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  1. Projected benefit obligation and accumulated benefit obligation

Theprojected benefit obligation as of a date is the actual present valueof all benefits attributed by the plan’s benefit formula toemployee service rendered before that date. It is measured using anassumption as to future compensation level if the pension benefitformula is based on those future compensation levels. The plans forwhich the pension benefit formula is future related are also known aspay related, final-pay, while the pension benefit formula based plansnot future based are called non-pay-related or flat benefit plans.

Theaccumulated benefit obligation as of a date is the actual presentvalue of benefits attributed by the pension benefit formula toemployee service rendered before that date and based on current andpast compensation levels.

Theaccumulated benefit obligation differs from the projected benefitobligation in that it includes no assumption about futurecompensation levels. The accumulated benefit obligation is more pastand present oriented. For plans with small benefit related pensionbenefit formulas, the projected benefit obligation, and theaccumulated benefit obligation are same. The vested benefitobligation and accumulated benefit obligation give us information onthe liability the employer would have should the plan bediscontinued.

  1. Assumptions made in a firm`s measurement of service cost component

Servicecost component is the actual present value of benefits attributed bythe plan’s benefit formula to services rendered by employees duringthe period. The following assumptions are made when measuring cost ofservices

  • Assumed discounts shall reflect the rates at which the pension benefits could be effectively settled. This permits the employer to look to rates of return on high-quality fixed-income investments in determining discount rates.

  • Assumed compensation levels shall reflect an estimate of the actual future compensation levels of employees.

  • Accepted compensation levels shall be consistent with assumed discount rates to the extent that both incorporate expectations of the same future economic condition.

  1. Issues relating to employer’s selection of an appropriate discount rate

Thelevel of interest rates. If the levels of interest rates rise ordeclines, the assumed discount rates shall change in a similarmanner.

Investmentrates. An employer will consider the rates of return available to itfor investing the premium received and the rates of return availableto it for reinvestment of future cash flows from the initialinvestment during the period until benefits are payable.

  1. Considerations that relate to the expected long-term rate of return

Theprojected return rate on planassets shall take into accountthe availability of all plan assets for investment throughout theyear. The amount and timing of pension plan contributions and benefitpayments expected to be made during the year shall be considered indetermining the expected return on plan assets for that year.

Theemployer’s expectation in such a case is best explained by anexample. If the employer’s pension contribution for the year isexpected to be made two months before the next measurement date, thenthe expected return on plan assets shall include an amount related tothe anticipated return on that contribution only for those twomonths.

  1. Objectives to be achieved in measuring the market-related value of plan assets

  • The market-related asset value is measured so as to determine the expected return on plan assets.

  • The market-related asset value is also measured for the purpose of accounting for asset gains and losses.