F6 Flashcards
What’s “service cost” of pension plans? Timing?
Present value of all pension benefits earned by employees (by providing service) in the current year. It increases PBO. Pension expense accrues during service period, not when paid.
How is prior service cost treated under pension plans? GAAP, IFRS?
GAAP-Increase PBO in the period of plan initiation/amendment (not going back to prior periods). Record (Dr. lowers OCI) under “unrecognized prior service cost” in OCI, and amortized (Cr. take out) to pension expense over future service periods(remaining years of service).
IFRS-income statement right away.
What’s “interest cost” of pension plans?
Because PBO is recorded using present value, when time passes, interest acrues at the discount rate used for calc PV, and increase PBO as a result.
What items are recorded in OCI regarding pension plans?
Unrecognized prior service cost(GAAP only, not IFRS);
Difference (G/L) between real and expected return on plan assets (when expected return is used);
G/L due to actuarial changes(when company chooses not to rec in I/S right away).
(Rare)–Underfunding(net obligation)/over funding(net asset) of existing plans as of 1987–FV plan asset-PBO.
First one(A) is amortized over future service periods; G/L (G) is amortized using the corridor approach(-10% greater of A/L, then / ave remaining life);funded status (E) is amortized over greater of 15 yrs or average remaining job life(finished for most company, now directly in B/S as asset or loss). Unamortized part stay in AOCI.
How is the funded status rec’d? I/S? B/S?
B/S. FV of plan assets minus PBO. Net asset is always noncurrent, net liability can be current or noncurrent or both. Reported in aggregate under asset/liability.
If it’s due to prior service cost or pension G/L, then goes into AOCI(including deferred tax benefit/liability), then amortize into I/S as expense(net periodic pension cost)/ offset expense.
How do return on plan assets and G/L of pension plan affect I/S of sponsoring company?
Return on assets offset current period pension cost(expense). G/L could be the same, or record in OCI then amortize to I/S (GAAP). IFRS-require G/L be treated as remeasurement of asset or liability, into OCI, never amortized.
How to treat the post-retirement benefit obligation due to transition to accrual accounting?
1) expense entire obligation in one year;
2) amortize the total unfunded obligation over the greater of 20 yrs or remaining service period.
What’s reported on the B/S for pensions?
1) Contributed assets;
2) The funded status as an asset or liability or both.
3) AOCI due to unamortized pension G/L(may be exp’d), prior service cost and initial transition obligation.
Is sick pay obligation accrual required by GAAP? IFRS?
For use it or lose it type (non carrying over, non vesting), since it’s hard to estimate, GAAP does not requir accrual. But IFRS does.
How is F/S tax expense calculated when there’re temprory differences between tax and book?
F/S tax expense= current tax (owe now) + deferred expense/- deferred benefit (owe later)
How type of account is “income tax benefit–deferred”?
It’s a contra-expense account. When increasing current book expense, Dr expense-deferred; when decreasing current book expense(increase deferred benefit), Cr benefit-deferred.
What is the balance of deferred tax asset reported on B/S? GAAP vs IFRS?
GAAP–full future benefit-valuation allowance(contra asset account for portion not meeting the “more likely than not) threshold).
IFRS–only report deferred tax asset when it’s probable (>50%) to be utilized in the future.
What’s the amount recorded in “income tax expense-current” account? Tax amount or book amount?
Always the IRS tax return amount. Book amount(GAAP accrual) is the current expense amount + the deferred expense/-deferred benefit amount
What tax rate is used for deferred tax asset/liability? What if tax rates change in the future?
Enacted rate (not anticipated, proposed or unsigned). If it changes in the future, adjust at the change period (prospectively) and enter into I/S (income from continuing operations).
Are diferred tax asset/liability and asset allowances current or noncurrent on B/S? GAAP vs IFRS?
GAAP– based upon what gave birth to it. If no “Mom” look at the expected reversal date. A and L are also netted within current/noncurrent category. Allowances are allocated pro rata to C/NC.
IFRS– general rule all noncurrent.
