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ACC 422 > Chapter 20 > Flashcards

Chapter 20 Flashcards

1
Q

Why are pensions so important?

A

effects everyone, not just an accounting problem

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2
Q

What is the old standard that applies to pension plans and follows accrual accounting?

A

SFAS 87: Accounting for Pension Plans

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3
Q

What is the new standard that relates to pension plans?

A

SFAS 158

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4
Q

What is a pension plan?

A

Provides benefits to retirees for services provided during employment

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5
Q

What are the two types of pension plans?

A

Defined contribution and Defined benefit

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6
Q

How does the accounting for pension plans work?

A

the work is done today but have to estimate for the future.

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7
Q

What is a defined contribution plan?

A

employer contributes a defined sum to a (third party) plan trust

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8
Q

How does a defined contribution plan work?

A

plan accumulates assets and makes distributions to retirees

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9
Q

What is an employer’s pension expense under a defined contribution plan?

A

equal to annual contribution needed (employees are beneficiaries)

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10
Q

When does an employer accrue a liability under a defined contribution plan?

A

when the contribution made is less then pension expense

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11
Q

When does an employer accrue an asset under a defined contribution plan?

A

when the contribution made is greater than pension expense

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12
Q

What is an example of a defined contribution plan?

A

401K that does not tie you to a company

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13
Q

How does a 401K operate?

A

If employee puts it in, company will match it and contribution is tax deductible

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14
Q

What entry is made when an employer makes a contribution?

A

Debit pension expense, credit cash

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15
Q

Whay is a defined benefit plan?

A

employee is promised certain amount of benefits at retirement (usually periodic), nothing is done as work is done

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16
Q

How does a defined benefit plan work?

A

trust accumulates assets, employer remains liable to ensure benefit payments, and the employer is the trust beneficiary

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17
Q

Who uses defined benefit plans?

A

most manufacturing companies and governments

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18
Q

What are the differences between defined contribution plans and defined benefit plans?

A

1) contribution: employer contributions defined, benefit: retiree benefits are fixed amount, 2) contribution: retiree benefits depend on fund performance, benefit: employer contributions to plan depend on promised benefits to retirees, 3) contribution: retirees bear investment risk, benefit: employers bear investment risk

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19
Q

What do pension calculations involve?

A

actuarial assumptions which are estimates

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20
Q

What do actuarial assumptions involve?

A

Mortality rates, employee turnover, future salaries, and rates of return

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21
Q

Where are actuarial assumptions found?

A

Deep in the footnotes of financial statements

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22
Q

What are the components of pension cost?

A

1) Service cost, 2) Interest cost, 3) Return on plan assets, 4) Gains and losses, 5) Amortization of unrecognized prior service cost

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23
Q

What is service cost?

A

expense caused by the increase in PBO payable to employees because of service rendered during the current year, new work performed

24
Q

What is interest cost?

A

company pays interest on beginning balance of PBO based on company’s projected interest rate

25
Q

Who’s liable for the promised employee benefits?

A

the company

26
Q

What determines the interest expense?

A

the settlement rate

27
Q

What is the result of a company not fully paying their PBO?

A

have unfunded liability that accrues interest

28
Q

What is a PBO?

A

Pension Benefit Obligation, pension liability, more realistic assumption

29
Q

What is an ABO?

A

Accumulated Benefit Obligation, old approach, no assumption of future changes

30
Q

Is a PBO or ABO larger?

A

PB because assumes inflation and other factors

31
Q

Is a PBO or ABO more conservative?

A

PBO

32
Q

What are unrecognized gains and losses?

A

deviations of actual amounts from estimated amounts

33
Q

When do you amortize the unrecognized gains and losses?

A

only if they exceed 10% of the greater of the PBO or market-related value (both as of beginning of year) and only recognize excess

34
Q

How are unrecognized gains and losses amortized?

A

over the remaining service life of active employees

35
Q

How are gains or losses created?

A

by differences in expected vs. actual return

36
Q

What is market-related value or fair value of plan assets?

A

Assets accounted for at fair value

37
Q

What is the effect of losses and gains on pension expense?

A

Losses - increase pension expense, Gains - decrease pension expense

38
Q

When does unrecognized prior service cost result?

A

only when a plan has been changed

39
Q

How is unrecognized prior service cost allocated to pension expense?

A

Based on remaining service years of concerned employees

40
Q

How is unrecognized prior service cost amortized?

A

straight-line

41
Q

Where is unamortized unrecognized prior service cost recognized?

A

in other comprehensive income

42
Q

What is unrecognized prior service cost’s effect on pension expense?

A

always increases pension expense because cannot cut benefits

43
Q

What changes were brought about by SFAS 158?

A

1) Use of OCI account, 2) Recognition of Pension Funding Asset or Liability, 3) No longer minimum liability computation based on ABO (now have adjustments to OCI)

44
Q

What accounts effect OCI?

A

Prior service cost and gains and losses (second biggest), also affected by gains and losses from AFS (biggest component)

45
Q

What is the journal entry for the recognition of a pension funding asset or liability?

A

debit Pension Expense and Pension Asset/Liability (if overpaying) and credit Cash (company contribution) and Pension Asset/Liability (if underpaying)

46
Q

If a company is underpaying their pension expense, what happens to the pension asset/liability account?

A

credit pension asset/liability

47
Q

What are the three OCI accounts?

A

OCI - AFS, OCI - G/L, OCI - PSC

48
Q

What is a vested benefit obligation?

A

smallest, only benefits that have been entirely vested

49
Q

What does the pension expense journal entry tell you?

A

Pension expense for individual year, still need to determine the end of the year balance

50
Q

How do the various aspects of pension expense effect pension expense?

A

1) Service: increase, 2) Interest: increase, 3) Return on assets: decrease (could have negative return in loss year and would increase), 4) Prior service cost: increase, 4) Amortization of gain/loss: increase if loss and decrease is gain

51
Q

How is interest calculated?

A

beginning PBO x rate

52
Q

How do prior service cost and amortization of gains and losses effect OCI?

A

amortization of losses and prior service cost are credits to OCI and amortization of gains is a debit to OCI

53
Q

Calculation of prior service cost

A

Total amount/useful life or service life

54
Q

Return on assets calculation

A

fair value of plan assets x ERR (different from interest rate)

55
Q

What is the materiality test used for gains and losses?

A

corridor approach (lag measure), always start one year later and evaluates PY performance, determines if G/L is too big

56
Q

Process of determining gains and losses

A

1) Does a gain/loss exist?, 2) If yes, is it material?, 3) Determine through corridor approach: a) Compare assets to liabilities, b) Take the bigger, c) Multiply by 10%, 4) Take excess and divide by service years

ACC 422 (7 decks)

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