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
If there is a period between the grant and vesting, it is referred to as the service period
The fair value of the stock grant is spread straight-line as a compensation expense in the income statement and increases common stock and APIC in the balance sheet.
Stock options
give the employee the right to buy shares in the future at the exercise price
The fair value of the option
- must be estimated using subjective assumptions
- is then expensed straight-line to the income statement over the vesting period
The vesting period
from the grant date until the first date the options can be exercised
A compensation expense
recorded in the income statement, and APIC increased in the balance sheet
At the point the options are exercised in the future
cash increases by the exercise price received, common stock increases by the par value of share issued and any balance is taken to APIC
If the options expire and are not exercised
no adjustments need to be made
Stock-based appreciation rights (SARs) or phantom stock
generate cash for the holders that is linked to stock performance
The objective of the disclosure
to provide the users of the accounts with sufficient information to understand the nature, risks, and extent of leases and compensation plans, including their impacts on current and expected cash flows
