F-6 Pensions & Tax Accounting Flashcards
What is a pension plan?
An agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current or past services
What is a defined benefit plan
The benefits of the employee receives at retirement or determined by formula. It is the sponsor company’s responsibility to ensure that contributions to the plan or sufficient to pay benefits as they come due
What is a defined contribution plan
The contributions that the sponsor company makes to the plant or determined by formula. The employees retirement benefits are based on the amount of funds in the plan
Is the pension plan and the sponsoring company to separate legal entity is or the same legal entity
They are two separate legal entity’s
What is the main accounting problem arose rising for defined benefit plans
Defined benefit plans issues are caused by necessary use of estimates and assumptions which affect the timing and measurements a pension costs gains and losses from investments of plan assets and liabilities
What does the term “funding” refer to
The term funding refers to the sponsor company making contributions to the pension plan.
The plan is funded when the employer makes cash contributions to the plan. The amount fund it does not have to equal the pension plan expensive for the period
What is an overfunded plan and an underfunded plan
And overfunded plan has assets that exceeds its liabilities where is it underfunded plan has liabilities that exceeds its assets
What are the two types of pension plans that are non-gap methods
Pay-as-you-go
Terminal funding
Both are cash basis
What are the two gap methods for pension plans
Defined contribution plan(401k)
Defined benefit plan (pension plan)
What is accumulated benefit obligation (ABO)
Actuarial present value of benefits attributed by a formula based on current and past compensation levels. And ABO differs from a PBO only in that the ABO includes no assumption about future compensation level (uses current salaries)
What is a projected benefit obligation PBO
The actuarial present value of all benefits attributed by the plans benefit formula to employee service rendered prior to that date.
Under IFR S, what is the defined benefit pension plan liability
Define benefit obligation DB
The DBO and the PBO are calculated in a similar manner
When our pension plan benefits vested
Pension plan benefits are vested when employees have earned their benefits by reason of having reached retirement age and or having otherwise met unique pension plan requirements. The benefits are vested whether or not the person is actually retired, and they are not contingent on remaining in the service of the employer. Generally pension plan documents require money to be left in the plant until retirement
What is service costs in a pension plan
Service causes the present value of all pension benefits earned by company employees in the current year. Is provided by the actuary. The service cost components increases the PBO
What is prior service cost
The cost of benefits based on past services granted for:
- Service prior to the initiation of a pension plan that employees retroactively receive credit for when the plan is implemented
- subsequent plan amendment, reflecting you were increased benefits, but also is applied to service already provided
Prior service cost increases the PBO in the period of the plan initiation or amendments and should be amortized to pension expense over the future service. Of the affected employees
What our benefit payments
Benefits are paid to pension plan participants after retirement. The payment of pension benefits reduces the PBO and reduces plan assets
What is the formula that can be used to calculate the PBO
Beg PBO \+ service cost \+ interest cost \+ prior service cost \+actuarial losses - actuarial gains - benefits paid -——-————— End PBO ————————- ————————–
What our plan assets
Plan assets of the assets, generally stocks, bonds, and other investments, set aside to provide for pension benefits. Plan as it should be reported at fair value. Plan assets increase each. My contributions to the pension plan and by The return on the plan assets. Plan assets decrease each. By the amount of benefits paid to retired employees
What is the formula that can be used to calculate the ending fair value of plan assets or to solve the actual return on plan assets
Beg FV of plan assets
+ contributions
+ actual return in plan assets
- benefits paid to retirees
= End FV of plan assets
How to calculate the US GAAP pension expense (AKA “net periodic cost”)
SIR AGE
Current service cost
Interest cost
Amortization of service cost
and losses
Amortization of existing net obligation or net assets
=net periodic pension cost
Under you S GAAP all the components of that periodic pension cost must be aggregated and presented as one amount of income statement
Under I FRS how is the defined-benefit cost calculated
Under IRS, defined benefit cost include service costs and that interest on the defined-benefit liability (asset). The components of defined-benefit costs are generally between separately on the inconvenience: there is no requirement that these amounts the aggregate in presented as one amount
What is the current service cost
The present value of all benefits earned in the current. Period in other words, the increase in the projected benefit obligation resulting from employee service in the current period
What is the interest cost
Also known as the discount rate and settlement rate
Formula
Beg PBO
X discount rate
= interest cost
What is the return on plan asset?
US GAAP allows companies to offset pension expense by either the actual return on plan assets or the expected return on the plan asset
Actual return on plan asset (calculated based on FV if plan asset at the beg and end of the period, and for contributions and benefit payments
Or
Expected return on plan asset (smooth)
Beg FV of plan asset
X expected ROR on plan asset
= expected return on plan asset
When companies use the expected return on plan assets to calculate pension expense, the difference between actual and expected return must be recognized in other comprehensive income each. And then amortize to pension expense overtime with any actuarial gains or losses