Pensions

Measurement uncertainty

Measurement uncertainty – Uncertainty that arises when the result of applying a measurement basis is imprecise and can be determined only with a range.

Measurement uncertainty arises when a measure cannot be determined directly by observing prices in an active market and must instead be estimated.

The level of measurement uncertainty associated with a particular measurement basis may affect whether information provided by that measurement basis provides a faithful representation of an entity’s financial position and financial performance. A high level of measurement uncertainty does not necessarily prevent the use of a measurement basis that provides relevant information.

However, in some cases the level of measurement uncertainty is so high that information provided by a measurement basis might not provide … Read more

Leveraged buyout IFRS 3 best reporting

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Leveraged buyout IFRS 3 best reporting – In corporate finance, a leveraged buyout (LBO) is a transaction where a company is acquired using debt as the main source of consideration. These transactions typically occur when a private equity (PE) firm borrows as much as they can from a variety of lenders (up to 70 or 80 percent of the purchase price) and funds the balance with their own equity. Leveraged buyout IFRS 3 best reporting

1 The process and business reason

The use of leverage (debt) enhances expected returns to the private equity firm. By putting in as little of their own money as possible, PE firms can achieve a large return on equity (ROE) and internal … Read more

Defined Benefit Pension Plans

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In traditional defined benefit pension plans, workers accrue a promise of a regular monthly payment from the date of their retirement until their death, or, in some cases, until the death Defined Benefit Pension Plansof their spouse. The promised life annuity (deferred) is commonly based on a formula linked to an employee’s wages or salary and years of tenure at the sponsoring firm. Defined Benefit Pension Plans

In a typical DB plan the member earns a unit of pension, usually expressed as a percentage of nominal earnings, for each year of credited service/participation. The DB pension may be indexed to inflation but in a number of countries such as the U.S. and Canada, this is uncommon in private sector pensions. … Read more

Service or insurance contract?

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Service or insurance contract – Some contracts meet the definition of an insurance contract but their primary purpose is to provide services for a fixed fee. An entity issuing such contracts may choose to apply IFRS 15 to them if, and only if all of the following conditions are met:

Identification of Fixed fee contracts for services:

All of the following three conditions apply to a fixed fee contract for services:

Non-risk-specific price

Setting the price for an individual customer does not reflect the entity’s assessment of the risk specific to that customer

YES

Compensation by service not cash

Cash payments are not made to customers

YES

Use, not cost, drives Insurance risk

The risk transferred by

… Read more

What is a correct discount rate in pension calculations?

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What is a correct discount rate in pension calculations – Some background information on the discussion on pension plans and discount rates. Choosing the correct discount rate in calculation pension liabilities is not an easy task and a task that brings public responsibility.

Interest rates in the European area are close to zero because the ECB holds its benchmark refinancing rate at zero since March 2016, see table below:

What is a correct discount rate in pension calculations

Low-interest rates play a critical role in calculating pension plan obligations. Specifically, the interest rates on high-quality corporate bonds are used to determine the plan’s expected risk-free return in the future – a metric known as the “discount rate”. If the discount rate decreases, a pension plan needs … Read more

Impact of the Discount Rate on Pension obligations

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Impact of the Discount Rate on Pension obligations – In order to understand how the discount rate impacts the company’s pension obligations, it is useful to first understand the finance concepts of time value of money and present value. Note that the discount rate is the most important (and most difficult to assess) assumption in calculating pension obligations.

Time Value of Money Impact of the Discount Rate on Pension obligations

The concept of time value of money is best explained in a simple way: a dollar today is worth more than a dollar in the future.

Imagine receiving $1,000 today and putting it in a simple bank savings account. That Impact of the Discount Rate on Pension obligations$1,000 will eventually grow over the years … Read more

What kind of pension plans are there?

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What kind of pension plans are thereWhat 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.

Hot topics

For financial reporting purposes, there is only one concern, pensions and their reporting … Read more

What is important in pension accounting?

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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. What is important in pension accounting?

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. What is important in pension accounting?

Parties involved in a pension plan

A pension plan is funded by an employer, and/or an employee, during an employee’s working years. Pension payments are later made to … Read more