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

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

of course, of 21,

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

in a 22-dollar amount that was a credit,

we end up with a debit of 21.

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

So, let's look at what we have now.

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

So, here are the filing amounts,

we're going to recognize in comprehensive income,

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

So, in that periodic benefit cost,

we'll have a total of 36.

That was 100 of service cost,

94 of interest cost,

10 of amortization of prior service cost,

and then you back out and net it against

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

And another comprehensive income,

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

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

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

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

this period from prior service cost is 230.

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

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

and the actuarial gains and losses on the assets,

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

and the total in OCI is 251.

It's a little complicated,

if you do understand it,

and take it step by step,

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

proceed into periodic benefit cost.

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

You should be able to reconcile the change,

and the net benefit obligation for the year,

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

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

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