F6 Flashcards
Pensions and Income Tax Accounting
The funded status of a defined benefit pension plan for a company should be reported in:
The statement of financial position (Balance Sheet).
Components of the Changes in the Net Assets Available for Benefits of a defined benefit pension plan trust.
- Contributions from the employer and participants
- The net change in fair value of each significant class of investments
- Benefits paid to participants
A Pension Plan is funded or Non-funded when?
A sponsor company makes contributions to the plan
It is funded when an Employer makes a contribution.
True or False: The contribution must be the same as amount as the Pension Expense?
False
What is the Defined Contribution Plan?
A plan the specifies the periodic amount of contributions and how those contributions are allocated to employees. Must like a 401k
What is a Defined Benefit Plan?
Defines benefits to be paid to employees at retirement. Contributions are computed using actuarial assumptions of future benefits.
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Factors of a Defined Benefit Plan
- Employees’ compensation levels at or near retirement
- Number of years of employee service
- Number of years until the employee retires
- Number of years that the plan expents to pay benefits after an employee retires
What is Accumulated Benefit Obligation? (ABO)
The actuarial present value of benefits attributed by a formula based on current and past compensation levels. Use Current Salaries
Projected Benefit Obligation? (PBO)
The actuarial present value of all benefits attributed by the plan’s benefit formula to Employee service prior to that date.
What is the Difference between PBO and ABO?
There is no assumption about Current Salary levels for the ABO.
What is the Service Cost?
PV of pension benefit earned by company employees in the current year.
What is Prior Service Cost?
Prior service costs increases the PBO in the period of initiation or amendment and should be amortized to the pension expense over the future service periods
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Costs of the Prior service costs are?
- Service prior to the initiation of a pension plan that employees retroactively receive credit for (past)
- Subsequent plan amendment, reflected new or increased benefits that is also applied to service already provided (bump-up)
Formula
What is BASE for the PBO?
Beg. PBO
+ Add: Service cost
+ Interest cost
+ Prior service cost
+ Actuarial Losses incurred i period
- Subtract: Benefits paid
Actuarial Gains incurred in current period
= End PBO
Formula
What is BASE for Plan Assets?
Beg. Fair Value of Plan Assets
- *+ Add:** Contributions
- Actual return on plan assets* (SQUEEZE)
- Subtract: Benefits paid to retirees
= Ending Fair Value of Plan Assets
What is the Pension expense under US GAAP?
Pension Expense (AKA Net Periodic Pension Cost) is the Increase in the PBO, offset by earning on plan assets.
Adjusted for the effects of certain smoothing mechanisms.
SIR AGE
What is the Income Statement expense formula is…?
SIR AGE
- *Service** Cost Current
- *+ Interest** Cost
- *- Return** on Plan Assets
+ Amortization of (Unrecognized) Prior Service Costs
- Gains/+ Losses on minimum amortization
+ Existing Net Obligation of Net Asset
= Net periodic pension cost
Old AGE goes to the…?
The income statement from the prior year balance sheet
New AGE goes to the?
The Balance Sheet
What is the current service cost?
The increase in the PBO resulting from employee service in the current period
What is interest cost?
Beg. PBO x Discount Rate % = Interest Cost
Discount rate is not prime or or market rate!
Increase in the PBO during the current period that is due to the passage of time.
What is Actual Return on Plan Assets?
Use the BASE formula to squeeze the amount.
Beg. FV Plan Asset
+ Add: Contributions
Actual Return⇔
Subtract: Benefits Paid
= Ending Balance
What are the Expected Return on Plan Assets?
Beg. FV of Plan Assets
x Expected Rate of Return %
= Expected Return on Plan Assets
It used to smooth earnings.
What’s the difference between the Expected and Actual return on plan asset?
It’s recognized in OCI and is amortized to pension expense over time.
Amortization of Unrecognized Prior Service Cost
Unrecognized prior service cost
÷ Avg. remaining service life
= Amortization of prior service cost.
The unrecognized prior service cost goes into OCI and and amortize of the participants remaining service years.
What is prior service cost in IFRS?
Past service cost.
It is NOT booked to Other Comprehensive Income (OCI)
Gains and Losses (for the Pension Expense formula)?
Come from 2 sources.
- Difference between the expected and actual return. When the expected return is used to calculate Pension expense
- Changes in actuarial assumptions.
How to determine whether something is a gain or a loss?
When something is good, like a when a return is more than expected, it is a Gain.
When something is bad, like when employees are expected to live longer, it is a Loss.
Formula
How to calculate the Funded Status of a Pension?
FV of Plan Assets
- (PBO)
= Funded Status
Over(under)funded
Pension Plan Asset
What is a positive fund status?
AKA positive fund status
FV Plan Assets > PBO.
ALWAYS noncurrent asset
Underfunded Pension
What is a Pension Plan Liability?
A negatively funded status
FV of Plan Assets < PBO.
This can be a current, noncurrent (or both) Liability.
Formula
Defined Defined Benefit plan calculation.
Beginning Funded States
Plus: Contribution
Plus: SIR AGE
Less: Net Losses incurred during the current period
Equals: Ending funded status
What is Deferred Tax Liability?
Future Tax Accounting Income GREATER > Future Financial Accounting Income
What is Deferred Tax Asset?
Future Tax Accounting Income LESS < Future Financial Accounting Income
Deferred tax items should be classified as?
The related to the asset or liability for financial reporting.
Gains and losses from differences in Expected and Actual returns are present in OCI and…?
They are Net of Tax!
Under IFRS,when is prior service cost is recognized ?
The full cost is recognized in the period of amendment
Corridor Approach (10%)
Minimum amortization of unrecognized net gain/loss?
GREATER of FV PA/PBO
x 10% Threshold (Corridor)
Unrecognized pension gain/loss - Corridor
= Gain/Loss over corridor
÷ Avg. Service Life
= Minimum Amortization of Gain/Loss
I DREAD having to disclose this.
Disclosures for Pension Plans
- *Description** of funding policies and types of assets held.
- *Reconciling** items: schedule reconciling funded status of the plan including all items (FVPA, PBO, etc.).
- *Expense** and OCI components: Components of net periodic pension cost and AOCI.
- *Actuarial** assumptions
- *Discount** rate: The weighted-avg. discount rate
What to do with vacation days and sick days?
Vacation pay should be **accrued if it either vests or accumulates. **
Sick pay should not be accrued even if it accumulates since it is not an additional benefit.
