Ch.21 acctg- ee benifits

Question 1

Short-Term Employee Benefits

Answer 1

benefits are accrued as an expense in the same period in which the employee has worked and earned the right to these benefits. If they are unpaid at the end of the year, then they are recognized as a liability. Profit-sharing and other bonuses are recognized when the entity has a legal or constructive obligation to pay and a reliable estimate can be made.

Question 2

Defined Contribution Plans

Answer 2

Pension expense to be recognized on the income statement in each period includes the following amounts:
• the current service cost for the period — the amount the employer is required to contribute to the plan, in the period, for the service provided by the employee in the period
• past service granted in the period — the amount the employer is required to contribute to the plan for past service granted to the employee in the period, as a consequence of the plan’s initiation or amendment
• the net interest cost on discounted current service or past service costs

Question 3

Defined Benefit Plans

Answer 3

Under a defined benefit plan, the future benefits to be paid out to employees on retirement are defined by the terms of the plan. The terms of a defined benefit plan may either specify the benefit to be paid out to employees under the plan or provide a formula for the determination of the future benefit.
Under a defined benefit plan, the majority of the risk is borne by the employer because of the uncertainty that exists about future benefits to be paid out
two other accounts are also tracked “off-balance-sheet” to help with the financial reporting:
• defined benefit obligation
• plan assets
In addition, the following accounts appear on the financial statements:
• on the income statement, pension costs for:
o current and past service (pension expense)
o net interest cost (financing expense)
• on the balance sheet:
o net defined benefit asset or liability
• in other comprehensive income:
o remeasurement component (experience and actuarial gains and losses)

Question 4

DBO

Answer 4

defined benefit obligation (DBO) account is tracked but does not appear on the financial statements
employer bears the majority of the risk with respect to future amounts of benefits to be paid out to retired employees. This includes both investment risk and actuarial risk.
entity with a defined benefit plan uses actuarial valuations and actuarial assumptions to make a reasonable estimate of its future obligation

Question 5

Net defined benefit asset or liability

Answer 5

When a pension plan is over-funded (in a net asset position), the entity may recognize a net defined benefit asset to the extent of the least of:
• the surplus in the plan (difference between plan assets and DBO)
• the asset ceiling
The asset ceiling is the net present value of the sum of:
• a future reduction in funding as a result of the existing surplus
• a cash refund of part or all of the surplus

Question 6

Remeasurement gains and losses

Answer 6

difference between expected and actual values for the DBO and plan assets. Remeasurement gains and losses on the DBO and on plan assets are netted and recognized as a component of other comprehensive income (OCI).