Question

The exercise is related to pensions. Respond to the prompts below, and upload a document with your responses.

• List and define each of the five pension expense components (in your own words) and discuss how each component is calculated. (0.4 points per pension expense component)
• Explain of the impact of contributions to the pension plan and distributions to retirees on the PBO, Pension Asset balance, and pension expense. (1 point)
• Based on a sample of nonprofit organizations with defined benefit plans, Calabrese and Searing (2018) find the following:

Nonprofit organizations increase pension contributions to decrease excessive/unexpected profits and decrease pension contributions to enhance profitability in years they fail to meet profit expectations.

• Evaluate the finding and explain why the finding is or is not reasonable. (2 points)

Answer 1

Q.1 List and define each of the five pension expense components (in your own words) and discuss how each component is calculated

• Current Service Cost: As employer serves during the period company needs to provide for additional cost and there by liability. in other words it indicates increase in the present value of the pension obligation that results from the employees’ current services
• Past Service Cost: When employer implements or modifies a pension plan, employees usually receive credit for service prior to the change. Employers would cover such cost over the outstanding portion of the employee's service.
• Interest Cost: The increase in the overall pension obligation due to the passage of time
• Expected Income from Plan Assets: Income expected from assets in the pension plan, including investment income from interest, dividends, and capital gains
• Gains and Losses : The gains or losses components show the changes in the employer's projected benefit obligation and the market impact on plan assets.

Q.2 Explain of the impact of contributions to the pension plan and distributions to retirees on the PBO, Pension Asset balance, and pension expense

Impact of contributions to the pension plan : No impact on PBO, Pension Asset balance would increase since contribution will be invested, No impact on pension expense

impact of distributions to retirees : PBO will reduce, Pension Asset Balance would also reduce as payment will be made from assets. No impact on pension expense directly

Q.3 Nonprofit organizations increase pension contributions to decrease excessive/unexpected profits and decrease pension contributions to enhance profitability in years they fail to meet profit expectations

Defined benefit pension plans are significant expenses of not-for-profit compensation.

The empirical result from Calabrese and Searing (2018) provides that a on overall basis not-for-profit pension plan sponsors use accumulated net assets to smooth consumption by decreasing pension expense & manage reported profits downwards when they perform better than expectations by increasing pension contributions.