FRA - Employee Compensation: Post-Employment and Share-Based Flashcards
defined contribution plan
a retirement plan whereby the firm contributes a certain sum each period to the employee’s retirement account - employer’s contributions are defined, employee’s benefits are not - employee’s contribution = pension obligation; thus, no further obligation to report on balance sheet - investment decisions are left to the employees, who assume all of the investment risk
defined benefit plan
the firm promises to make periodic payments to the employee after retirement - b/c the employees’ future benefits are defined, the employer assumes the investment risk - employer’s contribution isn’t fixed (e.g. the entitlement to the benefits increase w/the length of the employee’s service)
A company that offers defined pension benefits typically funds the plan by…
contributing assets to a separate legal entity, usually a trust. The plan assets are managed to generate the income and principal growth necessary to pay the pension benefits as they come due
Under defined benefits, the PV of future benefits is
firm’s current obligation
If plan assets > current obligations
the plan is overfunded -> may be possible for the employer to recapture funds either by: - reduced future funding - reversion of funds
If plan assets < current obligations
the plan is underfunded
Other post-employment benefits (OPB)
- healthcare benefits for retired employees - life insurance premiums OPBs are typically classified as defined benefit plans. Like DB plans, the future benefit is defined today but is based on a number of unknown variables Typically, companies don’t pre-fund OPBs unlike DB plans As OPBs are usually unfunded, employer recognizes expense in the P/L as benefits are earned. But, employer’s cash flow isn’t affected until the benefits are actually paid to the employee
pension obligation
PV of future benefits earned by employee’s for service provided to date, based on expected future salary increases IFRS - PVDBO (PV of defined benefit obligation) GAAP - PBO (Projected benefit obligation)
funded status is reported
on the balance sheet as either a net asset or liability funded status = fair value of the plan assets - PBO
A company must disclose in the footnotes
- discount rate
- expected return on plan assets
- rate of compensation growth
The expected lenght of employment isn’t a required disclosure in the footnotes
Equity compensation rewards depend on
future events
*continued employment is usually a necessary element (vesting)
Vesting
The process of accruing non-forfeitable rights -> usually earned through time in employment -> employee can’t lose that right/benefit
Compensation expense in share-based compensation plans is based on…
The fair value of the options on the grant date based on the number of options that are expected to vest
Main issues associated w/accounting for share-based compensation
- Recognition: when should the cost be recognized?
- Measurement: how the cost should be measured
Where does employee stock option plan go in the financial statements?
ESOP is charged to equity accounts
Such transactions are seen as capital transactions
