ch20 Accounting for Pensions and Postretirement Benefits Flashcards
A pension plan is contributory when the employer makes payments to an agency.
FALSE
Qualified pension plans permit deductibility of the employer’s contributions to the pension fund.
TRUE
Qualified pension plans permit tax-free status of earnings from pension fund assets.
TRUE
In a defined contribution plan, the employer must make up any shortfall in the accumulated assets held by the defined contribution trust.
FALSE
IFRS encourages, but does not require, companies to use actuaries in the measurement of the pension amounts.
TRUE
The employees are the beneficiaries of a defined contribution trust, but the employer is the beneficiary of a defined benefit trust
TRUE
An employer does not have to report a liability on its statement of financial position in a defined-benefit plan.
FALSE
Employers are at risk with defined-benefit plans because they must contribute enough to meet the cost of benefits that the plan defines.
TRUE
Companies compute the vested benefit obligation using only vested benefits, at current salary
TRUE
The accumulated benefit obligation bases the deferred compensation amount on both vested and nonvested service using future salary levels
FALSE
Regarding the alternatives for measuring the pension liability, the profession adopted the accumulated benefit obligation using the present value of vested and non-vested benefits accrued to date, based on employee’s future salary levels.
FALSE. Current salary levels.
If a company grants plan amendments, it allocates the past service cost of providing these retroactive benefits to pension expense in the future, specifically to the remaining service years of the affected employees.
FALSE
Service cost is the expense caused by the increase in the accumulated benefit obligation because of employee’s service during the current year
FALSE
The interest expense component of pension expense in the current period is computed by multiplying the discount rate by the beginning balance of the defined benefit obligation
TRUE
Companies should recognize the entire increase in defined benefit obligation due to a plan initiation or amendment as pension expense in the year of amendment
TRUE
For defined benefit plans, IFRS recognizes a pension asset or liability as the funded status of the plan
TRUE
The difference between the expected return and the actual return is referred to as the asset gain or loss.
TRUE
The unexpected gains and losses from changes in the defined benefit obligation are called asset gains and losses.
FALSE. They are called liability gains and losses.
Companies report any actuarial gains or losses charged or credited to other comprehensive income in the statement of financial position
TRUE
A curtailment occurs when a company enters into a transaction which eliminates all further obligations for part or all of the benefits provided under a defined benefit plan
FALSE
In determining the present value of the prospective benefits (often referred to as the defined benefit obligation), the following are considered by the actuary:
a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan
d. all of the above
a. retirement and mortality rate
b. interest rates
c. benefit provisions of the plan
In a defined benefit plan, the process of funding refers to:
a. determining the defined benefit obligation.
b. determining the accumulated benefit obligation.
c. making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims.
d. determining the amount that might be reported for pension expense.
Making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims
In all pension plans, the accounting problems include all of the following, except:
a. measuring the amount of pension obligation
b. disclosing the status and effects of the plan in the financial statements
c. allocating the cost of the plan to the proper periods
d. determining the level of individual premiums
Determining the level of individual premiums
In a defined contribution plan, a formula is used that:
defines the benefits that the employee will receive at the time of retirement.
b. ensures that pension expense and the cash funding amount will be different.
c. requires an employer to contribute a certain sum each period based on the formula.
d. ensures that employers are at risk to make sure funds are available at retirement.
Requires an employer to contribute a certain sum each period based on the formula
In a defined-benefit plan, a formula is used that:
a. requires that the benefit of gain or the risk of loss from the assets contributed to the pension plan be borne by the employee.
b. defines the benefits that the employee will receive at the time of retirement.
c. requires that pension expense and the cash funding amount be the same.
d. defines the contribution the employer is to make; no promise is made concerning the ultimate benefits to be paid out to the employees.
Defines the benefits that the employee will receive at the time of retirement
Which of the following is not a characteristic of a defined contribution plan?
a. the employer’s contribution each period is based on a formula
b. the benefits to be received by employees are usually determined by an employee’s three highest years of salary defined by the terms of the plan
c. the accounting for a defined contribution plan is straightforward and uncomplicated
d. the benefit of gain or the risk of loss from the assets contributed to the pension plan are borne by the employee
The benefits to be received by employees are usually determined by an employee’s three highest years of salary defined by the terms of the plan
In accounting for a defined-benefit pension plan
a. an appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised
b. the employer’s responsibility is simply to make a contribution each year based on the formula established in the plan
c. the expense recognized in each period is equal to the cash contribution
d. the liability is determined based upon known variables that reflect future salary levels promised to employees
An appropriate funding pattern must be established to ensure that enough monies will be available at retirement to meet the benefits promised
Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation?
DEFINED BENEFIT OBLIGATION. Accumulated benefit obligation requires current salaries
The accumulated benefit obligation measures:
a. the pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels.
b. the pension obligation on the basis of the plan formula applied to years of service to date and based on future salary levels.
c. an estimated total benefit at retirement and then computes the level cost that will be sufficient, together with interest expected to accumulate at the assumed rate, to provide the total benefits at retirement.
d. the shortest possible period for funding to maximize the tax deduction.
The pension obligation on the basis of the plan formula applied to years of service to date and based on existing salary levels
The defined benefit obligation is the measure of pension obligation that:
a. is required to be used for reporting the service cost component of pension expense.
b. requires pension expense to be determined solely on the basis of the plan formula applied to years of service to date and based on existing salary levels.
c. requires the longest possible period for funding to maximize the tax deduction.
d. is not sanctioned under international financial reporting
Is required to be used for reporting of the service cost component of pension expense
Differing measures of the pension obligation can be based on:
a. all years of service-both vested and nonvested-using current salary levels
b. only the vested benefits using current salary levels
c. both vested an nonvested service using salary levels
d. all of the above
a. all years of service-both vested and nonvested-using current salary levels
b. only the vested benefits using current salary levels
c. both vested an nonvested service using salary levels
Vested benefits:
a. usually require a certain minimum number of years of service
b. are those that the employee is entitled to receive even if fired
c. are not contingent upon additional service under the plan
d. are defined by all of these answer choices.
a. usually require a certain minimum number of years of service
b. are those that the employee is entitled to receive even if fired
c. are not contingent upon additional service under the plan
The relationship between the amount funded and the amount reported for pension expense is as follows:
a. pension expense must equal the amount funded.
b. pension expense will be less than the amount funded.
c. pension expense will be more than the amount funded.
d. pension expense may be greater than, equal to, or less than the amount funded.
The pension expense may be greater than, equal to, or less than the amount funded
The computation of pension expense includes all of the following except:
a. service cost component using current salary levels
b. interest on defined benefit obligation
c. interest revenue on plan assets
d. all of the above are included in the computation
Service cost component using current salary levels
In computing the service cost component of pesnsion expense, the IASB concluded that:
a. the accumulated benefit obligation provides a more realistic measure of the pension obligation on a going concern basis
b. the company should employ ann actuarial funding method to report pension expense that best reflects the cost of benefits to employees
c. the defined benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense
d. all of the above
The defined benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense
The interest rate used on the defined benefit obligation component of pension expense:
a. reflects the incremental borrowing rate of the employer
b. reflects the rates at which pension benefits could be effectively settled
c. is the same rate used to compute the interest revenue on plan assets
d. may be stated implicitly or explicitly when reported
Is the same rate used to compute the interest revenue on plan assets
One component of pension expense is interest revenue on plan assets. Plan assets include:
a. contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the statement of financial position of the employer as pension asset/liability.
d. None of these answer choices are correct.
Contributions made by the employer and contributions made by the employee when a contributory plan of some type is involved
The actual return on plan assets:
a. is equal to the change in the fair value of the plan assets during the year.
b. includes interest, dividends, and changes in the fair value of the fund assets.
c. is equal to the expected rate of return times the fair value of the plan assets at the beginning of the period.
d. All of these answer choices are correct.
Includes interest, dividends, and changes in fair value of the fund assets
In accounting for a pension plan, the difference between the pension cost charged to expense and the payments into the fund should be reported as:
a. an offset to the liability for past service cost.
b. pension asset/liability.
c. as other comprehensive income (G/L)
d. as accumulated other comprehensive income (PSC).
PENSION ASSET/PENSION LIABILITY
Which of the following items should be included in pension expense calculated by an employer who sponsors a defined-benefit pension plan for its employees?
Fair value of plan assets: Yes or no?
Past service cost: Yes or no?
Fair value of plan assets: NO
Past service cost: YES
A corporation has a defined benefit plan. A pension liability will result at the end of the year if the:
a. defined benefit obligation exceeds the fair value of the plan assets.
b. fair value of plan assets exceeds the defined benefit obligation
c. amount of employer contributions exceeds the pension expene
d. amount of pension expense exceeds the amount of employer contributions
Defined benefit obligation exceeds the fair value of the plan assets.
When a company adopts a pension plan, past service costs should be charged to:
a. other comprehensive income (PSC).
b. operations of prior periods.
c. operations of the current period.
d. retained earnings.
OPERATIONS OF THE CURRENT PERIOD
When a company amends a pension plan, for accounting purposes, past service costs should be:
REPORTED AS AN EXPENSE IN THE PERIOD THE PLAN IS AMENDED
Past service cost is amortized on a:
a. straight-line basis over the expected future years of service.
b. years-of-service method or on a straight-line basis over the average remaining service
life of active employees.
c. straight-line basis over 10 years.
d. past service costs are not amortized.
PAST SERVICE COSTS ARE NOT AMORTIZED
Whenver a defined benefit plan is amended and credit is given to the employees for years of service provided before the date of amendment:
a. both the accumulated benefit obligation and the defined benefit obligation are usually greater than before
b. both the accumulated benefit obligation and the defined benefit obligation are usually less than before
c. the expense and the liability should be recognized at the time the benefits are paid
d. the expense should be recognized immediately, but the liability may be deferred until a reasonable basis for its determination has been identified.
Both the accumulated benefit obligation and the defined benefit obligation are usually greater than before
The unexpected gains or losses that result from changes in the obligation are called:
a. asset gains and losses
b. liability gains and losses
LIABILITY GAINS AND LOSSES
A pension liability is reported when:
a. the defined benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation is less than the fair value of pension plan assets.
c. the pension expense reported for the period is greater than the funding amount for the same period.
d. accumulated other comprehensive income exceeds the fair value of pension plan assets.
The defined benefit obligation exceeds the fair value of the pension plan assets
A pension asset is reported when:
a. the accumulated benefit obligation exceeds the fair value of pension plan assets.
b. the accumulated benefit obligation exceeds the fair value of pension plan assets, but a past service cost exists.
c. pension plan assets at fair value exceed the accumulated benefit obligation.
d. pension plan assets at fair value exceed the defined benefit obligation.
Pension plan assets at fair value exceed the accumulated benefit obligation
There is account titled Pension Asset/Liability
TRUE
There is an account titled Defined Benefit Obligation
FALSE
Unrecognized net gain or loss should be reported in the liability section of the balance sheet.
FALSE
Other comprehensive income should be included in net income
FALSE
Under the IASB, recognition of a liability is required when the defined benefit obligation exceeds the fair value of plan assets. Conversely, when the fair value of plan assets exceeds the defined benefit obligation, the Board:
a. requires recognition of an asset.
b. requires recognition of an asset if the excess fair value of plan assets exceeds the corridor amount.
c. recommends recognition of an asset but does not require such recognition.
d. does not permit recognition of an asset.
REQUIRES RECOGNITION OF AN ASSET
Which of the following disclosures of pension plan information would not normally be made required?
a. the major components of pension expense
b. the amount of past service cost charged or credited in previous years
c. the funded status of the plan and the amounts recognized in the financial statements
d. the rates used in measuring the benefit amounts
The amount of past service cost charged or credited in previous years
Differences between pensions and post retirement benefits include all of the following except:
a. postretirement healthcare benefits are generally uncapped, while pensions are generally well-defined
b. postretirement healthcare benefits are generally paid as needed and used, whereas pension benefits are generally paid monthly
c. postretirement healthcare benefits are generally paid only to the retiree while pensions are generally paid to the retiree, spouse, and other dependents
d. postretirement healthcare benefits are generally not funded while pensions are generally funded.
Postretirement healthcare benefits are generally paid only to the retiree while pensions are generally paid to the retiree, spouse, and other dependents
