Pensions and Income Tax Accounting

Question 1

What is the approach under GAAP for income tax expense?

Answer 1

Asset and Liability approach

Question 2

How to net current and non-current assets and liabilities?

Answer 2

Current with currents

non-currents with non-currents

Question 3

Difference between “income tax expense” and “income tax liability”?

Answer 3

Current Income tax expense = taxable income * tax rate

Income tax liability = expense less any tax payments made.. except you less the payments made at the END after calculating the taxable income at TR rate

Question 4

How to calc. DEFERRED tax expense?

Answer 4

Equal to current period TEMPORARY differences times FUTURE TR

Question 5

Deferred Tax Asset?

Deferred Tax Liability?

Answer 5

Deferred Tax ASSET: Warranty costs for Future Years (to be calced at their tax rate in that year)

Deferred Tax Liability: EG. Depreciation, prepaid insurance, rent receivable

Deferred Tax EXPENSE = def. Tax Liabilities NET OF def. tax assets.

Question 6

How to calc for temporary difference?

Answer 6

Subtract permanent difference to arrive at temporary difference

EG equity in investee - dividends in investee (adj. for DRD deduction)

Question 7

Example Tax J/E

Answer 7

Tax exp - current XX
Tax exp - deffered XX
Tax Liab. - curr. XX
Tax Liab. - Deff. XX

Question 8

Also deferred tax asset formula:

Answer 8

Net Differences related to balance sheet accounts X future enacted tax rate

Question 9

Rule about income recognized on the financial statement before being reported as Taxable Income

Answer 9

The rule about income being recognized on the financial statement BEFOREbeing reported as Taxable Income, is that a deferred tax liability should be reported.

Question 10

What does a “deferred tax asset” represent?

Answer 10

Future Tax Savings

profit in year of, deductible down the line

Question 11

What is a Pension Plan Agreement?

Answer 11

Agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current or past services.

They are a form of DEFERRED COMPENSATION paid to retired employees, usually on a periodic basis.

Question 12

Defined benefit plan

Answer 12

Benefits the employee receives are determined by a formula, and it is the sponsor company’s responsibility to ensure that contributions to the plan are sufficient to pay benefits as they become due.

Question 13

Defined contribution plan

Answer 13

Empl. retirement benefits based on the amount IN the plan. (EASIER to account for)

Question 14

Pension Plan:

Prior service cost amortization under US GAAP?

Answer 14

Under GAAP, amortization of unrecognized prior service cost, means you amortize the total Credit to employees for services, over average “Remainder of years left”.

EG

100,000 for services rendered prior to plans adaptation
/ 5 (avg. of 3+5+7)

Question 15

Components of Pension Period Costs: SIRAGE

the income statement accounting for pension plans

Answer 15

S- Service Cost component (at present val - PBO)

I- Interest Cost component
(also called Discount Rate; multiply times beg. of period PBO)

R- Returns expected on plant assets for the period (either Actual or expected)

A- Amortization of Prior service cost component (unamortized portion goes to AOCI)
(unrecognized net losses less PBO x 10%)… then divide by remaining service life

G- Gain/Loss component
(unamortized portion goes to AOCI)

E- Transition asset or obligation component…
(unamortized portion goes to AOCI)

Plus the amnt of any gain/loss due to a settlement or curtailment.

Question 16

Pension Plans:

What is accumulated benefit obligation?

Projected benefit obligation? (PBO)

Answer 16

Acc ben obligation: PRESENT value of future retirement payments, attributed to the pension benefit formula to empl. services rendered prior to a date, based on current and past compensation levels

Proj. Ben. Obligations: like accumulated benefit obligation, but based on PROJECTED (or future) Compensation levels, instead of past/present

EG: beg bal, + 10% interest + Current year service costs (LESS) pension benefits paid during the year

Question 17

What makes up a gain in a pension plan?

Answer 17

(Actual Return - Expected Return) x Net of Tax (e.g. 1-.3)

Question 18

How to use the BASE formula to calculate “actual return on plant assets”

Answer 18

B - beg plan assets (+)
A - Contributions
   - Actual Return (SQUEEZED)
S - (Less) the benefits paid
E - Ending plan assets (e.g. given at 525000)

Question 19

How to know if a pension plan is underfunded or overfunded?

“Funded Status”

Answer 19

Do:

Fair Val of plan assets (LESS) PBO

FV - PBO

Question 20

How to calculate “return on plan assets” for the year in pension plans.

Answer 20

Fair val. of assets, beginning of the year X rate of return on plan assets

Question 21

Pension plans: when calculating amortization related to AOCI account, what must you do?

Answer 21

Multiply by effective TR!!

Aka - (1-TR)

Question 22

Minimum Recognized Amount to be reported

Answer 22

Unrecognized Gain/Loss (LESS) 10% of PBO…

take the excess, divide by remaining years in service life, to attain Minimum Recognized Amount

Question 23

Are pension plan investments reported at fair value?

Answer 23

Yes.

Question 24

Accruing post-retirement benefits:

Answer 24

Begins when hired,
Through eligible vesting date
(^^ “attribution period”)

Question 25

Compensated Absence Liability

Answer 25

Vacation days earned:

6 employees x 10 days x $100/day

(Hint: vacation pay is accrued if it vests or accumulates. Sick pay is accrued ONLY if it vests, not when it accrues.)

Question 26

If book basis of asset > tax basis (e.g. from depreciation methods,) a DEF. TAX LIABILITY should be established.

In future years, T.I. will be higher than Book Inc. when temporary difference reverses.

Journal Entries?

Answer 26

Year of original temporary diff:

Tax Expense : XX
Taxes Payable XX
Def. Tax Liability XX

Year of Reversal of temporary dif:

Tax Expense: XX
Def. Tax liability: XX
Taxes Payable XX

Question 27

What happens to a deferred tax asset arising from difs. in depreciation methods on balance sheet and taxable income?

Answer 27

The deferred tax asset decreases on a straight-line basis over life of asset.

Question 28

For IFRS how do we report all deferred tax assets and liabilities?

Answer 28

In the Noncurrent accounts.

Question 29

Calculating Effective Tax Rate

Answer 29

Income Tax Expense (EG calculate 190K * .3) / Book Income

Question 30

warranty expense

depreciation

Answer 30

w. e. = current deferred tax asset

dep. = noncurrent deferred tax liab.

Question 31

Calc. a deferred tax expense?

Answer 31

Total Temporary Dif * Rate

(Less - former temp. dif. times former rate)

= Deferred tax expense

Question 32

Overfunded pension plans?

Answer 32

Aggregated and current asset.

Question 33

Pension benefit liabilities - current and non-current?

Answer 33

Current: when expected benefits of next yr. exceed fair val. of plan assets by X amount

Non-current: the rest of underfunded

Question 34

Calc. gain/loss between actual vs. expected

Answer 34

Fair Val Plan Assets, Beg Bal x (dif. between ACTUAL - expected rate of return)

Question 35

Interest Cost for pension plan

Answer 35

Beg. year PBO x Discount Rate

Question 36

Service Cost for pension plan

Answer 36

FV YE - PBO YE

Question 37

How to calculate Gain on pension plan?

Answer 37

Beg Year FAIR VAL * ( Actual - expected rate of return)

Question 38

For pension accounting, what constitutes an increase in retained earnings?

Answer 38

Netting amortization of net gain (EG OCI), less deferred tax expense to net income.

Question 39

Are multiple defined benefit pension plans calculated separately?

Answer 39

Yes.

Question 40

Rule about deferred tax liabilities and assets:

Answer 40

Rule 1: Current are offset and presented as one amount

Rule 2: all noncurrent offset