F6 Pensions & Income Tax Accounting Flashcards
Define permanent differences and list some examples.
Permanent differences= transactions that affect either taxable income or financial income, but not both, and only in the period in which they occur. They do not affect future financial or taxable income.
- premium on key officer life insurance policy when entity is owner and beneficiary
- proceeds from key officer life insurance
- tax-exempt interest on state and municipal bonds
- nondeductible portion of meals & entertainment
- fines and expenses in violation of law
- dividends received deduction
Identify the tax rate used to measure deferred tax assets and liabilities under US GAAP & IFRS
GAAP: the enacted tax rate expected to apply to taxable items (temporary differences) in the periods the taxable item is expected to be paid (liability) or realized (asset_
Do NOT use the anticipated, proposed, or unsigned tax rate.
IFRS: permits the use of enacted or substantively enacted tax rates.
List the four criteria for recognizing post-employment benefits and compensation for future absences.
- employees services already rendered
- rights vest or accumulate
- payment of the compensation is probable
- amount can be reasonably estimated
How is funded status calculated and reported under IFRS?
Defined benefit obligation = funded status
Under IFRS:
Overfunded: (DBO FV of plan assets); reported as a net defined benefit liability
IFRS does not specify whether the asset/liability should be reported as current or noncurrent
Define temporary differences and list some examples
Temporary difference are differences between taxable income and financial income that results in taxable or deductible amounts in future years and necessitate the recognition of deferred tax assets or liabilities:
- depreciation (financial vs. MACRS)
- Gross profit on long-term construction contracts (percentage of completion vs. completed contract)
- estimated warranty costs
- litigation accruals
- gross profit on installment sales (accrual vs. cash)
- bad debt expense using the allowance method vs. actual bad debt expense
Define deferred tax asset
Anticipated future taxable income will be less than future financial income due to temporary differences.
Deferred tax assets is recognized for all deductible temporary differences, operating losses and tax credit carryforwards by applying the applicable enacted tax rate and provisions of the enacted tax law to temporary differences in the period in which they are expected to reverse. Deferred tax assets are also subject to recording a valuation allowance to reduce the asset to its NRV is its more likely than not that its full value will not be recognized.
How are deferred tax assets and liabilities classified on the B/S under GAAP & IFRS?
GAAP: Classification as current or noncurrent depends on the classification of the related asset/liability; if there is none, it is based on the timing on the reversal. Current def. tax assets and liabilities are netted; as well as noncurrent assets/liabs.
IFRS: Def. tax assets & liabilities are reported as noncurrent on the B/S. A/L may be netted if the entity has a legally enforceable right to offset current tax assets against current tax liabilites and the deferred tax assets and liabilities relate to income taxes levied by the same tax authorities.
What are the components of net periodic post-retirement benefit cost (post-retirement expense) under GAAP?
S - ervice cost I - nterest cost R - eturn on plan assets A - mortization of prior service cost G - ains and losses E - xpense/ amortization of transition obligation
Define deferred tax liability.
Anticipated future tax liabilities derived from situation in which future taxable income will be greater than future financial income due to temporary differences.
It is measured by applying the applicable enacted tax rate and provisions of the enacted tax law to temporary differences in the periods in which they are expected to reverse.
How are changes in the funded status from pension gains and losses and prior service costs reported on the financial statements under GAAP and IFRS?
GAAP: both are recognized as components of OCI in the period incurred, w/ the related tax effects. Then reclassified to net periodic pension cost as amortized.
IFRS: Prior (past) service cost is reported as a component of service cost on the I/S in the period incurred. Pension G/L are reported in OCI in the period incurred and are not reclassified (amortized) to the income statement.
What are some of the required disclosures for a defined benefit plan? DREAD
- Description: of funding policies and types of assets held
- Reconciling items: schedule of reconciling funded status of the plan including all reconciling items (FVPA, PBO, etc.)
- Expense and OCI components: components of net periodic pension cost (pension expense) and AOCI
- Actuarial assumptions
- Discount rate: the weighted average discount rate.
What are some of the required disclosures for postretirement benefit plans? DREAD
- Description: of funding policies and types of assets held
- Reconciling items: schedule of reconciling funded status of the plan including all reconciling items (FVPA, PBO, etc.)
- Expense and OCI components: components of net periodic pension cost (pension expense) and AOCI
- Actuarial assumptions: assumptions and rates used in computing APBO and EPBO including assumed health care cost trend rate, effect of 1% increase/decrease in assumed health care cost trend rates.
- Discount rate: the weighted average discount rate.
Define two types of pension plans.
Defined contribution plan - amount of contribution is specified
Defined benefit plan - amount of benefit to be received is specified or estimated
Define pension settlements and pension curtailments.
Settlements: transactions that a) is an irrevocable action, b) relieves the employer of primary responsibility for a PBO and c) eliminates significant risks related to the obligation and the assets used to effect the settlement
Curtailments: an event that significantly reduces the expected years of future service of present EE’s or eliminates for a significant # of EE’s the accrual of defined benefits for some or all of their future services.
What is the formula used to calculate the ending PBO?
Beginning PBO \+ service costs \+ interest cost \+ prior service cost from current period amendments \+ actuarial losses in the current period - actuarial gains incurred in the current period - benefits paid to retirees = Ending PBO
