Book 3_FinAn_READING-36_TOPICS-IN-LONG-TERM-LIABILITIES-AND-EQUITY-Part-2 Flashcards
A pension
a form of deferred compensation earned over time through employee service
- The most common pension are defined contribution plan and defined benefit plans.
A defined contribution plan
a retirement plan in which the firm contributes a sum each period to the employee’s retirement account.
a defined benefit plan
the firm promises to make periodic payments to employees after retirement
a net pension liability
if the fair value of a defined benefit plan’s assets is less than the estimated pension obligation => Underfunded
a net pension asset
the fair value of the plan’s assets is greater than the estimated pension obligation => Overfunded
The change in the net pension asset or liability
reflected in a firm’s income statement, and as changes to accumulated other comprehensive income (OCI) each period.
the estimated pension liability
- IFRS: the present value of defined benefit obligations (PVDBO)
- U.S. GAAP: the projected benefit obligation (PBO)
=> Both are equal to the benefits earned to date, to be paid between retirement and death, discounted back to the balance sheet date
Service cost
- the present value of the additional benefits earned by employees for being a member of the plan for an additional service period
- Both IFRS and U.S. GAAP include this in the income statement expense.
The interest cost
- is the increase in the PVDBO (PBO) due to the passage of time.
- IFRS nets the interest cost with the expected return on plan assets to show interest income or expense.
- U.S. GAAP shows these two components separately as they can be computed using different rates.
=> They are a component of the income statement expense
Remeasurements: Changes to the estimated pension liability
- as a result of actuarial estimates changing
- and the difference between actual and expected return on plan assets
are taken directly to OCI
- IFRS: remeasurements amount
- US GAAP: actuarial gains and losses
=> U.S. GAAP may potentially amortize these amounts through future income statement expenses, while IFRS does not.
Past service costs
are changes to the estimated pension liability as a result of benefits earned in prior periods changing if the plan is amended
- IFRS expenses these amounts in the income statement in the year of change
- U.S. GAAP takes these amounts to OCI and then amortizes them to the income statement over the remainder of the employees’ service life.
A pension expense for a defined contribution pension plan
- Equal to the employer’s contributions
- There is no balance sheet asset or liability reported, providing the employer’s contribution has been made by year-end.
Stock grants and stock options
- to reward employees and align employees and shareholders’ interest to reduce agency cost
- can have immediate or delayed vesting
The fair value of a stock grant
established on the grant date and is equal to the stock’s fair value.
If vesting is immediate
- The fair value is expensed to the income statement
- Common stock and additional paid-in capital (APIC) are adjusted in the balance sheet, as if the company was issuing shares
