 Welcome to the session in which we will discuss pension plan financial statement specifically for the CPA exam. So the first thing we need to understand is what is a pension plan in order to understand the pension plan financial statement? Well, a pension plan is a separate legal entity from the sponsoring employer, from the sponsoring organization. So what is a sponsoring organization? Well, think about any company. And for that matter, I will use Google or Alphabet as an example. This is the company, the sponsoring organization. The sponsoring organization or the sponsoring employer makes contribution to a pension plan. Simply put, Google will write a check or they will submit money to a pension plan. And for this pension plan, we're using IM national pension fund. Why would they do that? Well, they want to put money away for their employees when they retire. That's fine. So notice the company, Google, the pension plan, IM national pension fund, separate legal entity. Then the pension plan, this pension plan, once they have the money, they're going to invest the money in stocks and bonds, real estate, I don't know, maybe cryptocurrency, I'm not really sure what they what can they or cannot invest in. Then once the employee retired, they will pay their they will pay Google employees and notice Google employees are retiring very early because they make a lot of money. You guys get the point. So this is the this is the pension plan. So we have to understand we're dealing with the pension plan. Specifically, the pension plan financial statement, we are looking at this pension plan financial statement for IM a national pension fund. And the reason is, when you are a CPA, you are most likely to audit those pension fund companies. There are many pension funds out there. And your job as a as an auditor, you'll have to pension those you have to audit those pension fund. Therefore, you have to learn what goes on those financial statements. So that's why this topic is covered on the CPA exam. Now, we have to understand we have two basic types of pension plans. The reason is you have to know it because it's going to make your life easier when you're looking at your financial statements. We have what's called the fine contribution plan or simply put known as 401k plan sometime for teachers, it's called 403b. It doesn't matter. And we have a defined benefit plan, which is a traditional pension. So when someone says a pension plan, what they really mean is the fine pension plan. And when they say 401k, what they really mean is the fine contribution plan. I would have to explain the difference between the two. For the 401k, each individual will have their own separate account. So individual account exists for each participant employee. So you'll have a 401k account with Schwab, with Vanguard, with some company. The risk of the plan is transferred to employee. What does that mean? It means all what the company do all what Google do, they will send a check on your behalf to, I don't know, Schwab. Okay. And they would say this is what we contributed to Farhat. We contributed $1,000 and we're done. Now, what would Farhat do with that $1,000? It's up to them. Okay. I can take this $1,000 invested in Amazon, Google, Apple, keep it in cash, invest it in bonds. I bear the risk. So the benefit, what I'm going to get paid at the end of the day when I retire is the amount contributed by me, because I also contributed that plan by the employer and how well my investment did in return on my investment. So I could have, if I made the wrong investments, I may not have enough money for retirement, or if I made the correct investment, I may have millions and millions of dollars. So the risk is borne by me. How much I get paid, it's unknown because I select my investments. This is 401k. The traditional pension plan, the employer is responsible for providing the agreed benefit. What does that mean? It means I have, there's a formula and you will know exactly how much you will get once you retire per month. For example, I don't know, $4,500. Okay. That's it. It's based on a formula. The employer is taking the risk. The employer will have to guarantee you will have that money. So they're going to have to work with the pension plan fund. They'll have to work with the actuarial to make sure they contribute enough money so they will have money to pay you once you are retired. So the benefits paid are estimated by using actuarial assumption. And those actuarial assumption involve how long the employee is going to live or their survivors. If you have to pay their survivors, how long did they work for us for the company? How much money they were getting? So it's a formula to determine this $4,500 or whatever that number is, $6,000 or $3,000 per month you're going to be getting. But you will be getting that amount guaranteed. This plan, you could become super ultra rich if you invested in certain companies. So those are the two plans. What we care about as far as the CPA exam is the pension plan financial statements, those companies that have those assets that are invested for their people, for the pensioners. What does their financial statement look like, their pension plan financial statement? First, what is the objective of the pension plan financial statement? Well, we have to provide information that is useful to help assess the plan present and future ability to pay the benefit when they are due. So the goal of studying those pension plan as auditors is to do what? Is to make sure the company put enough money or everything is reported properly that they can pay whatever that's due down the road once the employee retired. They're present as well as future employees. We no longer have to compute pension expense and record the PBO, which is the projected pension obligation, benefit obligation. We used to have to do that under the old CPA rules. Under the old CPA rules, the exam was about the pension expense and projected benefit obligation. We did not really have to have to worry about the pension plan financial statement. I still have those lessons if you're interested on farhatlectures.com under my intermediate accounting because we still teach them under intermediate accounting. But the CPA exam decided that that's not really what accountant do in a sense they don't have to determine the projected benefit obligation. They have to audit the financial statements of those pension companies. So therefore you have to be familiar with those financial statements. There are two main financial statements that apply to both pension plans, whether it's a 401k or it's a defined benefit plan. Those are statement of net asset available for benefits and statement of changes of net asset available for benefits. So both plan will have those statements. In addition, traditional pension plan, which is not the 401k plan and you will see why they will have a statement called statement of accumulated plan benefit and statement of changes and accumulated plan benefit. So notice the naming are very similar to each other. So you have to be careful when it's not changes and when it's changes. And the reason is this, when they test you on the exam, they want you to know if you know where this item goes. Does it go on the statement of net asset available for benefit or does it go on the statement of changes of net asset? And what does each statement tells us? And this is what we have to learn about for the CPA exam, how to read those pension plan financial statement, what goes on those pension plan financial statements. Now, before we do so, most likely, if you are watching, most likely you're a CPA candidate. Great, you are looking for some help and you are and you found it. If that's the case, please go to farhatlectures.com and subscribe. I have additional resources, lectures, multiple choice, true, false, that's going to supplement. I don't replace your CPA review course. I'm going to supplement. I'm going to help you do better. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording. It doesn't cost you anything. Just click on the like. Connect with me on Instagram, Facebook, Twitter and Reddit. Give me a chance. Try my subscription for one month. If you find it's helping you, keep it. If not, that's fine. Cancel. So let's take a look at the first statement, which is statement of net asset available for benefit. And this is for a pension, traditional pension plan. Now I'm going to go over the component of this statement, section by section, bear in mind everything that I do for this pension plan, it applies to the 401k plan, which I will show you the statement about 401k as well. I just want to let you know it's the same concept. So this is a two year. Let's start with this. It's called the statement of net asset. What do we mean by net asset? Well, we have, we are deducting something from asset to get the net asset. Well, obviously we're going to have assets and we're going to have minus something. Well, it's assets minus liabilities. So the statement of net asset should present total assets, total liabilities, of course, and the difference between them assets minus liabilities will give us the net benefits available. We don't have equity in the traditional balance sheet assets minus liabilities equal to equity. We're not looking at equity here. We're looking at the net benefit. So think of a balance sheet when you think of statement of net asset. Now, what would we see on this? Let's take a look at a balance sheet. We're going to see the investments. We're going to first see the assets. And under the assets, we're going to have all sorts of investment stocks, bonds, corporate bonds, US government bond, mortgages, real estate, gold, we could have anything cryptocurrency, any investments. What do you need to know about these investments? Well, that's unique to know this. Those investments are reported at fair value. What does that mean? What does that mean? It means if they went up in value, you'll write them up. If they went down in value, you write them down. Now, obviously, if you write them up or down, you're going to have gains and losses. Where do you put those gain and losses? Don't worry. Those gain and losses will be reported in the statement of changes of net asset available for benefit. So those are assets. The losses, unrealized losses and gains will be reported in another statement. So that's usually, that's usually a big section. That's usually the, that's usually a big section of the asset. Then the pension plan financial statement might show you some receivables. What could be some receivables? Assets receivables. Well, employer contribution. We're waiting for the, the employer are responsible. The company is responsible for making a payment at the pension plan. And they have not made it yet. So it's 80,000 security sold. They sold some securities and they're waiting for the money. They did not receive the money yet. It's a receivable. Any accrued interest or dividend on the stocks and the bonds. Those are receivables. And notice we have 590,000 of receivables. It could be a little bit. It should not be a large component. And we have cash of 200,000. Now, usually traditionally in a traditional financial statement we'll start with cash first because cash is the most important. For a pension plan, usually their investments are the most important. And that's why we'll start with the investment. Then they might have some liabilities. They should not be a lot. Okay. Why? Because the purpose of the pension plan is to have the assets, is to have the assets to pay, to be able to pay off. Due to broker, we have some dues to broker. We have to pay some broker to have some accounts payable. Some bills we have to pay and some accrued expenses, 278,000. Not a lot. It doesn't matter whether the number is large or enough. The reason I'm telling you not a lot to emphasize the point that the purpose of the pension plan is to hold assets, not liabilities. You're gonna have some liabilities, but it's gonna be mostly assets. So assets minus liabilities will give you net asset available for benefit, which is 6,902,000. So this is basically what we are saying here. So now let's take a look at statement of changes in net asset available for benefit. So it's the same thing except the word changes. So changes means what? Changes that's gonna explain to us what happened from this number. It was last year. Year one was 6,391,000. Now it's 6,902,000. So what was the change? Why did the net asset benefit change? So basically the equity. Why did the equity change? And think about it. How would equity change on a traditional balance sheet? Net income. If we make more income or if we contributed more to the company, but there's no stocks here, if we make more profit, more net income, our equity will change. So let's take a look at what led to that change in equity. So think of the changes, statement of changes as the income statement. Show the changes. Think of an income statement. Well, first it's gonna show the investment income, net appreciation and fair value of the investment. So our investment went up in value. Remember I told you we have investments and they go up in value. We report the change here. We receive, we earn interest. We earn dividend. That's in total 585. Now we had some investment expenses we have to deduct them. The employer contribution. This is the employer contribution as addition. We are contributing to the plan plus 748 total addition, 1,281,000. Then we paid out to the participant 650 and we have some administrative expenses 120. This is the total deduction. The net increase 511,000. If we take what we started the prior year, 6,391,000 plus the net increase, it's gonna give us 6,902,000. So the 511, now the difference between those two is 511,000 explained on the statement of changes because it's how, why did we have the change in net asset? So you have to understand what goes on the statement of changes, which is income accounts and expense accounts. They're not really income and expenses. They're additions and deductions, but think of them as income and expenses. Think of it as an income statement. So any changes in the fair value of the investments, any unrealized appreciation or depreciation, which is increase or decrease and the value of the investments, interest and dividend income, any contribution made by the employer or any contribution made by the employee, some pension plan, even the employee contribute. For example, I have a pension plan and I also contribute, my employer contribute and I also contribute and the contribution will have to be divided between cash and non-cash. Usually it's cash. That's what they contribute and contribution from participant like myself when that's applicable, when the employee also have to pay. Also payment to insurance entities to any, to contract that are excluded from the pension plan are also included here. So if you have, if you're guaranteeing some sort of an investment, you have to show it. Also, you have to know that there are no cash flow statement for the pension plan funds. So make sure you know this. It could be just a multiple choice question, no cash flow statement. Also, in addition to those two financial statements, when it comes to traditional pension, we have to have statement of accumulated plan benefit. So this statement of accumulated plan benefit is specific to pension plan, to traditional pension plan, not 401k. So this statement shows you what is the obligation, the liability for the company. For example, year one, let me show you, their obligation was 11,900,000. It's a broken down as follow. Participating currently receiving benefit 3.1 million, other participants 6.8 million and they have no non vested benefit benefit that hasn't been vested 2 million. Well, you have, your liability would include vested and non vested because this is the vested benefit and this is the non vested. So this is, this is what we know that we, that we learn about, what we used to learn about in the past as the PBO projected benefit obligation was 11.9 million for year one. So this is what this statement shows. It shows you your obligation, it could be presented with the, with the, with the net asset available for benefit or it could be presented separately. So here we are presenting it separately. So those are the liabilities for the company. Okay, remember, we show the assets and those are the liabilities, how much the company is required, is responsible for today as of today in their pension obligation. So remember, this only applies to traditional pension and this number, this 11,900,000 is coming from actuarial assumptions. You know, how long our employees would live, how long would they work for us, what's their salary, so on and so forth, actuarial assumption. Now we also have a statement of changes. So let's see where the changes came from, we started with 11.9 million, then they increased the plan by a million, they have an increase in the plan by a million, they had a plan amendment for some reason, they said now employees are living longer, we have more employees, whatever the reason is they, they, they increase the plan by a million, then they reduce the plan, do do changes and actuarial assumption, maybe people are living now shorter, 210,000, they accumulate, they, they, they benefit accumulated during the period, 660, then benefit paid 650. So basically, they contributed to the plan, then they took out, which is to cancel each other out, the net, the net increase was 800,000. Therefore, what we end up with a liability at year two, 12.7 million. So basically we went from 11.9 to 12.7, which is 800,000. And this statement of changes and accumulated plan benefits will show you why we had this increase, it's only an increase. Again, those statements could be shown separately or part of the net asset available for benefits, either or. Also, we have statement of net assets available for benefit for 401k, 401k pension plan, which is 401k and statement of changes and net asset available for benefit. The good news is they follow the same concept. We have assets, then we have liabilities, we take assets minus liabilities to get to net asset available for benefits. Simply put assets will be investments and they're also reported at fair value. We have different type of receivable similar to the receivable for the traditional pension and we have liabilities which should be minor. This is year one, this is year two. Then we have the statement of changes and net asset. We have to explain why did the asset change from 8,840,000 to 9,534,500. Well, we have what's called additions and deductions. Notice additions and deduction, think of them as income and expenses. But again, they're not income and expenses, but it's the same concept. There was an appreciation in the investments, we receive interest, dividend, the employer put some money, the participant put some money, the participant rolled over some of their money from other 401k plans. So we have an addition of 1,595,000. The plan paid 852 to retirees. There was administrative expenses of 550,000, total deduction 900,500, the net increase is 695. Take the increase, plus what we started with will give us the year end. So the difference between those two was 694,500. It explained in this why did it change. We had contribution, we had deduction. So what do you need to know? You need to know what goes where, what goes where and how these balances, how do we arrive to those balances. So generally speaking, the multiple choice questions on this section is not basic. Yeah, I would say basic. They're not going to give you a simulation about this most likely, but you have to practice multiple choice. If you're not a subscriber, go to farhatlectures.com, subscribe. I have additional resources that's going to help you prepare for the CPA exam. Don't shortchange yourself. Make this investment. It's a minor investment. It's going to help you tremendously. Good luck, study hard and of course, stay safe.