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Lesson details
- Estimated study time
- 135 min
Learning objectives (2)
The opening PBO is $18.0 million. The actuarial movement report says the ending PBO is $20.0 million. A two-million-dollar increase is not pension expense. First recover the movements.
Build the obligation rollforward
opening PBO
+ service cost
+ interest cost
+ prior service cost from amendments
+ actuarial loss - actuarial gain
+ obligations assumed - obligations settled
- benefits paid
= ending PBO
Cedar Trail's supplied schedule is:
| PBO movement | Increase / (decrease) |
|---|---|
| Opening PBO | $18,000,000 |
| Service cost | 1,200,000 |
| Interest cost | 900,000 |
| Prior service cost from July amendment | 600,000 |
| Actuarial loss from updated assumptions and experience | 400,000 |
| Benefits paid | (1,100,000) |
| Ending PBO | $20,000,000 |
The equation closes: $18,000,000 + 1,200,000 + 900,000 + 600,000 + 400,000 - 1,100,000 = $20,000,000.
Give each movement one meaning
Service cost represents benefits attributed to current service. It increases PBO and enters net periodic pension cost.
Interest cost represents passage of time on the obligation under the supplied rate and convention. It increases PBO and enters periodic cost.
Prior service cost comes from an authorized amendment granting benefits for past service. It increases PBO on the amendment date, ordinarily enters OCI initially, and reaches periodic cost through the applicable amortization.
An actuarial loss increases PBO because experience or assumptions made the obligation less favorable to the sponsor. It enters the gain-and-loss and OCI/AOCI bridge, not service cost.
Benefits paid reduce PBO because the plan has settled amounts already included in the obligation. They ordinarily reduce plan assets by the same amount. If the two schedules use different benefit totals, stop; do not plug one schedule.
Recompute interest without claiming to choose the rate
If the supplied convention uses the opening PBO and a 5-percent rate:
$18,000,000 × 5% = $900,000
That multiplication checks the report. It does not prove the discount rate, timing convention, duration match, or participant cash flows. If significant events require an interim remeasurement, a simple opening-balance computation may no longer be the supported convention.
Distinguish assumption from experience effects
An actuarial movement package should separate, when material:
- discount-rate changes;
- compensation-growth changes;
- mortality or longevity changes;
- retirement, turnover, and form-of-payment changes;
- participant data corrections;
- plan interpretation corrections; and
- actual demographic experience different from assumptions.
The accounting team can reconcile these supplied components and explain their direction. It should not merge a census error with a genuine actuarial loss or describe a lower discount rate as “poor plan performance.”
Cross-check the rollforward
Use five controls:
- Population: participants reconcile to the actuarial census.
- Date: opening and ending measures use the stated measurement dates.
- Benefits: benefit payments match the trustee register and asset schedule.
- Amendments and events: each special movement has authorization and an effective date.
- Cost handoff: service and interest cost match the periodic-cost file, while new prior-service and actuarial amounts match OCI/AOCI.
A balanced PBO schedule proves arithmetic consistency of supplied inputs. It does not validate the actuarial valuation. The close advances when every movement has a source, owner, sign, statement destination, and cross-ledger match.