 Hello and welcome to the session. This is Professor Farhad and which would look at CPA questions that deals with pension. This topic is also covered in my intermediate accounting course. What I do on farhadlectures.com, I supplement. I don't substitute. So if you're studying for your CPA exam and you are, you have Becker CPA review or Roger CPA review or Glyme or Sargent, you're supposed to keep those. Those are great resources. What I offer you is additional in depth explanation about topics that you either missed in college or you forgot since you learned. And the CPA review course don't go in depth because they assume they know it. So if you go to my website, farhadlectures.com, you will find additional lectures organized by topic under the CPA review course to help you understand master this topic. So you will do well on your CPA prep course. Go ahead and pass your exam. As always, I'm going to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1800 plus as I was just mentioning about accounting, finance, tax, audit, as well as Excel tutorial. If you like my lectures, please like them and share them. If they benefit you, it means they might benefit other people, share the wealth, connect with me on Instagram, on my website, farhadlectures.com. This is where you find additional resources, thousands of practice questions and 2000 plus CPA questions and hundreds of hours of lectures that's going to help you supplement. Remember, supplement help you supplement. It means help you with your CPA preparation. For today, we're going to be looking specifically at pension questions. So what's important about pension questions? What's always important is knowing what you don't know. The part that you know that's good. That doesn't give you any positive feedback. What you should be looking for is the questions and the topics that you are weak with. Now how do you know I'm weak in a topic? Well, I read a question and I cannot answer it. Well, guess what? I need to learn a little bit more about it. So in this session, we'll cover pension and you will find out how much you know and how much more importantly you don't know. And always going to invite you to visit my website for additional resources about this topic. I will do so at the end as well. So let's take a look at this question. So this question asks, what is the projected benefit obligation that was underfunded at the end of 2021? So here we go. They're asking us about the PBO and they're already telling us it's underfunded. Sometime in the question, they don't tell you whether it's underfunded or overfunded. They just tell you, give me the PBO and that's important to know whether it's overfunded or underfunded. So let's take a look at the data. Data for 2021, we're as follow. PBO January 1st, 249,000 and December 31st, 2021, 276,000. The important number for us is the December 31st because we are being asked about December 31st, 2021. Therefore, what we need to do is take this number down. This is the PBO, this is the PBO, 276 and the date is 12, 31, 2021. Pension plan assets, fair value January 1st, 183,000 and December 31st, 233,000. I'm concerned with December 31st because I am looking at 2021, not 2020. So for 2021, my plant asset, which are my assets, they amount to 233,000. Now what I do, I will take the difference between the two and find out what my answer is. If I take the difference, the difference is 43,000 and they already tell me it's underfunded. Now they may not tell you it's underfunded. They may give you 43,000 and they may give you 43,000 like this as an answer. So they may give you this 43,000 and they might give you this 43,000. So you have to be very careful. Don't jump, say it's 43,000. Since they're giving you 143,000, that's fine or they may say it's underfunded or overfunded. They're telling you it's underfunded. Now is it underfunded? Indeed it's underfunded. My obligation, my PBO, my obligation is more than my assets. I have more obligation than assets. Therefore I am underfunded. The answer is 243,000. If my assets, if my plant assets, I have more assets to cover my obligation for my pension, that will be overfunded, overfunded. So be careful because the answer will be given to you or, for example, they will give you, they will not say this and they would say underfunded and overfunded 43,000. So okay, I found out it's 43,000. You still have to know it's underfunded. So this is, I would say it's an easy. So let me, let me tell you this. If you looked at this question, if you're listening to me right now and you're like, oh my God, you know, I missed this question. I could not answer it. You need serious help. So you need to know how to find the underfunded or overfunded amount. It's very simple. The difference between your PBO at the end of the period and your PA at fair value, plan that. Let's take a look at this question. What pension liability should AA report and its balance sheet for year ended? Okay, on January 1st, 2021, AA Accounting Academy started a defined benefit pension plan for its employees. The annual service cost for each year, 21 and 22 was 79,000. The interest cost, the interest use, I'm sorry, the interest use to determine the projected benefit obligation is 12%. Both the actual and the expected return on the plan for both years were 10%, making it easy for us. AA funded the plan in the amount of 590,000 on January 1st, beginning on January 1st, beginning on January 1st, 2021. So here what they're asking us is, they're telling you what should be your liability. So you're going to have a liability, but the question is how much it's going to be. So notice this question is a little bit more involved. Now, how do we do this? Well, we have to find out what is our PBO versus our PA? Well, here I was pretty simple. We took 276 and 233. Now they're giving you additional information and you have to figure out what's your PBO and what's your PA. So what you have to do is you have to, do you know how to keep track of your PBO and do you know how to keep track of your PA, plant asset? Well, let's start to compute the PBO first. So they're saying the annual service cost was 790,000 for 2021 and 790,000 for 2022. Is this part of your PBO? Sure it is. So this is part of your PBO. So let's start with 2021. So January 1st, 2021, you started with nothing. You did not have any obligation. Then you add the service cost for that year. The service cost was 790,000 for 2021. You did not have any other costs. You could have other costs such as interest and other costs. We'll look at them later. Now, so what happened if that's all what you have? You started with zero and you only had a service cost. What does that mean? It means you end up the period. So December 31st, 2021 is 790,000. But the question is December 31st, 2022. So we have to keep on going. Now, in year 2022, you started. So this is, so December 31st, 2021 is the same thing as beginning of 2022. Then we're going to add again, another service cost for the second year. And that service cost is 790,000. So we had 790,000 in year one, 790,000 in year two. Now, we're going to have an interest component. We're going to have an interest component. What is the interest component? Well, the interest component is how much is my PBO multiplied by the rate? Because once you have an obligation, because you had at the end of the year, 790,000. So the 790,000, it's going to have an interest part of it. So you're going to have to multiply it by 12%. And that's going to give us 94,800. So year two, you're going to add to your obligation the interest cost. And that's going to be 94,800. And that's it. That's all we have. We have service cost and interest cost. But we did not have any interest costs until year two because for year one, we did not have any obligation when we started the year. Now we can add up our obligation for December 31st, 2022. And that's 1,674,800. That's our obligation. That's fine. Now we have to find out what is our assets. How much assets do we have in comparison to the obligation? Well, AA funded the plan in the amount of 590 each January 1st. So January 1st, 2021, we put in the plan 590,000. We put that in the plan. Now this amount, remember, the assets will earn interest, expected interest. The expected interest and the actual interest happens to be the same. It doesn't matter. We're going to use the expected interest. What does that mean? It means we have a return, an actual return, not the actual, the expected return. The expected return is 10%. Hello. Okay. That's fine. We are here. We are here. Thanks. So to figure out the return, we're going to take 590,000 times 10%. And that's going to give us 59,000. Well, we earned 10%. That's going to add, we're going to add to our plant asset, 59,000. And this is what we end up with year one. This is December 31st, 2021, which is 649,000. Same thing in year two. In year two, we made a contribution. So in year two, we made another contribution of, we funded the amount 590,000. Now what's going to happen, we're going to also earn a 10% return. But we're going to earn the 10% return on both of these amounts. Therefore, what's going to happen is when we add those two amounts, when we add those two amounts, it's going to give us total assets of 1,239,000 and we earn 10%. Therefore, our earnings on the plant asset is 123,900. So what we're going to do, we're going to add the return. So this is the funded. This is what we contributed and we're going to add the return 123,900. Well, that's all that we have for the plant asset. We add them up and we have plant asset of 1,362,900. Indeed, we have a liability. Indeed, we have a liability. Now again, the question might not even tell you it's a liability or the question might tell you whether we have a liability or an asset. Okay. So here we have a liability and what's the liability? Well, simply put, it's the difference between the PBO and the PA. We have more obligation than we have assets. Therefore, what's the difference between them? If we compute the difference, the difference is 311,900 and that's the answer. It's the difference between the PBO and the PA. So the difference between this question and this question is in this question, you're giving everything you need. And on the exam, on the CPA exam, if I have to guess which question they will give you, they will give you this question. If I have to guess, they might give you something similar to this in a simulation, but I doubt that they will give you a question that would require this much work. I don't say they won't. I just doubt it. I doubt it, but everything is possible, but I doubt it. But if you understand this question, then this question will be a piece of cake. That's what I'm trying to say. Let's take a look at this question. The long-term expected rate of return on the plant asset is 10%, assuming no other data are relevant. What's the pension expense for the year? That's an important topic. You need to know how to compute your pension expense. So what are you giving here? Let me show you what you are giving here. Maxime Company received the following report for its defined pension plan. So this would be, this is your PBO, December 31st. This is your PA, December 31st. One question they could ask you, tell me whether it's a liability or an asset. It's a liability, 6.33 minus 3.90. I'm going to have a liability. But that's not the question here. The question here is what's your pension expense? So that's an important computation. You need to know how to compute your pension expense. You need to know the five components of your pension expense. Again, this is what my website, this is what I do on my website. I explain this in details with explanation, with detailed examples. So let's take a look at what we are giving. So pension expense is service cost part of the pension expense. Hopefully you know this. That's usually the big one. Service cost means the employee work for you that year. They service the company. Therefore, you have an obligation and that obligation happens to be 100 and 92,000. They're giving you interest cost of 32,000. Well, is interest cost part of your pension expense? And the answer is yes. Interest cost equal to 32,000. Benefit paid, is that part of your pension expense? I hope you know. Benefit paid has nothing to do with your pension expense. That's the amount that you paid from your assets to your retirees. Therefore, notice it reduces, notice it's a minus to your PBL. So that has nothing to do with your service cost. Let's look at the plant asset. Balance, you had 255,000 in asset. The actual return was 34,000. You contributed. You wrote a check of 111,000 to the plan and you paid, notice 81,000. So it reduces, notice when you pay, when you paid, it's going to reduce your plant asset and it's going to reduce your obligation because if you paid, the money would leave the plant asset, it would reduce the plant asset. If you paid your retirees, you're going to reduce your obligation as well. So notice the 81,000, it's reducing both amount. Now, pension expense is offset by a return. Now this is your actual return, 34,000. Do we use the actual return? And here you have to be very careful. You don't use the actual return. You would use the expected return. What does that mean? It means during that year, your assets, they actually earned 34,000, but we don't compute. We don't use the actual return. We use the expected return. How do we compute the expected return? Well, it's the beginning of the period PA times the expected rate, times 10%. Now, why do we use the expected versus the actual? Again, you can go to my website. I explain further, but the reason is because we don't want white fluctuation. In some years, the stock market does very well. If we are invested in the stock market, in another years, the stock market might do very poorly and we don't want those white fluctuations. That's why we use the expected of 10%. If we use the expected, our expected return is 25,500. Remember, this is a, if these are pluses, if these are pluses, this will be a minus. This is going to reduce your expense, 25,500. And that's all what we have for now. We could have more. We could have more, for example, amortization of prior service cost or something like that. So now what we can do is we can compute our pension expense and we net them out and we net out to 185, 198,500 and the answer is 198,500. Be careful. Don't use the actual return when you compute your pension expense. Let's take a look at this question. What amount should Brown, Inc. report as pension expense? Pension expense. We practically, we did a similar question a second ago. Let's see if we can do this. Brown Inc. has provided a defined pension benefit plan for its employee for several years. So far, so good. It's like really doesn't mean anything to us. At the most recent year, the following information was available with regard to the plan. Service cost 7.7. Is that part of the pension expense? Sure. Service cost is always there because if the employee are working, if the company is open, we're going to have to add the star pension expense. Expected return on the planned asset 2.7. Expected. Is that relevant for us? Oh, sure it is. It's expected and it's negative. It's going to reduce. The expected return is going to reduce expected return on the planned asset 2.7, actual 2.5. So we would use the expected. So the expected return on the planned asset that's negative minus 2.7. So we're done with this. Actual return. We don't care about the actual return. Interest cost 2.9 million. Is interest cost part of your pension expense? Of course it is. You have an obligation. You have a liability. You're going to have an interest cost and the interest cost is 2.9 million. Payment provided to the employees 3.5. I don't care. This is not part of my pension expense. This is part of reducing my PAA and my PBO when I pay to the employees. An amortization of prior service cost created when the pension plan was amended, causing a drop in the projected benefit obligation of 2.6 million. I don't care. Just amortization. I have to amortize prior cost. So simply put what happened is at some point in the past I amended the plan. I changed the plan and as a result it increases my obligation and I'm going to amortize this obligation. So amortization. That's an additional cost 2.6 and that's pretty much it. What's my pension expense? Net them out. That's my pension expense and they will net out to 10.5 million and the answer is 10.5 million. So what I'm going to do, again I'm going to invite you to visit my website farhatlectures.com so you can tackle this topic whether looking at my intermediate accounting course or you can go to your CPA FAR course in this topic once again. Cover in depth, in details. I can assure you many students used my website, used my resources to understand the topics and once you understand it well you will do well on the exam. You'll be well prepared for your CPA prep course. Your CPA prep course will prepare you well for the actual exam. Study hard. Good luck. Don't shortchange yourself. Your CPA is a lifetime investment. It's going to pay dividend for years to come for decade. Invest in your career. Invest in yourself and stay safe.