Intermediate Financial Accounting III – 4113

Intermediate Financial Accounting III – 4113

Fall 2018

Analytics and Critical Thinking Project

PantherTec sponsors a defined benefit pension plan for its employees. The company’s pension formula pays 2% per year of service time of the employee’s final year’s salary, with a maximum benefit of 60% of final salary. To illustrate, an employee earning $200,000 and retiring after 20 years would receive an $80,000 annual benefit (2% x 20 years x $200,000).

Accompanying this project is an Excel spreadsheet with two tabs. The first, “Employee Information,” lists the 200 employees of PantherTec, along with information which may or may not be needed to compute pension obligations. The second tab, “Pension Plan Asset Performance,” outlines how PantherTec’s plan assets have performed over the last several periods, expected returns on plan assets over that period, and information on previous amortizations. There are no prior service costs or other accumulated losses on the projected benefit obligation.

Required:project summary addressing each of the following requirements, citing accompanying tables and figures as necessary. Your final deliverable should include a typed report with responses to each of the following points as well as an Excel file with supporting analysis. Responses should be succinct, but complete.

Analyses:

1. Compute the projected benefit obligation (PBO) as of 12/31/2014 using the “Employee Information” tab assuming the company’s actuary recommends a 6% discount rate. For simplicity, assume that all retirements occur on December 31 of the retirement year, and partial years worked provide no benefit. In other words, if a 40 year-old employee begins working on 7/1/2014 and is expected to retire at 65, then assume that his retirement date is 12/31/2039 and that he will accrue 25 years of service (2015 through 2039). Computations should be performed in Excel.

2. Compute Pension Expense for 2014, separately identifying each component. Assume that no actuarial assumptions changed between 2013 and 2014 (i.e., same projected ending salaries, benefit periods, etc.).

3. Describe the funding status for the plan. Is the plan over- or under-funded?

4. PantherTec is considering a pension plan amendment that would alter its plan to pay an annual benefit of 2.75% instead of 2%. In addition, the company’s actuary recently suggested that the company may need to reduce its discount rate from 6% to 5% in 2015 in light of historically low interest rates. Treating each potential change independently, compute the effect of the changes on the company’s PBO as of 12/31/2014 and comment on how each would be recorded, should the changes be enacted.

 

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