FAR 6

Question 1

Pension Plans: Service Cost & Interest Cost

Answer 1

Service Cost: PV of all pension benefits by company employees in CY. Increases PBO.

Interest Cost: Increase in PBO due to passage of time. Accrual of interest cost on PBO at rates equal to assumed discount rates.

Beg BPO x Discount rate

Question 2

Calculating PBO

Answer 2

Beg PBO
+Service Cost
+ Interest Cost
+Prior service cost from current period plan amendments
+ Actuarial losses incurred in current period
- Actuarial gains incurred in current period
- Benefits paid to retireees

= Ending PBO

Question 3

FV of Plan Assets

Answer 3

Beginning FV of plan assets
+ Contributions
+ Actual return on plan assets (plug)
- Benefits paid to retirees

= Ending FV of plan assets

Question 4

Income Statement (Expense) Formula for Net Pension Expense (GAAP)

S.I.R. A.G.E.

1 amount on I/S

Answer 4

S. - +Service cost (current)
I.- + Interest cost
R.- (Return on plan assets)

A. + Amortization of prior service cost
G.- - (Gains) & (+) Losses
E.- + Existing net obligation or net asset - amortization of it

= Net Periodic Pension Cost

Question 5

Interest Cost Calculation in Pension Expense

Answer 5

Beginning of period PBO
x Discount Rate
= Interest Cost

Question 6

2 Methods for Gains/Losses in Pension Expense

Answer 6

1. Recognize gains/losses on IS in period incurred
2. Recognize in OCI and amortize over time using corridor approach

Option 2 useful to smooth earnings

Question 7

Account for Net Pension Cost

Answer 7

Dr. Net periodic pension cost
Cr. Pension benefit liability
Cr. OCI

Question 8

When will pension plan liability be listed as current?

Answer 8

Underfunded pension plans are reported as a current liability to the extent that the benefit obligation payable within the next 12 months exceeds the FV of the plan’s assets.

The rest of amount would be listed as noncurrent

Question 9

Prior Service Cost & Pension Losses - Accounting Entries

Answer 9

1. Hit OCI first….

Dr. OCI
Cr. Pension benefit asset/liability

2. When amoritizing to pension expense:

Dr. Net periodic pension cost
Cr. OCI

Don’t forget the deferred tax asset/liability to be removed from AOCI

Question 10

Pension Gains: Recognition in Period Incurred

Answer 10

Increase funded status of pension plan:

Dr. Pension benefit asset
Cr. OCI

Question 11

What determines income tax expense for current year?

Answer 11

Corporate tax return, not GAAP income. Whatever the tax expense is for the TAX return, that will be the expense for the GAAP statements.

Question 12

Temporary Differences Summary

Answer 12

Tax Income Later = Liability
Tax Income First = Benefit

Tax Deduction Later = Asset
Tax Deduction First = Liability

Question 13

How is past service cost recognized in IFRS

Answer 13

Past service cost is recognized on I/S in period of plan amendment.

Question 14

Deferred Tax Liability

Answer 14

GAAP Income > Tax Income

Financial accounting expense in future years that will not be deductible in future years because it was already deducted.

Question 15

Deferred Tax Asset

Answer 15

GAAP Income < Tax Income

Future taxable income will be less than future financial accounting income due to temporary differences

Question 16

What rate is used for temporary differences

Answer 16

Applicable tax rate - enacted tax rate expected to apply to taxable items. Use tax rate in effect when temporary difference reverses itself.

Question 17

How should deferred tax assets & liabilities be classified in balance sheet?

Answer 17

DTA & DTL should be netted and classified as current or noncurrent

Net across not down

Question 18

Deferred Tax Expense

Answer 18

Deferred Tax Expense =

current period temp diff x enacted future tax rate

If net DTA - reduce from income tax expense

If net DTL - add to income tax expense

Income tax expense = Taxable income * rate plus net DTA/DTL * rate

Question 19

How should deferred tax items be classified in balance sheet

Answer 19

Related to asset/liability - according to related asset/liability

If not asset/liability - based on expected reversal date

Question 20

What must you subtract to arrive at temporary differences

Answer 20

Must subtract permanent differences

Question 21

Deferred tax expense calculation

Answer 21

If deferred tax liability > deferred tax asset, diff b/t 2

Question 22

Corridor Approach - Method of Amortizing gains/losses

Answer 22

Net unrecognized gain/loss amortized over employee’s avg remaining service. If beg of year the amount exceeds 10% of the GREATER of the beginning of year balances of:

• Market related value of plan assets - Assets
• Projected benefit obligation

Formula:

Unrecognized gain/loss

= Excess
/ Avg remaining useful life
= Amortization of unrecognized gain/loss

Question 23

Presenting Current & Non Current Assets/Liabilities

Answer 23

Net tax deferred based on whether Current or Non Current

Net Current assets/liabilities

Net Non Current assets/liabilities