The role of actuaries in pension accounting

Accounting for defined-benefit pension plans involves complicated mathematical considerations. As a result, organizations enlist the help of actuaries, who are trained to assign probabilities to future events and quantify their financial effects.

Actuaries help ensure that sponsors have established appropriate funding levels to meet future obligations, and they assist in reporting on pension plans. Employers rely heavily on actuaries for assistance in developing, implementing, and administering pension plans. Continue Reading “The role of actuaries in pension accounting”

What kind of pension plans are there?

There are two basic types of pension plans: defined-contribution plans and defined-benefit plans. The plans differ in how benefits to retired employees (formal: pension recipients) are determined/calculated, and who bears the ultimate risk associated with the number of future benefits to be paid to retired employees.

For accounting purposes, defined-benefit plans can be further broken down into sole-sponsored, jointly sponsored and multi-employer plans. These sub-types dictate how a sponsor accounts for the plans, and differ in the number and types of entities sponsoring the plan as well as how risk is shared between them. Continue Reading “What kind of pension plans are there?”

What is important in pension accounting?

For a start:

While pension accounting is complicated, an understanding of a few basic concepts can help answer the important questions regarding the company’s pension balances and the required disclosures to provide useful information to all users of financial statements.

This textbook explains key concepts underlying the company’s pension liability and pension expense, how they are calculated, and what factors influence the amounts reported in the consolidated financial statements. Continue Reading “What is important in pension accounting?”

Change in accounting policy?

Tangible assetsOil and natural gas properties, including related pipelines, are depreciated using a unit-of-production method. The cost of producing wells is amortized over proved developed reserves. License acquisition, common facilities and future decommissioning costs are amortized over total proved reserves. The unit-of-production rate for the depreciation of common facilities takes into account expenditures incurred to date, together with estimated future capital expenditure expected to be incurred relating to as yet undeveloped reserves expected to be processed through these common facilities. Continue Reading “Change in accounting policy?”

What can the Statement of Cash Flows tell you?

The statement of cash flows, as its name implies, summarizes a company’s cash flows for a period of time. The statement of cash flows explains how a company’s cash was generated during the period and how that cash was used. Even if the statement of cash flows seems to be a replacement for the income statement, the two statements have distinct objectives.

The income statement measures the results of operations for a period of time. Net income is the reporting entity’s best estimate representing a company’s economic performance for a period. The income statement provides details as to how the retained earnings account changed during a period and ties together, in part, the changes in the owner’s equity section of period-to-period balance sheets (the income statement started as a disclosure (sheet) of movements in shareholder’s equity). Continue Reading “What can the Statement of Cash Flows tell you?”

Cross-currency swap

In a currency swap operation, also known as a cross-currency swap, the parties involved agree under contract to exchange the following: the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.

Currency swaps are often used to exchange fixed-interest rate payments on debt for floating-rate payments; that is, debt in which payments can vary with the upward or downward movement of interest rates. However, they can also be used for fixed rate-for-fixed rate and floating rate-for-floating rate transactions. Continue Reading Cross-currency swap

Hedged item – Hedge of a net position

Q: When can an entity hedge a net position?

A EUR-functional currency entity has a sales department that sells certain items in USD. At the same time, the purchasing department buys certain products in USD. Each department is unaware of the other’s activities, but both want to hedge their forecast USD sales and purchases respectively. Assume that the sales department has USD100,000 of sales in six months’ time, so it enters into a forward contract with the entity’s central treasury department (that is a separate entity within the same group). Continue Reading Hedged item – Hedge of a net position”

Aggregate hedged item – Forecast issue of undecided currency debt

Q: Does IFRS 9 allow a highly probable forecast foreign currency debt issuance as eligible as a hedged item in a cash flow hedge of interest rate risk if the currency of issuance is not yet known?

At 1 January 200X, entity A, whose functional currency is the Euro, intends to issue a variable interest rate debt in six months’ time in order to finance future activities. Depending on the market conditions existing at 1 July 200X, entity A will decide whether the debt is issued in Euros or in US dollars. If the debt is issued in US dollars, then at the debt issuance date (1 July 200X) entity A will enter into a cross-currency swap in order to convert the US dollar exposure on the debt to a Euro exposure.

Management wants to hedge its exposure to variable interest rates. On 1 January 200X, it contracts a forward-starting interest rate swap (that is, an interest rate swap that will start on 1 July 200X) which is denominated in Euros. Continue Reading “Aggregate hedged item – Forecast issue of undecided currency debt”

Hedged item – Forecast Issue of FX debt

Q: Does IFRS 9 allow a highly probable forecast foreign currency debt issuance as being eligible as a hedged item in a cash flow hedge of foreign currency risk?


On 1 January 20X1, it is highly probable that company X (with EUR functional currency) will issue, on 1 July 20X1, USD 100 million of five–year, fixed–rate debt, with quarterly coupons. On 1 January 20X1, the EUR:USD spot and six–month forward exchange rates are 1:1. The proceeds from the issuance of the debt are needed to finance the expansion of the company’s production facilities in Europe. The company is concerned that the EUR:USD exchange rate will fluctuate, such that additional USD debt will need to be issued in order to lock in the desired EUR 100 million in proceeds, which in turn will affect the interest incurred on the foreign currency debt to be issued. Continue Reading “Hedged item – Forecast Issue of FX debt”

Hedged item – Cash flow hedges – Future interest flows

Q: Does IFRS 9 allow the following cash flow hedge designations of future interest flows?

Consider the following cases. Note: In all scenarios both the swap and the hedged debt are denominated in Company A’s functional currency.

Case 1
Company A enters into a forward starting swap in which it pays a fixed rate and receives a floating interest rate to hedge a highly probable forecast debt issuance. The date of issuance is known, but it is not known whether the debt will be at fixed– or floating– rates. Company A designates the swap as a cash flow hedge of the variability in cash flows of the debt to be issued, due to changes in interest rates. As a result, the company considers the following: Continue Reading “Hedged item – Cash flow hedges – Future interest flows”