FAR6 Flashcards
Funded Status (reported in Statement of Financial Position)
FV of plan assets - PBO = funded status
Pension Plan Asset (noncurrent)
Overfunded = FV of plan assets > PBO
Pension Plan Liability (current, noncurrent, both)
Underfunded = PBO > FV of plan assets
Defined Contribution Plan
Specifies the periodic amount of contributions to the plan (charge expenses, and credit cash)
Defined Benefit Plan
Defines the benefits to be paid to employees at retirement (computed using actuarial assumptions of future benefit payments)
Accumulated Benefit Obligation (ABO)
Based on current and past compensation levels (only current salaries)
Projected Benefit Obligations (PBO)
The actuarial present value of all benefits attributed by the plan’s benefit formula to employee service rendered prior to that date. PBO only uses assumptions as to future compensation levels (guess future salary)
Calculating PBO
B: Beginning PBO
A: Service cost, Interest cost, Prior service cost from current period plan amendments, Actuarial losses incurred in the current period
S: Actuarial gains incurred in the current period, Benefits paid to retirees
E: Ending PBO
Calculating Actual return on plan assets
B: Beginning FV of plan assets
A: Contributions,
Actual return on plan assets (squeeze)
S: Benefits paid to retirees
E: Ending FV of plan assets
Income Statement (expense) formula
S current Service cost I Interest cost (R) (Return on plan assets) A Amortization of prior service cost (G) (Gains) and Losses E amortization of Existing net obligations (+) OR net assets (-) = Net periodic pension cost
Net Periodic Pension Costs JE
DR: Net periodic pension costs
CR: Pension benefit liability
CR: Other comprehensive income
when pay: Pension benefit liability
Cash
Interest Costs
Beginning of period PBO x Discount rate
(Expected return on plan assets)
Beginning FV of plan assets x expected rate of return on plan assets
= (expected return on plan assets)
Amortization of unrecognized prior service costs
Beginning unrecognized prior service cost / Average remaining service life
= Amortization of prior service cost
(unamortized is in AOCI)
(Gains) and Losses(+)
The difference between the expected and actual return on plan assets when the expected return on the plan assets is used AND changes in actuarial assumptions
(unamortized is in AOCI)
Accounting for (Gains) and Losses
Recognize G/L immediately in I/S OR Recognize G/L in OCI and amortize over time using the corridor approach
Corridor Approach: Accounting for (Gains) and Losses
GREATER of:
Market related value of plan assets = assets OR PBO = liabilities multiplied by 10%
Then divided by Average remaining service life
amortization of Existing net obligations/net assets at implementation
PBO - FV of plan assets = Initial unfunded obligation / 15 years OR average employee job life (GREATER OF) = Minimum amortization (unamortized is in AOCI) (net obligations +, net assets -)
B/S Accounting Pension Plan Contributions
DR: Pension benefit asset/liability
CR: Cash
to fund the pension
Beginning and ending funded status (FV plan assets - PBO) of a defined benefit plan
Beginning funded status \+ contributions - service cost - interest cost \+ expected return on plan assets - prior service cost \+ net gains - net losses = Ending funded status
Prior Service Cost and Pension Losses
DR: OCI (goes to AOCI) CR: Pension benefit asset/liability DR: Deferred tax asset CR: Deferred tax benefit - OCI (pensions gains are the opposite)
Amortization of Pension Expense
DR: Net periodic pension cost CR: OCI (take it out of AOCI) DR: Deferred tax benefit - OCI CR: Deferred tax benefit - I/S (following year JE's are opposite)
U.S. GAAP Pension Plan Disclosures
More is better (disclose everything)
DO NOT DISCLOSE: repeat info and predict/project good items
Defined Benefit Pension Plan F/S
F/S presented by the pension plan itself
Plan Investments reported at FV
Accumulated Postretirement Benefit Obligation (APBO)
Is the PV of future benefits that have vested as the measurement date (is discounted using the assumed discount rate)
Attribution period
APBO is accrued during the period the employee works (from hire date to full eligibility date)
Amortization or Expense of the Transition Obligation
Either immediately expense or amortize over average remaining service period or 20 years (GREATER of)
Funded Status - B/S
FV of plan asset - APBO = funded status
Noncurrent: Postretirement benefit plan asset
Overfunded (FV of plan assets > APBO)
Current, noncurrent, both: Liability
Underfunded (APBO > FV of plan assets)
Liability Recognition
The employer’s obligation is attributable to services already rendered
The obligation relates to rights that vest/accumulate
Payment of the compensation is probable
The amount can be reasonably estimated
Vacation/Sick Pay Benefits
Accrue for vesting
If non-vesting accumulating rights then DO NOT accrue
Permanent Differences
Affects “current”, not “deferred”
Temporary Differences
Affects “current” and “deferred”
Deferred Tax Liabilities
Future tax accounting income > future financial accounting income
(tax deductible first/f.s. expense later)
(f.s. income first/taxable income later)
Deferred Tax Asset
Future financial accounting income > future tax accounting income (gift certificate)
JE to record taxes
DR: Income tax expense - current (YR 1) DR: Income tax expense - deferred CR: Deferred tax liability CR: Income tax payable DR: Deferred tax liability (YR 2) CR: Income tax benefit - deferred
Valuation method
(50%) that part of all the deferred tax asset will not be realized, a valuation allowance is recognized DR: Deferred tax asset (YR 1) DR: Income tax expense - current CR: Income tax payable CR: Income tax benefit - deferred DR: Income tax expense - deferred (YR 2) CR: Deferred tax asset
Uncertain tax positions
Aggressive tax positions
Step 1 - the evaluation is based on the expected outcome in the court of last resort
Step 2 - the evaluation is based on the expected outcome in a settlement with the taxing authority
Enacted tax rate
Measurement of deferred taxes based on the applicable tax rate (for temp. differences)
Changes in Tax Laws/Rates
I - income from continued operations (change in estimate - prospectively)
Net temporary adjustment
Deferred taxes: end balance - current balance
= requirement adjustment
B/S presentation Income taxes
“based upon what gave birth to it”
Rule 1: Deferred tax items should be classified based on the classification of the related assets/liability for financial reporting
Rule 2: exceptions (not related to asset or liability should be classified based on expected reversal date of temp. difference)
B/S deferred Net Across
All deferred tax assets and liabilities classified as “current” netted
All deferred tax assets and liabilities classified as “noncurrent” netted
Operating Loss Carrybacks
100% collectible (no valuation allowance)
Used to reduce taxes due or receive a refund for a prior period
Operating Loss Carryforwards
Valuation allowance may be necessary (required) - 2 years: recognized to the extent that the tax benefit is more likely not realized
Investee’s undistributed earnings
Income tax return = dividend income
GAAP F/S = % of sub’s income
= temp. difference
Ownership 0-19% - 70% exclusion (perm. diff.)
Ownership 20-80% - 80% exclusion
Ownership over 80% - 100% exclusion
