FAR 6 Flashcards
Pension Plans: Service Cost & Interest Cost
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
Calculating PBO
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
FV of Plan Assets
Beginning FV of plan assets
+ Contributions
+ Actual return on plan assets (plug)
- Benefits paid to retirees
= Ending FV of plan assets
Income Statement (Expense) Formula for Net Pension Expense (GAAP)
S.I.R. A.G.E.
1 amount on I/S
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
Interest Cost Calculation in Pension Expense
Beginning of period PBO
x Discount Rate
= Interest Cost
2 Methods for Gains/Losses in Pension Expense
- Recognize gains/losses on IS in period incurred
- Recognize in OCI and amortize over time using corridor approach
Option 2 useful to smooth earnings
Account for Net Pension Cost
Dr. Net periodic pension cost
Cr. Pension benefit liability
Cr. OCI
When will pension plan liability be listed as current?
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
Prior Service Cost & Pension Losses - Accounting Entries
- Hit OCI first….
Dr. OCI
Cr. Pension benefit asset/liability
- 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
Pension Gains: Recognition in Period Incurred
Increase funded status of pension plan:
Dr. Pension benefit asset
Cr. OCI
What determines income tax expense for current year?
Corporate tax return, not GAAP income. Whatever the tax expense is for the TAX return, that will be the expense for the GAAP statements.
Temporary Differences Summary
Tax Income Later = Liability
Tax Income First = Benefit
Tax Deduction Later = Asset
Tax Deduction First = Liability
How is past service cost recognized in IFRS
Past service cost is recognized on I/S in period of plan amendment.
Deferred Tax Liability
GAAP Income > Tax Income
Financial accounting expense in future years that will not be deductible in future years because it was already deducted.
Deferred Tax Asset
GAAP Income < Tax Income
Future taxable income will be less than future financial accounting income due to temporary differences
What rate is used for temporary differences
Applicable tax rate - enacted tax rate expected to apply to taxable items. Use tax rate in effect when temporary difference reverses itself.
How should deferred tax assets & liabilities be classified in balance sheet?
DTA & DTL should be netted and classified as current or noncurrent
Net across not down
Deferred Tax Expense
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
How should deferred tax items be classified in balance sheet
Related to asset/liability - according to related asset/liability
If not asset/liability - based on expected reversal date
What must you subtract to arrive at temporary differences
Must subtract permanent differences
Deferred tax expense calculation
If deferred tax liability > deferred tax asset, diff b/t 2
Corridor Approach - Method of Amortizing gains/losses
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
Presenting Current & Non Current Assets/Liabilities
Net tax deferred based on whether Current or Non Current
Net Current assets/liabilities
Net Non Current assets/liabilities
