Chapter 6 - Pensions and Income Tax Accounting Flashcards
What classifies an overfunded benefit plan?
Plan has assets that exceed its liabilities
Pension plan and sponsoring company are two separate or non-separate legal entities?
Separate legal entities
What classifies an underfunded plan?
Plan has liabilities that exceed its assets
What base is used to calculate Accumulated Benefit Obligation (ABO)?
Current and past compensation levels
What base is used to calculate Projected Benefit Obligation (PBO)?
Use (guess) future salary
What are vested benefits?
Pension plan benefits are vested when employees have earned their benefits by reason or by reaching retirement age
What is the formula to calculate the Ending PBO?
Beginning PBO
+Service cost
+Interest cost
+Actuarial losses incurred in the current period
-Actuarial gains incurred in the current period
-Benefits paid to retirees
____________________________________________
Ending PBO
What is the formula for Ending FV of Plan Assets?
Beginning FV of plan assets \+Contributions \+Actual return on plan assets -Benefits paid to retirees \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Ending FV of plan assets
What is the formula to calculate Net Periodic Pension Cost?
"SIRAGE" Current Service Cost Interest Cost Return on Plan Assets Amortization of Prior Service Cost Gains and Losses Amortization of Existing Net Obligation of Net Asset
How are the components of net periodic pension cost reported differently under US GAAP and IFRS?
US GAAP - Aggregated, presented as one
IFRS - separately
Formula to calculate Interest Cost in SIRAGE
Beginning PBO x Discount Rate
Formula to calculate Expected Return on Plan Assets in SIRAGE
Beginning FV of Plan Assets x Expected rate of return on plan assets
How to calculate Actual Return on Assets in SIRAGE
Beg. FV of plan assets \+Contributions \+ACTUAL RETURN -Benefit Payments \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ End FV of plan assets
How to calculate Amortization of Prior Service Cost in SIRAGE?
Beg. Unrecognized Prior Service Cost/Avg. Remaining Service Life
Where do gains and losses in SIRAGE arise from?
(1) Difference between expected and actual return on plan assets when expected return on plan assets is used to calculate pension expense
(2) Actuarial gains and losses
How are gains and losses accounted for pensions?
(1) Recognize immediately
OR
(2) The Corridor Approach/amortize
How are gains and losses amortized if the corridor approach is chosen?
Beg. Remaining Unrecognized Gain or Loss - (greater of)
= Excess / Avg. Remaining Service Life
How are existing net obligation or net asset amortized?
PBO - FV of Plan Assets = Initial unfunded obligation
/
Greater of 15 years OR Avg. Employee Job Life
Where are unamortized prior service costs, gains & losses, and existing net obligation/net asset allocated?
AOCI
How to record pension plan contributions?
DR. Pension Benefit Asset/Liability
CR. Cash
How to determine the funded status?
FV of Plan Assets - PBO
- Positive = overfunded
- Negative = underfunded
Pension plan assets and liabilities are classified as current or noncurrent?
Pension Plan Asset = noncurrent (always)
Pension Plan Liability = current, noncurrent, or both –> depends when paid
Pmt = Expected Benefits Pmt > FV of Plan Asset
How to record Prior Service Cost and Pension Losses during period incurred?
DR. OCI
CR. Pension Benefit Asset/Liability
*Record deferred tax asset
DR. Deferred Tax Asset
CR. Deferred Tax Benefit - OCI
How to record amortization of Prior Service Cost and Pension Losses?
DR. Net periodic pension cost
CR. OCI
DR. Deferred Tax Benefit - OCI
CR. Deferred Tax Benefit - I/S
How to record pension gains during period incurred?
DR. Pension benefit asset/liability
CR. OCI
DR. Deferred tax expense - OCI
CR. Deferred tax liability
How to record amortization of pension gains?
DR. OCI
CR. Net periodic pension cost
DR. Deferred Tax Expense - I/S
CR. Deferred Tax Expense - OCI
Under IFRS, how are gains and losses accounted for?
Included in OCI but not amortized to I/S
How are termination benefits calculated and recorded?
Lump sum payments
+PV termination benefit
______________________
Special term benefit
DR. Special term benefit expense
CR. Special term benefit liability
What are the required financial statements for defined benefit pension plans?
Stmt of Net Assets Available for Benefits
Stmt of Change in Net Assets Available for Benefits
Stmt of Accumulated Plan Benefits
Stmt of Changes in Accumulated Plan Benefits
What are the accrual requirements for post-retirement benefits?
- Obligation is attributable to employee’s services already rendered
- Employee’s rights accumulate or vest
- Pmt is probable
- Amount of benefits can be reasonably estimated
What period is post-retirement benefit obligation accrued?
Beginning at employee’s date of hire and ending at the fully eligible date
Formula to calculate interest cost for post-retirement benefits
Beg. APBO * Discount Rate
Formula to calculate amortization or expense of transition obligation?
(1) Immediate expense recognition
OR
(2) APBO - FV of plan assets = Initial unfunded
Divided by:
Greater of 20 years OR Avg. remaining service period
How to determine funded status for post-retirement benefits?
FV of plan assets - APBO
What conditions must be met to accrue post-employment benefits?
(1) Employer’s obligation is attributable to services already rendered
(2) Obligation relates to rights that vest or accumulate
(3) Pmt of compensation is probable
(4) Amt can be reasonably estimated
How are post-employment benefits recorded?
DR. Severance expense
CR. Severance liability
What are the conditions to accrue for vacation days and sick days?
Vacation Days - Accrue if vest or accumulates
Sick Days - Accrue only if vests
How do permanent differences affect tax computation?
Affect “current”/not “deferred”
How do temporary differences affect tax computation?
Affect “current” and “deferred”
How is Income Tax Expense calculated?
Tax Income * Current Tax Rate
Deferred Tax Asset of Deferred Tax Liability?
(1) Revenue or gains included in taxable income then F/S
(2) Revenue or gains included in F/S then taxable income
(3) Expenses or losses included in taxable income then F/S
(4) Expenses or losses included in F/S then taxable income
(1) Deferred Tax Asset
(2) Deferred Tax Liability
(3) Deferred Tax Liability
(4) Deferred Tax Asset
What is the valuation allowance account used for?
For amounts of deferred asset that are not expected to be used
Under IFRS, are valuation allowances permitted?
No
What are the steps to recognize tax benefits when tax position is uncertain?
Step 1 - Recognition of the Tax Benefit
- More likely than not: >50%
- Based on expected outcome in court of last resort
Step 2 - Measurement of Tax Benefit
- Based on expected outcome in settlement w/ taxing authority
- Recognize the largest amount of tax benefit that has <50% likelihood of being realized
- If unambiguous, recognize full benefit
What tax rate is applied to temporary differences?
Enacted tax rate in periods the taxable item is expected to be paid (liability) or received (asset)
What is the treatment of and adjustment for changes?
Treated as change in estimate. Change in future years, prospectively. Adjustment is reflected in income tax expense as component of income from continuing operations.
How to net temporary adjustment?
Ending Bal
_______________
Required Adj.
How are deferred tax liabilities and assets classified as current or noncurrent?
- Deferred tax items should be classified based on classification of related asset or liability for financial reporting –> “Classify based upon what gave birth to it”
- If deferred tax item not related to an asset or liability, it should be based on the expected reversal date of the temporary difference
How should deferred tax liabilities and assets be netted against each other under US GAAP and IFRS?
US GAAP:
Current w/ Current
Noncurrent w/ Noncurrent
IFRS:
Noncurrent
How to record operating loss carrybacks?
DR. Tax Refund Receivable
CR. Tax Benefit
How to record operating loss carryforward?
DR. Deferred Tax Asset
CR. Tax Benefit
Valuation allowances may be required for operating loss carryback or operating loss carryforward?
Operating loss carryforward
Dividends Received Deduction Rules for Tax Return
Ownership:
0-19% –> 70% exclusion
20%-80% –> 80% exclusion
>80% –> 100% exclusion
Investee’s income for GAAP financial statements
20-50% ownership = use equity method –> % of sub’s income
Deferred income tax expense or benefit is equal to
Sum of net change in deferred tax asset and tax liabilities
What is the formula to calculate effective tax rate?
Tax Income Expense/Pretax Income
Pretax Income = Income in FS
Which item is not subject to the application of intraperiod income tax allocation?
Operating income
*Only items net of tax on I/S
Under IFRS, when are prior service costs recognized when a defined benefit plan is being amended?
Recognized on the I/S in period of plan amendment
