Deferred Compensation Arrangements-pg 475-

Question 1

Defined Contribution Plan

Answer 1

• -Amt of employer contribution. Benefit pd during retirement are dependent on return on pension fund assets and therefore not defined. (401K)
• If liability (bc shortfall in pension expense recognized) if pmt not expected w/in one yr of BS date, liability discounted to present value
• Amendment to plan change benefits earned previously are immediately expensed
• DISCLOSURE: Description of plan/covered employee groups/info about how amts determined/any factors affecting comparability b/w periods

Question 2

Defined Benefit Plan

Answer 2

-Benefits pd during retirement based on formula

Question 3

Contributory Plan/Noncontributory Plan

Answer 3

Contributory: Contributions to pension plan made by employer & employees
Noncontributory: Contributions to pension plan made by employer only

Question 4

Defined Benefit Plan (Accounting for)

Answer 4

-Accrual Basis (cash not permitted) Expense recognized as benefit earned/obligation recognized for unpd benefits

Question 5

Annual Pension Benefit Formula

Answer 5

(yrs of service/40)(final/highest annual salary)(age at retirement/65)

Question 6

Actuary

Answer 6

• Calculate PV of pension checks based on life expectancy, turnover, final salary, ect.
• This calculation is basis for liability & expense side of pension accting. Defined Benefit Plan Not possible w/o actuary

Question 7

Current Yr Reporting for Defined Pension Plans

Answer 7

1. Pension Exp: Cost to firm of providing pension benefits earned. Amt reported in income stmt and has 5 independently computed components
2. PBO (Projected Benefit Obligation): PV unpd pension benefits promised for work done though BS date.Reflect future salaries if used in formula BUT PBO reflects only service credits earned through BS date. PBO is actuarial PV–MAJOR LIABILITY ONLY REPORTED IN FOOTNOTES
3. Pension Assets @ Market Value: Current Ending Plan asset w/ trustee. This is fund available for retirement benefit.–PLANT ASSETS ONLY REPORTED IN FOOTNOTES–Ending balance = contributions made by sponsoring firm to date + investment return to date(interest dividend stock appreciation recognized gains/losses) - benefits pd to date
4. Pension Liability (funded status): Diff b/w ending PBO and plan assets @ BS date, REPORTED IN BS, –amt underfunded–if over-funded pension asset reported

Question 8

Current/Noncurrent Asset/Liability for pension plans

Answer 8

• Current Liability: Portion pension liability classified as current is excess of benefits payable for coming yr over FV of plan assets–rest is noncurrent liability
• Current Asset: If PBO is less than plan assets, reported pension asset is noncurret asset bc restricted and not available for other purposes
• When more than one pension plan and pension asset > PBO they are AGGREGATED into one asset for reporting and vise versa for pension liabilities–OFFSETTING not permitted bc cannot use one plan’s assets to pay for another plans benefit pmts

Question 9

Add’l Liability Measures in Footnotes Only

Answer 9

1. ABO (Accumulated Benefit Obligation): PV of unpd pension benefits through BS using current salaries (same as PBO except PBO uses future salaries)
2. VBP (Vested Benefit Obligation): PV of vested benefits; situations, following relationship holds PBO > ABO > VBO

Question 10

Two Important Estimates in Pension Accting

Answer 10

Discount Rate: Rate used for all actuarial PV pension calculations.
Expected Rate of Return: Rate used to compute expected return on plan assets (one component of pension exp)

Question 11

5 Components of Pension Exp

Answer 11

1. Service Cost: Actuarial PV pension benefits earned during current period–INCREASE IN PBO
2. Interest Cost: Growth in PBO for period due to passage of time (discount rate) * (PBO @ Jan 1)–Based on Benefits earned previous yr–INCREASE IN PBO
3. Expected Return on Plan Asset= Expected rate of return * plan assets @ Jan 1 @ market value– DECREASE IN PENSION EXP
4. Amortization of Prior SC: INCREASE PENSION EXP
5. Amortization of Net Gain/Loss: INCREASE/DECREASE TO PENSION EXP

–Plant Assets always use actual return and pension expense uses expected return

Question 12

Requirements for annual accrual basis FS for Defined CONTRIBUTION plans

Answer 12

1. Statement net assets available
2. Statement changes in net assets available
3. Statement of Cash Flows (not required but encouraged)
4. General Description of plan agreement

Question 13

Requirements for annual accrual basis FS for Defined BENEFIT plans

Answer 13

1. Statement reporting net plan assets @ fair value available @ beginning or end of yr
2. FS reporting changes for yr in net plan assets @ fair value available
3. Statement of actuarial PV of accumulated plan benefits @ beginning or end of yr
4. Add’l info about factors affecting change in actuarial PV of accumulated plan benefits from previous yr
5. Statement Cash Flows (not required but encouraged)
6. General Description of plan

Question 14

Amortization of Prior Service Charges & Amortization of Net Gain/Loss

Answer 14

Recognized immediately in pension liability and other comprehensive income

Question 15

Amortization of Prior Service Charges

Answer 15

• Immediate Increase in PBO for service already rendered.
• Example: If provided benefits increase
• Is applied Retroactively

–Could decrease PBO but very rare

Question 16

Amortization of Gains/Losses

Answer 16

Two Sources:

1. Changes in PBO due to estimate changes and experience changes
2. Diff b/w expected and actual return

–Life Expectancy increases future benefit exceed previous estimates use to compute PBO so increase in PBO called actuarial loss or PBO loss

–If actual return exceeds expected return diff is gain

–Gains/Losses are netted to one amt at beginning of each yr

–Asset Gains/Losses also affect pension liability because it affects expected return–impact on pension liability is recognized immediately along w/ equal effect on OCI–however they are delayed recognition for pension expense by gradually amortizing them

Question 17

PBO (Projected Benefit Obligation)

Answer 17

PBO End = SC to date + interest cost to date - benefits pd to date + prior service charge + net gain/loss to date

Question 18

Corridor Method of Amortization for G/L

Answer 18

Takes percentage of larger of PBO and assets at beginning of yr

Question 19

Pension Plan Curtailment

Answer 19

A pension plan curtailment occurs when the sponsor stops accruing the pension benefits for a portion of the future services of plan participants
-Ex. Actuarial Loss or when expected return < actual return–something lessened because of a situation

Question 20

Pension Plan Settlement

Answer 20

A pension plan settlement relieves the sponsor of the responsibility for a portion of the projected benefit obligation
-Ex. Paying the Pension Liability–to pay something

Question 21

Nonretirement Postemployment Benefit criteria

Answer 21

• Same as for compensated absences
  1. Employer’s obligation relating to employee’s rights to receive compensation for future absences is attributable to employees services already rendered
  2. Obligation relates to rights vest or accumulate
  3. Pmt of compensation is considered probable
  4. Amt of compensation can be reasonably estimated

-If benefits don’t meet four conditions acct standard for contingencies applies.
1. If probable that post employment liability has been incurred as of date of FS
2. Amt of future compensation pmt can be reasonable estimated
Than expense & liability is recorded in that period

If meet either of these two things they are accrued

Question 22

Expected Postretirement Benefit Obligation

Answer 22

• Computed only to compute Accumulated Postretirement Benefit Obligation
• PV of benefits to be pd by firm and includes service projected all the way to retirement

Question 23

Accumulated Postretirement Benefit Obligation

Answer 23

Computed by yrs of service divided by yrs of service needed times EPBO

Question 24

Postretirement Benefit Liability

Answer 24

Reported in balance sheet = APBO - plan assets @ MV.

APBP and plan assets reported in footnotes only

Question 25

Postretirement Benefit Expense

Answer 25

Same 5 as pension plus one (Amortization of transition obligation)

4. Amortization of PSC: same depreciation as pensions (straight line or yrs of serice)
5. Amortization of net gain or loss: Same depreciation as pensions (straight line or corridor). HOWEVER unlike pensions firms may recognize postretirement benefit gains/losses immediately w/ some limitations
6. Amortization of Transition Obligation: This component NOT needed if firms elected to recognize immediately entire amt as accting change decreasing net income in yr of transition. Those who didn’t do the above need to straight line amortize initial APBO amt over average remaining service period (if less than 20 yrs, may use 20 yrs)

Question 26

Fully Eligible

Answer 26

Doesn’t mean will receive full benefits but means employee has reached service level required to receive benefits that will most likely be granted to employee during retirement