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　　7. (8 points) NOC is acquiring TechCo, a private company in the country of Xanadu.
　　Xanadu has similar tax and pension legislation rules to Vosne, with the following
　　exceptions:
　　?  Employees can contribute up to $5,000 per year to a DB ERP and $5,000 per year to
　　a DC ERP.
　　?  Employee contributions are tax-deductible to the individual.
　　?  Investment earnings on the employee contributions are not taxable until withdrawn.
　　?  There are no PPAs.
　　Xanadu sponsors the following government-provided retirement income program:
　　?  Both employees and employers contribute 5% of pay every year.
　　?  The pension provided at retirement is equal to 50% of the best 3-year average
　　earnings, provided the contributory period was at least 30 years. A proportionately
　　reduced benefit is provided if less than 30 years of contributions were made to the
　　program.
　　?  Eligibility for a pension is age 62.
　　?  The pension is reduced by 5% per year that the retirement age precedes age 67.
　　TechCo did not provide either a DB ERP or a DC ERP.
　　(a) Evaluate the appropriateness of NOC establishing an ERP for the salaried
　　employees of TechCo.
　　(b) NOC’s VP of Human Resources is proposing a plan with the same provisions as
　　the Full-Time Salaried Pension Plan. Critique this proposal.
　　(c) Recommend
　　an alternative program for the salaried employees of TechCo.
　　Justify your recommendation.
　　**END OF EXAMINATION**
　　MORNING SESSION
　　COURSE 8: Fall 2003 -8- GO TO NEXT PAGE
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Afternoon Session
　　**BEGINNING OF EXAMINATION 8**
　　COMPREHENSIVE SEGMENT – U.S.
　　AFTERNOON SESSION
　　All Questions pertain to the Case Study8. (8 points) NOC is considering laying off part of its union workforce to reduce costs. In
　　order to avoid layoffs, the union has agreed to discuss changes to the Full-Time Hourly
　　Union Pension Plan.
　　NOC has proposed to freeze accruals in the pension plan as of September 30, 2003.
　　Under the frozen plan, benefits would be determined for all active participants based on
　　service earned through September 30, 2003, and no future benefits would accrue.
　　The union offers a counter proposal to reduce future accruals as of January 1, 2004.
　　Under the union’s proposal, benefits would accrue to December 31, 2003 at the $75 rate.
　　After December 31, 2003, benefits would accrue at a rate of $50 per year of service
　　earned after December 31, 2003.
　　(a) Estimate the change in NOC’s 2003 accounting expense if NOC’s proposal is
　　adopted.
　　(b) If the union proposal is adopted, estimate the change in the 2003 and the 2004
　　accounting expense.
　　(c) Describe the effect of NOC’s proposal from both the employee and the employer
　　perspectives.
　　COURSE 8: Fall 2003 -9- GO TO NEXT PAGE
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Afternoon Session
　　All Questions pertain to the Case Study
 
　　9. (15 points) NOC is purchasing a refinery from ABC Company, and will offer
　　employment to all of the employees at the refinery. All refinery employees are members
　　of the ABC Refinery Pension Plan and the ABC Refinery Post-Retirement Medical plan.
　　There are no other members of these plans.
　　You are given:
　　Provisions of the ABC Refinery Plans
　　The ABC Refinery Pension Plan provisions are as follows:
　　?  Normal Retirement Age: Age 65
　　?  Early Retirement Age: Age 60
　　?  Normal Retirement Benefit: 1.75% of final earnings times years of service
　　?  Early Retirement Reduction: Actuarially equivalent
　　?  Normal Form of Benefit: If married, 50% joint & survivor, without
　　reduction. If not married, single life annuity
　　?  Post-Retirement Indexing: Lesser of 1% or CPI
　　?  Termination and Pre-Retirement Death Benefits: Lump sum value of the
　　accrued benefit, excluding indexation.
　　The ABC Refinery Post-Retirement Medical Plan provisions are exactly the same
　　as NOC’s.
　　COURSE 8: Fall 2003 -10- GO TO NEXT PAGE
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Afternoon Session
　　All Questions pertain to the Case Study
　　9. Continued
　　January 1, 2003 Membership Data – ABC Refinery Plans
　　The membership demographics of the refinery’s employees are described in the
　　following table:
　　Age <5 years
　　of service
　　5-10 years
　　of service
　　>10 years
　　of service
　　Total
　　<55 # Participants
　　Avg Salary
　　50
　　40,000
　　100
　　42,000
　　50
　　46,000
　　200
　　42,500
　　55-65 # Participants
　　Avg Salary
　　500
　　44,000
　　1,500
　　48,000
　　2,500
　　50,000
　　4,500
　　51,444
　　>65 # Participants
　　Avg Salary
　　150
　　47,000
　　350
　　52,000
　　250
　　57,000
　　750
　　52,667
　　Total # Participants
　　Avg Salary
　　700
　　44,357
　　1,950
　　48,410
　　2,800
　　55,018
　　5,450
　　51,284
　　The ABC Refinery Plans have no retirees.
　　COURSE 8: Fall 2003 -11- GO TO NEXT PAGE
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Afternoon Session
　　All Questions pertain to the Case Study9. Continued
　　January 1, 2003 Accounting Valuation Results for the ABC Refinery Plans
　　Pension Plan Post-Retirement
　　Medical Plan
　　Market value of assets $350,000,000 $0
　　PBO/APBO
　　Active members $325,000,000 $280,000,000
　　Inactive members 0 0
　　Total $325,000,000 $280,000,000
　　Service Cost $21,000,000 $15,000,000
　　Assumptions and Methods
　　Interest 8.5%
　　Salary scale 5.0%
　　Mortality GAM83
　　Turnover None
　　Retirement 100% at age 62
　　Asset valuation method Market Value
　　Actuarial cost method Projected unit credit
　　COURSE 8: Fall 2003 -12- GO TO NEXT PAGE
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Afternoon Session
　　All Questions pertain to the Case Study
　　9. Continued
　　Provisions of the Draft Purchase and Sale Agreement
　　The main provisions of the draft purchase and sale agreement, prepared by ABC,
　　for discussion with NOC, are:
　　Pension Benefits
　　?  Accrued benefits under the ABC Refinery Pension Plan will become
　　the responsibility of NOC under its Full-Time Salaried Pension Plan.
　　?  ABC will transfer the ABC Refinery Pension Plan assets to the NOC
　　plan, subject to regulatory approval
　　?  NOC is required to provide “substantially similar” pension benefits for
　　refinery employees following the sale date.
　　Post – Retirement Medical Benefits
　　?  NOC will be responsible for providing retiree medical benefits for
　　refinery employees.
　　?  ABC will make a lump sum cash payment to NOC equal to the
　　accounting liabilities for post-retirement medical benefits determined
　　using the ABC accounting assumptions.
　　Analyze the terms of the agreement and recommend revisions. Justify your
　　recommendation.
　　COURSE 8: Fall 2003 -13- STOP
　　Retirement Benefits,
　　Comprehensive Segment – U.S.
　　Morning Session
　　All Questions pertain to the Case Study
　　10. (7 points) The CEO of NOC is targeting a substantial reduction in operating expenses.
　　Three alternatives are being considered:
　　(i) An employee lay-off with severance benefits.
　　(ii) A temporary early retirement pension enhancement.
　　(iii) Phased-retirement.
　　(a) Describe advantages and disadvantages of each alternative.
　　(b) Describe the accounting implications of each alternative.
　　**END OF EXAMINATION**
　　AFTERNOON SESSION
　　高顿网校之名人信念：要抒写自己梦想的人，反而更应该清醒。