Question

Mini Exercise M10-17: Analyzing and Interpreting Pension Disclosures—PBO and Funded Status

YUM! Brands Inc. discloses the following pension footnote in its 10-K report.

Pension Benefit Obligation ($ millions)	2015
Change in benefit obligation
Benefit obligation at beginning of year	$1,301
Service cost	18
Interest costs	55
Plan amendments	28
Curtailments	(2)
Special termination benefits	1
Benefits paid	(50)
Settlements	(16)
Actuarial (gain) loss	(196)
Administrative Expense	(5)
Benefit obligation at end of year	$1,134

1. Explain the terms “service cost” and “Interest Cost”
2. How do actuarial losses arise?
3. The fair value of YUM!’s pension assets is $1,004 million as of 2015. What is the funded status of the plan and how will this be reflected on YUM!’s balance sheet?

Answer 1

The answers are as followa

A Service cost

Service cost The cost associated with another person performs a valuable job that requires a particular skill.When the service cost of a business that hires independent contractors to do the required work reaches a certain point, it becomes more profitable to hire full-time employees to do the work.

Interest Cost

The nterest cost is the sum of the interest paid by the borrower on the borrower's lifetime debt. In addition to the repayment of capital, the loan also carries interest. However, any negative points or rebates given by the borrower to the borrower should be deducted from the interest rate as they will be a refund of future interest.
In consumer mortgage loans, any points paid to reduce the interest rate on the loan should be included in this amount, as the points are effectively prepaid interest.

B.In the following ways Actuarial Loss may arises.

I. Actuarial Loss may arising from changes in Assumptions and

II. Actuarial Loss arising from Experience Adjustment.

I. Actuarial Loss may arising from changes in Assumptions and

The main reason for the Actuarial loss is the change in the actuarial assumptions from the calculation of the opening liability to the closing liability. The Actuarial estimate includes changes in economic or financial assumptions (salary rate, discount rate), and difference in demographic assumptions (, morbidity, disability,mortality and employee attribution rates).

II. Actuarial Loss arising from Experience Adjustment.

Change because of experience adjustment: This includes reasons beyond real assumptions, i.e., change due to actual experience during the inter-evaluation period is different from the assumptions used to determine the value of liability.

Gratuity

Long-term assumptions include salary / benefit increase rates and employee attendance rates, and no new hires are hired during the year. There are two main factors that contribute to the actual loss: discount rate and mortality

Leave Encashment
additionally the main factors mentioned above as mentioned in Gratuity, Leave Encashment is also directly relevant in the valuation, as the Actuarial gain / loss in the case of Leave Encashment valuation becomes zero.

CTC Salary
The actuarial liability of leave encashment in CTC includes various factors that value an element: Leave value when leaves are available (usually sick leaves are obtained only without encash). The CTC salary is not equivalent to the salary used to calculate the actual payment (Benefit Pay) of Leave Encashment to the employee when he leaves the service.so the Benefit Payment Equivalent of Leave Encashment for this period is CTC Salary minus deductible Eligible Salary for Encashment. Because of this inherent contradiction, one remaining item cannot be avoided and some may result in Actuarial gain / loss.