FAR - Financial Statement Acct - Deferred Compensation Agreement

Question 1

2 types of pension plans

Answer 1

1) defined contribution plan: # of annual employer contribution is defined by contract
2) defined benefit plans: annual retirement benefit based on formula/defined, employer liable for benefits

• accrual accounting is used for both
• employer bears risk on fund performance for both
• both can be contributory/non-contributory
  1) contributory = contributions by employer/employee
  2) non-contributory = contributions by employer ONLY

Question 2

Defined contribution plan

Answer 2

Simple accounting, little issues arise.
Employer pays periodic contribution into separate trust fund administered by 3rd party trustee
Investment risk is borne by employer, income is dependent on fund management by employer
Sponsor must disclose description of plan.

Question 3

Acct for defined contribution plan

Answer 3

annual pension expense = annual employer contribution

shortfalls arise = liability, until employer covers it

Question 4

Defined benefit plan

Answer 4

complicated acct, pension exp/PBO liab dependent on many factors: turnover, salary, life expectancy, etc.

amounts contributed are related to future benefits expected to be paid to current employees. ALL funding based on PV methods. Additional future benefits must be discounted to PV

Question 5

Acct for defined benefit plans

Answer 5

Accrual accounting, pension exp recognized as benefits earned, pension obligation recognized for unpaid benefits

Question 6

Defined Benefit Plan Benefit Formula

Answer 6

3 variables =

1) years of service
2) age at retirement
3) highest salary attained/annual salary

(year of service/40) X (annual salary) X (age at retire/60)

Question 7

Main acct reporting issues

Answer 7

1) pension expense
2) projected benefit obligation (PBO)
3) Pension assets @ FMV
4) Pension Liability

Question 8

Pension Expense

Answer 8

Cost to provide pension benefits, reported in I/S and has 5 components:

1) Service Cost: always increase pension expense
2) Interest Cost: always increase pension expense
3) Expected return on plan assets: always reduce pension expense
4) Amort. of prior service cost: always increase pension expense
5) Amor. of net gain/loss: decrease expense under gains and increase expenses under losses.

Question 9

Projected Benefit Obligation (PBO)

Answer 9

PV of unpaid pension benefits, measured by benefit formula. Reported only in footnotes, NOT the B/S. This is an actuarial PV.

Question 10

Pensions assets @ FMV

Answer 10

fund available for retirement benefits, reported only in footnotes, off B/S.
Ending plan assets = contributions to date + investment return (interest, divs, stock appreciation, gains/losses) - benefits paid to date

Question 11

Pensions Liability

Answer 11

Difference between PBO & Plan Assets, reported on the B/S (amount of contribution not paid)

Formula = PBO - Assets, normal balance = underfunded = liability.

IF Assets > PBO = overfunded balance = assets.

Question 12

2 important pension acct estimates (rates)

Answer 12

1) discount rate: used for PV calculations, rate at which the PBO could be settled and MKT interest rate is used
2) Expected rate of return: used to compute expected return on plant assets, (component of pension expense)

Question 13

Service Cost

Component 1 of PE

Increase PE/PBO

Answer 13

PV of pension benefits earned in current period, increase pension expense due to service provided, also increase PBO

Question 14

Interest Cost

Component 2 of PE

Increase PE/PBO

Answer 14

discount rate X BOY PBO, increase pension expense

Question 15

Expected return on plant assets

Component 3 of PE

Reduce Exp/Increase Plan Asset

Answer 15

(expected rate) X (plant assets BOY @ FMV), reduce pension expense

Question 16

Amort. of Prior Service Cost

Component 4 of PE

Increase PE/PBO

Answer 16

gradually increase (delayed recognition) service cost/pension expense by effects of amendments to plan, grant increase in value of PBO, no income statement impact,

Question 17

Amort. of net gain/losses

Component 5 of PE

Answer 17

gradually increase/decrease (delayed recognition) pension expense by

1) changes in PBO due to est. changes
2) differences between expected and actual return on plan assets

asset gains/losses affect pension liability and is recognized immediately on Other Comprehensive Income, not immediately recognized in PE

Question 18

3 attributes of Defined benefit plan acct

Answer 18

1) delayed recognition of PE items - gradual recognition through amortization
2) net reporting of PE - net sum of 5 PE components
3) offsetting in B/S - PBO & plan assets are not on B/S, they offset and yield either a liab or asset which is then reported on the B/S

Question 19

Unfunded PBO

Funded status

Answer 19

PBO - plan assets @ FMV

Difference between PBO & Plan assets @ FMV

Question 20

Accumulated Benefit Obligation

Answer 20

PV of all unpaid future retirement benefits as of B/S date based on (1) service rendered to that date, and (2) current salary levels.

Question 21

PBO Ending Balance

Answer 21

BOY PBO + SC + Interest Cost = PBO Ending Balance

Question 22

Plan Assets Ending Balance

Answer 22

Plan Assets BOY + actual return on asset + funding contribution = Plan Assets Ending Balance

Question 23

Amortization methods for Prior Service Cost

Answer 23

1) SL Method: PSC/remaining service period

2) Service Method: equal amount of PSC per year (more amortization)

Question 24

Pension Gain/Loss

Answer 24

Decrease PBO = Gain
Increase PBO = Loss
Actual Return > Expected Return = Asset Gain
Expected Return > Actual Return = Asset Loss

Net the PBO change & Asset Return

Question 25

Net Pension Amortization Methods

Answer 25

1) SL Method: Net gain/Loss / Denominator
2) Corridor Method: Net pension gain/loss - Corridor amount (results in smaller number)

Corridor: 10% of larger PBO or assets @ 1/1
(amortize at least corridor #, if negative -> no minimum)

Denominator: average remaining service life of employees

Question 26

Pension Formal Record

Answer 26

pension info. maintained in accounts (pension exp, pension liab, PSC-OCI, Pension G/L-OCI

Question 27

Pension Informal Record

Answer 27

Pension info. not recorded in accounts, PBO/Assets @ FMV

Question 28

Pension Defined Benefit Plan required Disclosures

Answer 28

(a) a description of the plan, (b) the amount of pension expense by component (current service cost, interest cost, return on plan assets, etc.), and (c) the weighted average discount rate used in pension calculations.

Question 29

Pension gain affect exp? Liab?

Answer 29

Reduce pension expense & no effect on liab -> affect OCI

Question 30

Pension Plan Settlement

Answer 30

irrevocable transaction relieves all/portion of PBO (lump sum payment to replace future pension benefits).

gain/loss recog. == net pension gain/loss not yet recognized in pension expense.

If portion of PBO settled, pro rata of gain/loss recognized

Question 31

Pension plan curtailment

Answer 31

reduce length of future employee service/eliminates accrual of benefits (occur when employees terminate/reduces scope of operations)

Question 32

IFRS - Pension differences

Answer 32

1) PBO = Defined Benefit Obligation (DBO)
2) Pension Liab = Defined Benefit Liab
3) PSC = Past (not Prior) Service Cost
4) Pension expense may be itemized

Question 33

IFRS - Past Service Cost

Answer 33

Vested amount = expensed immediately

Unvested amount = amortized over remaining vesting period

Question 34

IFRS - pension gain/loss differences

Answer 34

1) recognize immediately in defined benefit liab and in OCI
2) recognize them in defined benefit liab and in valuation account (unrecognized net gain/loss) = contra/adjunct acct to defined benefit acct

unrecognized acct is amortized through corridor amort into pension expense

Question 35

Nonretirement Postemployment benefits

Answer 35

not pensions

EX:

1) severance pay
2) counseling/disability
3) job training
4) supplemental unemployment benefits
5) continued health care/insurance coverage ltd.

Question 36

Nonretirement Postemployment Benefits Recognition

Answer 36

Accrual Acct

Must meet 4 criteria

1) obligation attributable to services already rendered
2) benefits vest/accumulate
3) payment is probable
4) payment amount is estimable

Question 37

Nonretirement Postemployment Benefits

Criterias 1/2 don’t work

Answer 37

accrual continues if 3/4 are met

(probable and estimable)

if none of 4 are met -> Acct for contingencies!

Question 38

Nonretirement Postemployment Benefits

Restructuring plan

Answer 38

recognition of benefits occurs only when restructuring plan of benefits is approved

Question 39

Nonretirement Postemployment Benefits

Vesting vs Accumulation

Answer 39

no limit on amount of expense to be recognized for vested benefits

accumulation is generally limited

Question 40

Nonretirement Postemployment Benefits

Earned vs Probable Payments

Answer 40

Not all earned benefits represent probably payments

Fewer earned benefits are recognized in comparison to compensated absences

Question 41

Retirement Benefits

Answer 41

Other Postemployment Benefits (OPEB)

noncash beenfits to retirees

Eye care, health care, dental care, life insurance, etc

Question 42

Acct for retirement benefits

Answer 42

Accrual Acct

Same as pension acct

1) delayed recognition
2) Net cost computation of expense
3) Reported balance sheet liab (obligation - assets)

Question 43

Post Retirement (Plan Obligation & Liab)

Answer 43

Accumulated Pension Benefit Obligation (APBO) - same as PBO

B/S liab = postretirement benefit liab (obligation - assets)

APBO = fraction of (EPBO) Expected PBO:
actuarial PV of benefits expected to be received by employee at retirement

Question 44

Post Retirement Benefit Expense ( 6 components)

5 first components similar to Pension Expense

+ 1 (amort of transition obligation)

Answer 44

1) service cost
2) interest cost
3) expected return on assets
4) Amort of PSC
5) Amort of net gain/loss as of 1/1
6) Amort of transition obligation

Question 45

Amort. of transition obligation

Increases the Postretirement Benefit Expense

Answer 45

firms switched to accrual acct = firms had large APBO unrecognized liabilities, transition obligation = APBO at that date

1) 1 time option - recognize transition obligation immediately in earnings, no component 6
2) if not chosen option, must amortize transition obligation = SL over average remaining service life, if average period

Question 46

Full Eligibility

Answer 46

date by which the employee has served the required number of years to attain the level of benefits the employee is expected to attain.

Question 47

EPBO Computation

Answer 47

estimated PV of benefits expected to be paid based on level of coverage employees are expected to attain.

(no formula)

Question 48

APBO Computation

MOST COSTLY BENEFIT

Answer 48

computed as fraction of EPBO earned by employee $ B/S date

Formula
EPBO X (years worked/total years)

Question 49

EOY Postretirement Benefit Liab Computation

2 methods

Answer 49

1) EOY APBO - EOY Assets

2) BOY Liab + P. Exp - Funding

Question 50

Postretirement Benefit Disclosures

Answer 50

APBO & EPBO are disclosed not reported

Components of Postretirement Benefit Exp are disclosed

Discount/EROPA rates are disclosed

Question 51

Postretirement Benefit per capital claims cost

Answer 51

basis for computing the obligation reported for a post-retirement healthcare plan