Financial Lecture 6

Question 1

Define two types of pension plans.

Answer 1

Defined Contribution Plan

Amount of contribution is specified.

Defined Benefit Plan

Amount of the benefit to be received is specified or estimated.

Question 2

What is the difference between projected benefit obligation (PBO) and accumulated benefit obligation (ABO)?

What is the name for the pension plan liability under IFRS?

Answer 2

ABO

Actuarial PV of benefits attributed by the pension benefit formula to employee service rendered before a specified date based on employee service and current and past compensation levels.

PBO

Actuarial PV of all benefits attributed by the pension benefit formula to employee service rendered before a specified date based on assumptions as to the future compensation levels.

Under IFRS, the pension plan liability is the defined benefit obligation (DBO).

Question 3

What is the formula used to calculate the ending projected benefit obligation (PBO)?

Answer 3

Beginning PBO

+ Service cost

+ Interest cost

+ Prior service cost from current period amendments

+ Actuarial losses incurred in the current period

• Actuarial gains incurred in the current period

- Benefits paid to retirees

Ending PBO

Question 4

What is the formula used to calculate the ending fair value of plan assets?

Answer 4

Beginning fair value of plan assets

+ Contributions

+ Actual return on plan assets

- Benefit payment

Ending fair value of plan assets

Question 5

Name the components of net periodic pension cost (net pension expense) under U.S. GAAP.

[SIR AGE]

Answer 5

Service cost

Interest cost

Return on plan assets

Amortization of prior service cost

Gains and losses

Amortization of Existing unrecognized net obligation or unrecognized net asset at implementation

Question 6

How are unrecognized gains and losses amortized to pension expense under U.S. GAAP?

Answer 6

Using the corridor approach. The formula is:

Unrecognized gain or loss

<10% of PBO OR Market related value (greater)>

Excess

/ Average remaining service life

Amortization of unrecognized gain or loss

Question 7

How is funded status calculated and reported under U.S. GAAP?

Answer 7

Companies with defined benefit pension plans must report funded status on the balance sheet.

Fair value of Plan Assets
<pbo></pbo>
Funded Status

Under U.S. GAAP:

Overfunded: (Fair value of plan assets > PBO)

Report as a noncurrent liability

Underfunded: (Fair value of plan assets < PBO)

Report as a current liability (to the extent that benefits payable in the next 12 months exceed the fair value of the plan’s assets), a noncurrent liability, or both.

Question 8

How is funded status calculated and reported under IFRS?

Answer 8

Defined Benefit Obligation

Question 9

How are changes in the funded status from pension gains and losses and prior service costs report on the financial statements under U.S. GAAP and IFRS?

Answer 9

U.S. GAAP

Question 10

Define pension settlements and pension curtailments.

Answer 10

Settlements Curtailments

Question 11

What are some of the required disclosures for a defined benefit plan? [I dread having to disclose this stuff!]

Answer 11

Description

Question 12

What are the components of net periodic postretirement benefit cost (postretirement expense) under U.S. GAAP?

Answer 12

Service cost

Question 13

How do we account for postretirement benefits on the balance sheet under U.S. GAAP?

Answer 13

The funded status of the postretirement benefit plan must be shown as a noncurrent asset

Question 14

What are some of the requirements for postretirement benefit plans?

Answer 14

copy

Question 15

List the four criteria for recognizing post-employment benefits and compensation for future absences.

Answer 15

Employees’ services already rendered

Question 16

Define permanent differences and list some examples.

Answer 16

Permanent differences are transactions that affect either taxable income or financial income, but not both, and only in the period in which they occur. They do not affect future financial or taxable income.

Question 17

Define temporary differences and list some examples.

Answer 17

Temporary differences ate differences between taxable income and financial income that result in taxable or deductible amounts in future years and necessitate the recognition of deferred tax assets or liabilities.

Question 18

Define deferred tax liability.

Answer 18

Anticipated future tax liabilities derived from situations in which future taxable income will be greater than future financial income due to temporary differences.

Question 19

Define deferred tax asset.

Answer 19

Anticipated future taxable amounts will be less than future financial income due to temporary differences.

Question 20

What is the valuation allowance?

Answer 20

If it is more likely than not (>50%) that some position or all of the deferred tax asset will not be realized, a valuation allowance needs to be created to recognize the reduction in the carrying amount of the deferred tax asset.

Question 21

Identify the tax rated used to measure deferred tax assets and liabilities under U.S. GAAP and IFRS.

Answer 21

U.S. GAAP

Question 22

How are deferred tax assets and liabilities classified on the balance sheet under U.S. GAAP and IFRS?

Answer 22

U.S. GAAP