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CPA - FAR > Chapter 6 - Pensions and Income Tax Accounting > Flashcards

Chapter 6 - Pensions and Income Tax Accounting Flashcards

0
Q

What classifies an overfunded benefit plan?

A

Plan has assets that exceed its liabilities

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1
Q

Pension plan and sponsoring company are two separate or non-separate legal entities?

A

Separate legal entities

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2
Q

What classifies an underfunded plan?

A

Plan has liabilities that exceed its assets

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3
Q

What base is used to calculate Accumulated Benefit Obligation (ABO)?

A

Current and past compensation levels

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4
Q

What base is used to calculate Projected Benefit Obligation (PBO)?

A

Use (guess) future salary

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5
Q

What are vested benefits?

A

Pension plan benefits are vested when employees have earned their benefits by reason or by reaching retirement age

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6
Q

What is the formula to calculate the Ending PBO?

A

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

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7
Q

What is the formula for Ending FV of Plan Assets?

A 
Beginning FV of plan assets
\+Contributions
\+Actual return on plan assets
-Benefits paid to retirees
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Ending FV of plan assets
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8
Q

What is the formula to calculate Net Periodic Pension Cost?

A 
"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
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9
Q

How are the components of net periodic pension cost reported differently under US GAAP and IFRS?

A

US GAAP - Aggregated, presented as one

IFRS - separately

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10
Q

Formula to calculate Interest Cost in SIRAGE

A

Beginning PBO x Discount Rate

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11
Q

Formula to calculate Expected Return on Plan Assets in SIRAGE

A

Beginning FV of Plan Assets x Expected rate of return on plan assets

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12
Q

How to calculate Actual Return on Assets in SIRAGE

A 
Beg. FV of plan assets
\+Contributions
\+ACTUAL RETURN
-Benefit Payments
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
End FV of plan assets
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13
Q

How to calculate Amortization of Prior Service Cost in SIRAGE?

A

Beg. Unrecognized Prior Service Cost/Avg. Remaining Service Life

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14
Q

Where do gains and losses in SIRAGE arise from?

A

(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

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15
Q

How are gains and losses accounted for pensions?

A

(1) Recognize immediately
OR
(2) The Corridor Approach/amortize

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16
Q

How are gains and losses amortized if the corridor approach is chosen?

A

Beg. Remaining Unrecognized Gain or Loss - (greater of)

= Excess / Avg. Remaining Service Life

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17
Q

How are existing net obligation or net asset amortized?

A

PBO - FV of Plan Assets = Initial unfunded obligation
/
Greater of 15 years OR Avg. Employee Job Life

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18
Q

Where are unamortized prior service costs, gains & losses, and existing net obligation/net asset allocated?

A

AOCI

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19
Q

How to record pension plan contributions?

A

DR. Pension Benefit Asset/Liability

CR. Cash

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20
Q

How to determine the funded status?

A

FV of Plan Assets - PBO

  • Positive = overfunded
  • Negative = underfunded
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21
Q

Pension plan assets and liabilities are classified as current or noncurrent?

A

Pension Plan Asset = noncurrent (always)
Pension Plan Liability = current, noncurrent, or both –> depends when paid

Pmt = Expected Benefits Pmt > FV of Plan Asset

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22
Q

How to record Prior Service Cost and Pension Losses during period incurred?

A

DR. OCI
CR. Pension Benefit Asset/Liability

*Record deferred tax asset
DR. Deferred Tax Asset
CR. Deferred Tax Benefit - OCI

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23
Q

How to record amortization of Prior Service Cost and Pension Losses?

A

DR. Net periodic pension cost
CR. OCI

DR. Deferred Tax Benefit - OCI
CR. Deferred Tax Benefit - I/S

24
Q

How to record pension gains during period incurred?

A

DR. Pension benefit asset/liability
CR. OCI

DR. Deferred tax expense - OCI
CR. Deferred tax liability

25
Q

How to record amortization of pension gains?

A

DR. OCI
CR. Net periodic pension cost

DR. Deferred Tax Expense - I/S
CR. Deferred Tax Expense - OCI

26
Q

Under IFRS, how are gains and losses accounted for?

A

Included in OCI but not amortized to I/S

27
Q

How are termination benefits calculated and recorded?

A

Lump sum payments
+PV termination benefit
______________________
Special term benefit

DR. Special term benefit expense
CR. Special term benefit liability

28
Q

What are the required financial statements for defined benefit pension plans?

A

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

29
Q

What are the accrual requirements for post-retirement benefits?

A
  1. Obligation is attributable to employee’s services already rendered
  2. Employee’s rights accumulate or vest
  3. Pmt is probable
  4. Amount of benefits can be reasonably estimated
30
Q

What period is post-retirement benefit obligation accrued?

A

Beginning at employee’s date of hire and ending at the fully eligible date

31
Q

Formula to calculate interest cost for post-retirement benefits

A

Beg. APBO * Discount Rate

32
Q

Formula to calculate amortization or expense of transition obligation?

A

(1) Immediate expense recognition
OR
(2) APBO - FV of plan assets = Initial unfunded
Divided by:
Greater of 20 years OR Avg. remaining service period

33
Q

How to determine funded status for post-retirement benefits?

A

FV of plan assets - APBO

34
Q

What conditions must be met to accrue post-employment benefits?

A

(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

35
Q

How are post-employment benefits recorded?

A

DR. Severance expense

CR. Severance liability

36
Q

What are the conditions to accrue for vacation days and sick days?

A

Vacation Days - Accrue if vest or accumulates

Sick Days - Accrue only if vests

37
Q

How do permanent differences affect tax computation?

A

Affect “current”/not “deferred”

38
Q

How do temporary differences affect tax computation?

A

Affect “current” and “deferred”

39
Q

How is Income Tax Expense calculated?

A

Tax Income * Current Tax Rate

40
Q

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

A

(1) Deferred Tax Asset
(2) Deferred Tax Liability
(3) Deferred Tax Liability
(4) Deferred Tax Asset

41
Q

What is the valuation allowance account used for?

A

For amounts of deferred asset that are not expected to be used

42
Q

Under IFRS, are valuation allowances permitted?

A

No

43
Q

What are the steps to recognize tax benefits when tax position is uncertain?

A

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
44
Q

What tax rate is applied to temporary differences?

A

Enacted tax rate in periods the taxable item is expected to be paid (liability) or received (asset)

45
Q

What is the treatment of and adjustment for changes?

A

Treated as change in estimate. Change in future years, prospectively. Adjustment is reflected in income tax expense as component of income from continuing operations.

46
Q

How to net temporary adjustment?

A

Ending Bal

_______________
Required Adj.

47
Q

How are deferred tax liabilities and assets classified as current or noncurrent?

A
  • 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
48
Q

How should deferred tax liabilities and assets be netted against each other under US GAAP and IFRS?

A

US GAAP:
Current w/ Current
Noncurrent w/ Noncurrent

IFRS:
Noncurrent

49
Q

How to record operating loss carrybacks?

A

DR. Tax Refund Receivable

CR. Tax Benefit

50
Q

How to record operating loss carryforward?

A

DR. Deferred Tax Asset

CR. Tax Benefit

51
Q

Valuation allowances may be required for operating loss carryback or operating loss carryforward?

A

Operating loss carryforward

52
Q

Dividends Received Deduction Rules for Tax Return

A

Ownership:
0-19% –> 70% exclusion
20%-80% –> 80% exclusion
>80% –> 100% exclusion

53
Q

Investee’s income for GAAP financial statements

A

20-50% ownership = use equity method –> % of sub’s income

54
Q

Deferred income tax expense or benefit is equal to

A

Sum of net change in deferred tax asset and tax liabilities

55
Q

What is the formula to calculate effective tax rate?

A

Tax Income Expense/Pretax Income

Pretax Income = Income in FS

56
Q

Which item is not subject to the application of intraperiod income tax allocation?

A

Operating income

*Only items net of tax on I/S

57
Q

Under IFRS, when are prior service costs recognized when a defined benefit plan is being amended?

A

Recognized on the I/S in period of plan amendment

CPA - FAR (8 decks)

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