Accounting for Leases, Pensions, & Retirement Plans

Question 1

How should the present value of the minimum lease payments (for the Lessor) be computed?

Answer 1

The rate implicit in the lease must be used. If the lessee knows the lessor’s implicit rate and it is less than the lessee borrowing rate, the lessee should also use the implicit rate.

Question 2

Market-related value of plan assets

Answer 2

A balance used to calculate the expected return on plan assets. Market-related value can be either fair market value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. Different ways of calculating market-related value may be used for different classes of assets, but the manner of determining market-related value shall be applied consistently from year to year for each asset class.

Question 3

Service cost component (of net periodic pension cost)

Answer 3

The actuarial present value of benefits attributed by the pension benefit formula to services rendered by employees during that period. The service cost component is a portion of the projected benefit obligation and is unaffected by the funded status of the plan.

Question 4

Interest Cost (post-retirement Pension Expense)

Answer 4

The interest cost component recognized in a period shall be determined as the increase in the accumulated postretirement benefit obligation to recognize the effects of the passage of time.

Question 5

Normal Leaseback (Lessee-Lessor relationship)

Answer 5

Normal leaseback is a lessee-lessor relationship that involves the active use of the property by the seller-lessee in consideration of payment of rent, and excludes other continuing involvement provisions or conditions.

Question 6

Under IFRS there are eight criteria to be considered a finance lease. How many must be met to be considered a finance lease?

Answer 6

Only one criterion must be met to be considered a finance lease.

Question 7

Defined Benefit Pension Plan

Answer 7

A pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service, or compensation.

Question 8

Net periodic pension cost

Answer 8

The amount recognized in an employer’s financial statements as the cost of a pension plan for a period. Components of net periodic pension cost are service cost, interest cost, actual return on plan assets, gain or loss, amortization of unrecognized prior service cost, and amortization of the unrecognized net obligation or asset existing at the date of initial application of this Statement. This Statement uses the term net periodic pension cost instead of net pension expense because part of the cost recognized in a period may be capitalized along with other costs as part of an asset such as inventory.

Question 9

Unfunded projected benefit obligation

Answer 9

The excess of the projected benefit obligation over plan assets.

Question 10

Total Pension liability “PBO” is called what term under IFRS?

Answer 10

In the US, the total pension liability is called the projected benefit obligation (PBO). In IFRS, the term is present value of the defined benefit obligation (DBO).

Question 11

If the beginning of the lease term is within the last 25% of the economic life of the leased asset what kind of lease would this be considered (ASC 405)

Answer 11

In that case the lease would be considered an operating lease.

Question 12

How does ASC 405 treat rental revenue from an operating lease?

Answer 12

ASC 405 states that rental revenue from an operating lease should be recognized on a straight-line basis unless an alternative basis of systematic and rational allocation is more representative of the time pattern of physical use.

Question 13

Actual return on plan assets component (of net periodic pension cost)

Answer 13

The difference between fair value of plan assets at the end of the period and the fair value at the beginning of the period, adjusted for contributions and payments of benefits during the period.

Question 14

PBGC

Answer 14

The Pension Benefit Guaranty Corporation

Question 15

Unrecognized prior service cost

Answer 15

That portion of prior service that has not been recognized as a part of net periodic pension cost.

Question 16

IFRS treatment of actuarial gains or losses vs. US treatment

Answer 16

Under US GAAP, actuarial gains or losses are amortized over the average expected working lives of employees. Under IFRS, actuarial gains or losses may be recognized immediately or amortize over the expected remaining working lives of the employees using a corridor approach similar to US GAAP.

Question 17

How should a lessee treat a capital lease?

Answer 17

The lessee should, if certain criteria are met, treat the lease as a capital lease and record an asset and related obligation equal to present value of minimum lease payments.

Question 18

Lease terms meet the criteria for 75% or more of the estimated economic life of a leased property. Would this qualify as a capitalized lease? (Lessee criteria)

Answer 18

Yes, would qualify as capitalized lease because the lease terms meet the criterion for 75% or more of the estimated economic life of the leased property.

Question 19

For a Lessee’s perspective a capitalizable lease must meet one of which four criteriz?

Answer 19

1) Transfer title2) Bargain purchase option3) 75% or more of asset’s useful life4) Present Value of Future Lease Payment is 90% or more of the asset’s fair market value.

Question 20

Expected return on plan assets

Answer 20

An amount calculated as a basis for determining the extent of delayed recognition of the effects of changes in the fair value of assets. The expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets.

Question 21

Prior service cost

Answer 21

The cost of retroactive benefits granted in a plan amendment.

Question 22

The expected postretirement benefit obligation (EPBO) for an employee

Answer 22

The actuarial present value as of a particular date of the postretirement benefits expected to be paid by the employer’s plan to or on behalf of the employee.

Question 23

Sales-type Lease

Answer 23

Lease where a profit or loss is involved

Question 24

How is a lease defined for the lessor (US Standards)?

Answer 24

For the lessor the lease is defined as an operating, a direct financing or sales-type lease.

Question 25

How should the present value of the minimum lease payments (for the Lessee) be computed?

Answer 25

Using the lessee’s incremental borrowing rate (the rate the lessee would pay if the asset were purchased with borrowed funds).

Question 26

Fund

Answer 26

Used as a verb, to pay over to a funding agency (as to fund future pension benefits or to fund pension cost). Used as a noun, asset accumulated in the hands of a funding agency for the purpose of meeting pension benefits when they become due.

Question 27

Retroactive benefits

Answer 27

Benefits granted in a plan amendment (or initiation) that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment. The cost of the retroactive benefits is referred to as prior service cost.

Question 28

Service Cost (post-retirement Pension Expense)

Answer 28

The service cost component recognized in a period shall be determined as the portion of the expected postretirement benefit obligation attributed to employee service during that period. The measurement of the service cost component requires identification of the substantive plan and the use of assumptions and an attribution method.

Question 29

Executory Costs

Answer 29

Executory costs are items such as Insurance, maintenance and taxes should be charged to lease expenses.

Question 30

Under IFRS what is a finance lease?

Answer 30

Under IFRS, a finance lease is one in which substantially all of the risks or benefits of ownership have been transferred to the lessee.

Question 31

Implicit Rate in the Lease

Answer 31

The implicit rate is the interest rate necessary to make the present value of the minimum lease payments plus the unguaranteed residual value of the leased property equal to the fair value of the leased property less any investment tax credit retained by the lessor.

Question 32

Measurement date

Answer 32

The date as of which plan assets and obligations are measured.

Question 33

Single-employer plan

Answer 33

A pension plan that is maintained by one employer. The term also may be used to describe a plan that is maintained by related parties such as a parent and its subsidiaries.

Question 34

IFRS theory for the accrual of defined pension cost terminology difference (Benefit years-of-service approach)

Answer 34

The basic theory for the accrual of defined benefit pension cost is the same but the terminology is different. In the US, the concept is called “benefit-years-of-service approach” and under IFRS it is called “projected-unit-credit approach”.

Question 35

One criterion for a capital lease is that the term of the lease must equal a minimum percentage of the leased property’s estimated economic life at the inception of the lease (ASC 405).

Answer 35

ASC 405 states that a lease should be capitalized if at its inception the lease term is 75% or more of the economic life of the leased asset.

Question 36

How does IFRS classify a lease when land and buildings are leased together?

Answer 36

Under IFRS if the title to the land does not transfer, the land is usually classified as an operating lease and if the building meets one of the criteria it is recorded as a finance lease.

Question 37

Defined Contribution Pension Plan

Answer 37

A plan that provides pension benefits in return for services rendered, provides an individual account for each participant, and specifying the amount of benefits the individual is to receive.

Question 38

Participant

Answer 38

Any employee or former employee, or any member or former member of a trade or other employee association, or the beneficiaries of those individuals, for whom there are pension plan benefits.

Question 39

Unrecognized net gain or loss

Answer 39

The cumulative net gain or loss that has not been recognized as part of the net periodic pension cost.

Question 40

Accumulated benefit obligation is called what term under IFRS?

Answer 40

The accumulated benefit obligation is called the accrued benefit obligation under IFRS.

Question 41

Lease Definition (simple form and substance)

Answer 41

A lease is in form a rental of property, but may be in substance the acquisition of an asset and the related obligation.

Question 42

ASC 405 states that if either of the four criteria for lease capitalization is met, the lease should be ______.

Answer 42

Capitalized

Question 43

What control will a lessee have over an asset where a bargain purchase option is involved (capital lease)?

Answer 43

In a capital lease with a bargain purchase option, the lessee will control the asset for its total useful life.

Question 44

Benefit/years-of-service approach

Answer 44

One of three benefit approaches. Under this approach, an equal potion of the total estimated benefit is attributed to each year of service. The actuarial present value of the benefits is derived after the benefits are attributed to the periods.

Question 45

Prepaid pension cost

Answer 45

Cumulative employer contributions in excess of accrued net pension cost.

Question 46

Vested benefits

Answer 46

Benefits for which the employee’s right to receive a present or future pension benefit is no longer contingent on remaining in the service of the employer. (Other conditions, such as inadequacy of the pension fund, may prevent the employee from receiving the vested benefit). Under graded vesting, the initial vested right may be to receive in the future a stated percentage of a pension based on the number of years of accumulated credited service; thereafter, the percentage may increase with the number of years of service or of age until the right to receive the entire benefit has vested.

Question 47

Difference between IFRS and US handling of prior service costs.

Answer 47

In the US, the prior service cost is amotized over the average remaining service lives of its employees. Under IFRS, any vested amount is recognized immediately and the unvested amount is spread over the average remaining vesting period.

Question 48

How should a lessee treat an operating lease?

Answer 48

Lease payments are charged to expense when payable on a straight-line basis.

Question 49

How is a lease defined for the lessee (US Standards)?

Answer 49

In the US, a lease is defined as an operating or a capital lease for the lessee.

Question 50

For a Lessor’s perspective a captalizable lease must meet one of which four criteria?

Answer 50

MEET ONE:1) Transfer title2) Bargain purchase option3) 75% or more of asset’s useful life4) Present Value of Future Lease Payment is 90% or more of the asset’s fair market value.Plus must meet both:1) No problem with collectability of lease receivable2) No important uncertainties surround the amount of unreimbursable cost yet to be incurred by the lessor under the lease.

Question 51

Flat-benefit formula (Flat-benefit plan)

Answer 51

A benefit formula that bases benefits on a fixed amount per year of service, such as $20 of monthly retirement income for each year of credited service. A flat-benefit plan is a plan with such a formula.

Question 52

Projected benefit obligation

Answer 52

The actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The projected benefit obligation is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, final-average-pay, or career-average-pay plans).

Question 53

The accumulated postretirement benefit obligation (APBO) as of a particular date

Answer 53

The actuarial present value of all future benefits attributed to an employee’s service rendered to that date.

Question 54

Minimum Lease Payments

Answer 54

Minimum lease payments are those required to be made in connection with the lease, except that executory costs.

Question 55

Under IFRS, how is a lease defined for the lessee and lessor?

Answer 55

Under IFRS, the lease is defined as either an operating or a finance lease for both the lessee and lessor