F7 Flashcards
Defined Contribution Plan
ER contributions determined by a formula
401K
Defined Benefit Plan
EE benefits determined by a formula
Pension
For pensions do pension expense = amount funded (paid) to the plan?
No! Not typically
Noncontributory
EEs are not required to contribute to the plan
Contributory
EEs required to contribute to the plan
Funded pension plan
Money is already at the trust waiting to be distributed to EEs of the pension plan
Unfunded pension plan
Promise from ER to pay pension benefits, but just a promise only
Overfunded
More money in the plan than required (plan assets exceed plan liabilities)
PBO
Projected Benefit Oblgation (uses future compensation levels - guess)
ABO
Accumulated Benefit Obligation (uses past / current compensation levels)
ABO vs PBO
ABO uses past / current salary levels and PBO uses future (guess) salary levels
DBO
Defined benefit obligation
IFRS
PBO equivalent for IFRS
IFRS equivalent to PBO
DBO
Vesting for pension plans - how?
Reach retirement age and / or meet unique special requirements
If a person leaves to work for another employer after vesting - are they still vested!
Yes, retired or not, they will still be vested
Pension Service Cost
Present value of all pension benefits earned by company EEs in the current year
Increases the PBO
Interest cost for pension plans increases what?
PBO because it raises the value of the obligation closer to the maturity value
What does pension service cost increase?
The PBO
Prior service costs
Pension
EEs grandfathered in for service previously rendered or
Subsequent plan amendment reflecting new or increased benefits applying to service already provided
Actuarial gains and losses
Gains or losses that occur due to actuarial adjustments
Benefit payments
PBO (down)
Plan assets (down)
(Payout to retired and working EEs)
Is service cost a pension cost?
Well no - it’s presented separately in the compensation
Pension costs
I RAGE
Interest cost (Return on Plan Assets) Amortization of Prior Service Cost (Gains) and Losses amortization of Existing net obligation or net asset
AGE
AOCI Pension costs unamortized
Amortization of prior service cost
(Gains) and losses
Existing net obligation or net asset
Projected Benefit Obligation increases with
+ Service Cost
+ Interest Cost
+ Prior service cost from current plan amendments
+ Actuarial losses incurred in current period
Projected Benefit Obligation decreases with
Actuarial gains in current period
Benefits paid to retirees
Pension plan assets increase how
+ Contributions
+ Actual returns on plan assets
Pension plan assets decrease how
Benefits paid to retirees
SIR
Service cost
Interest cost
less (Return on plan assets)
Prior service cost under GAAP JE
OCI
PBO
Prior service cost under IFRS JE
IS - service cost
DBO
Expense immediately
How do pensions account for gains
Two ways:
- Actual return to IS
- Difference between expected and actual return to OCI and amortized using the corridor approach
What is the corridor approach
Gains / losses at beginning of the year exceeding 10% of plan assets or PBO are amortized by the average remaining service life
How is interest cost calculated for PBO
Beginning of period PBO
x Discount Rate
= Interest cost
Which discount to use for pension interest cost? Prime or market?
Neither, use rate provided by actuary
Prior service cost is amortized over
Average remaining service life
Existing net obligation or net asset
Pension Obligation less plan assets amortized over the GREATER of 15 years or average EE job life
How do gains affect net period pension cost
They decrease it
Both the R and the G of SIR AGE
Interest cost calculation for pension
Beg PBO * discount rate
Service cost is measured using the
Project plan obligation
Net transition asset amortized into what?
Gain
Net transition liability amortized into what?
A loss
Overfunded pension asset is what kind of asset?
Always non-current
Underfunded pension plan is what kind of liability?
Must be split between current and no current
ER obligation for postretirement health benefits is expected to be fully accrued for an employee by the date the
EE is fully eligible for benefits
Attribution period
Date EE starts til date of full eligibility (vesting)
Measurement date for funded status
BS date at year end
Difference between public and non public disclosures for pension benefits
Non public does not require reconciliations
If pension plan is a liability how to find current from non current
Current is expected benefit payments in 12 months over fair value of plan assets
If funded status is negative and FV of plan assets is greater than expected benefit payments next year, what is the current liability?
Zero. FV of plan assets can cover the liability next year
What cost is unique to post retirement benefit plans?
Per capita claims
The funded status of a defined benefit plan is reported in which financial statement
Statement of financial position / BS
If you have two pension plans, one overfunded and one underfunded, do you net them into one non-current asset or one liability or split the overfunded and underfunded portions?
Split them, will report non-current asset and liability
For a defined benefit plan, what should be reported as a liability?
The unfunded projected Benefit Obligation (funded status if negative)
IFRS remeasurement of defined benefit obligation is determined how?
Actuarial gains / losses unrecognized
GAAP vs IFRS difference in OCI for pension plans
IFRS: Prior service costs expenses immediately and remeasurement adjustments are NOT amortized
Where does service cost appear on the income statement?
Compensation cost in income from operations
Where does net period pension cost appear on the income statement?
Other gains / losses
Statement of
Net assets available for benefits
BS - Asset
Statement of
Changes in net assets for benefits
IS
Statement of
Accumulated plan benefits
BS - Liabilities
Statement of
Changes in accumulated plan benefits
Changes in liabilities
Net assets available
Assets
Accumulated Plan Benefits
Liabilities
Financial statements required for a defined contribution pension plan
401K
Statements of:
Net assets available for benefits
Changes in net assets available for benefits
Statement of net assets available categories
FV assets
Receivables
Cash - bookend of assets
Less: Liabilities
Footnote disclosures in the financials statements for PENSIONS do NOT require what?
The differences between executive and non-executive plans
How should Plan investments be presented on defined benefit plan’s financials?
Fair value
Which financial statement may be prepared but is NOT required for defined benefit and defined contribution plans?
Statement of cash flows
What is NOT shown on the defined benefit plan’s financials that is shown on the company’s financials
Funded status and net period pension cost
Capital stock
Amount that must be retained by the corporation for the protection of creditors
Common stock pros and cons
Pros: control / ownership / preemptive rights
Cons: last in line upon liquidation, no guaranteed dividends or assets
Book value per common share
Measures amount that common shareholders would receive per share upon liquidation (according to the recorded book value)
Common Shareholders Equity is calculated how?
Net assets - preferred stock outstanding - cumulative preferred dividends in arrears
How to calc common stock outstanding
Issued less repurchases
How to solve participating preferred stock problems?
Share equally (capital stock * %) then pro rata
Legal capital
Capital stock
RE
Accumulated earnings (or losses) during life of corporation that have NOT been paid out as dividends
If retained earnings has a negative balance it is called
A deficit
How to calc ending retained earnings
Beg RE - Dividends DECLARED \+/- Prior period adjustments \+/- Accounting changes reported retrospectively End RE
What kind of dividends are NOT on the statement of cash flow?
Property or Stock dividend, they aren’t on statement of cash flows because they aren’t cash
Difference between Cost and legal / par method for treasury stock
Timing of gain / loss
Cost - upon reissuance
Legal / par - immediately
Does treasury stock gain / loss ever affect IS or RE
IS - no
RE - will never go up, but may be reduced if there is a loss in excess of APIC
Retirement of stock, cost vs par method
Cost - DR CS, APIC for original issuance amount pro rats and the retained earnings or APIC - TS is a plug
Par - DR CS and TS @ par
Cost method treasury stock
Similar to buying an asset. Carry at cost and then recognize gain / loss on sale.
Retirement involves reversing CS and APIC for the issuance price (pro-rata) then plugging RE or APIC for the difference between TS and the issuance
Par value method for treasury stock
Treasury stock is carried at par, issuance APIC is reversed (pro rate) and any gain or loss is a plug to equal the cash received. The plug account could be APIC - TS or RE (loss)
Gain / Loss is determined repurchase vs issuance price
All other entries CR Treasury Stock and APIC for the difference
Donated stock’s effect on balance sheet
No net effect, increases equity (donated Treasury Stock) and decreases equity by same amount (donated APIC)
Recorded @ FV
JE to record sale of donated treasury stock
Cash
Donated Treasury Stock
APIC plugs the difference in sales price vs book value of the donated treasury stock
If the state of incorporation has laws that protect the treasury stock from dilution, how does that affect a stock split?
Stock split will also affect treasury stock
Be careful gains and losses refer only to
Income statement transactions and never refer to treasury stock transactions
Adjustments to RE
+ Net Income (net of tax)
+ Prior period adjustments (net of tax)
+ Restatements due to change in accounting principle
- Dividends Declared
How is common stock reported in the equity section
Issued at par and NOT decreased by treasury stock transactions
How does Treasury Stock affect book value per share?
Generally it increases because the denominator decreases (increasing the value)
Rule for a basket purchase or sale of convertible preferred stock
Allocate based on relative fair market values (FMV / basket purchase price)
What is the purpose of appropriating retained Earnings?
Restrict earnings available for dividends
Cumulative vs noncumulative preferred stock
Cumulative receiver Dividends in arrears before common stockholders are paid
Participating preferred stock
Share equal, then pro rata
Stock subscriptions Receivable is what kind of account?
Contra-equity unless collected as a subsequent event in which case it may be an asset
Services traded for stock, the stock is recorded at
FMV of stock
Dividend
Distribution of earnings
NOT ON IS
Who approves a dividend?
The board of directors
Date of record
Date board of directors does roll call for dividends. No journal entry
Are Dividends paid on treasury stock?
No - only outstanding shares
Scrip dividends
Basically the same thing as a regular dividend except instead of crediting dividends payable, credit notes payable. Might even accrue interest.
Done when there is a cash shortage
How are Dividends presented for IFRS and GAAP on financials?
Same for both
On the face or in the notes presented as dividends per share for each class
Small stock dividend threshold
<20-25%
Small stock dividend effect on stockholders equity
No effect, capitalizes RE
Small stock dividend reduces RE by
FMV
B/c to small to have effect on the market price
Large stock dividend threshold
> 20-25%
Large stock dividend reduces RE by
Par
JE for large stock dividend
At declaration:
Retained Earnings
Common stock distributable
At distribution:
Common stock distributable
Capital stock
Statement of Changes in Stockholders Equity
GAAP vs IFRS
Primary financial statement for IFRS and SEC public ally traded companies
NOT required by GAAP (could be presented in the notes). Required by SEC though
Stock compensation question, what should for first thought be?
Under 20%? Small, FMV
Over 25%? Large, par
When you see Non-compensatory stock option / purchase plan, what should you think?
No compensation expense
Noncompensatory plan requirements
Offered to all EEs equally for a limited time and at a reasonable discount
IFRS vs GAAP noncompensatory vs compensatory plans
All stock purchase plans are compensatory under IFRS
Grant date
Date option is used, no JE yet
Compensatory Stock options expire JE
APIC - stock options
APIC - stock options expired
Stock appreciation rights
EE gets paid the difference of FMV over a specified price at grant date. Service cost is estimated and credits a liability.
How much is RE adjusted for in a property dividend?
Debited (reduced) by the FMV of the property
Do treasury stock transactions affect CS?
Only if par value method -or- retiring shares
That’s b/c par value method = retire shares then reissue
Redeemable preferred stock
Issuing corporation has option to call the stock at a specified strike price
What JE is recorded for stock rights?
Only record when exercised
What date is a property dividend adjusted for FMV?
Declaration date
What distribution to stockholders is NOT considered an asset or capital distribution?
Stock split / stock dividends
After all nominal accounts are closed what is the affect on retained earnings?
The FV decrease is netted against the gain / loss from the income statement, resulting in an impact equal to the carrying amount of the property
If a property dividend is declared and the property is stock, how to calc gain or loss?
Difference in FMV of shares vs book price * # of shares being declared
For a stock subscription, when is APIC increased?
On recording date
For the investor, are stock dividends recorded at FMV or book value?
Neither - not considered income
Carrying value of stock rights
FMV of stock rights / (FMV of stock rights + FMV of stock Ex-rights) * cost of stock
Which day is a public entity required to measure cost of employee services in exchange for an award of equity interested based on the FMV of the award?
date of grant
When compensatory stock options are redeemed, by how much will APIC increase?
Cash received
+ total compensation expense
- Par value of stock
= APIC
Visualize the JE
Cash
APIC - stock options
CS
APIC
How much will SE increase as a result of the exercise of stock options?
The strike price * notional amount
CS + APIC - (APIC stock options) = notional amount
If the expected rate of return is used for pension cost and the actual rate decreases, how does that affect pension cost this year?
It won’t. It will affect pension cost next year as it is amortized
If plan is overfunded at beg of the year, is PBO still used for net pension period cost ?
No, use pension benefit asset account - do not use PBO even if the plan is underfunded by the end of the year.
Even though plan assets and actual PBO will differ from the balance created by this JE. In this case you have two separate books
When calculating PBO ending balance, what to watch out for?
Return on plan assets technically affects the plan assets account and not PBO.
Also decrease by benefits paid
Equity for land, record the land at what?
Always value at consideration given. For equity it would be FMV
How are stock dividends factored into WACSO?
They are retroactively applied
WACSO
Weighted Average Common Stock Outstanding
Donated stock is measured / recorded at
Fair value
Are Dividends shown on the IS?
No
