Pensions & Taxes Flashcards
What is the difference between contributory & noncontributory pension plans?
Contributory = employees required to contribute
Noncontributory = Only employer can contribute
What is the difference between overfunded vs. underfunded pension plans?
Overfunded = more assets than liabilities
Underfunded = more liabilities than assets
What are the two types of Non-GAAP pension plans?
Pay as you go & terminal funding
What are the two types of GAAP pension plans?
Which plan is used most often for CPA?
Defined contribution plan & defined benefit plan
Defined Benefit Plan is used more
What is the difference between accumulated benefit obligation (ABO) & projected benefit obligation (PBO)?
Which one is used more more for the CPA?
ABO = current salaries only
PBO = future salaries
PBO is used more
Formula for Ending PBO:
Beg. PBO \+ service cost \+ interest cost \+ prior service cost \+ actual losses - actual gains -benefits paid = Ending PBO
Formula for Ending FV of Plan Assets:
Beg. FV of plan assets \+ contributions \+actual return on plan assets - benefits paid = Ending FV of plan assets
Formula for Net Period Pension Cost:
“SIR AGE”
\+ service cost \+ interest cost - return of plan assets \+ amortization of prior service cost - gains or + losses \+ amortization of existing net obligation or - net asset
What is the JE on the I/S for recording the net periodic pension cost?
DB: Net periodic pension cost
CR: pension benefit liability
CR: OCI
Formula for Service cost:
Service cost will be provided by actuary.
Formula for Interest cost:
Beg. PBO * discount rate
Formulas for Return on Plan Assets:
Actual Return: Beg. FV of plan assets \+ contributions \+ actual returns (squeeze) - benefits paid = ending FV
Expected Return:
Beg. FV of plan assets * expected rate of return
Formula for Amortization of prior service cost:
What is the difference using this with IFRS?
Beg. unrecognized prior service cost / avg. remaining service life
IFRS - the entire service cost is booked into IS and not unrecognized to OCI
What are the two ways to determine a gain or loss?
1) Difference between expected & actual return on plan assets
2) Actual gains & losses in period
Formula for amortizing gains/losses on IS:
Corridor approach:
Total gain/loss - greater of 10% of PBO or 10% of FV plan assets = Excess / avg. remaining service life = Amortization of gain/loss
Formula for amortization of existing net obligation or net assets:
PBO - FV plan assets = initial unfunded obligation / 15 years OR avg. employee job life = amortization
On the B/S, what is the JE for a pension plan contribution?
DB: Pension benefit assets/liability
CR: Cash
Formula for funded status of pension plan:
FV of plan assets
- PBO
= Funded status
How are overfunded and underfunded pensions reported in IS?
Overfunded = noncurrent asset
Underfunded = noncurrent liability & curent liability if expected future benefits exceed the FV of plan assets
Formula for ending funding status:
Beg. funding status \+ contributions - service cost - interest cost \+ expected return on plan assets - prior service cost \+ net gains - net losses = ending funded status
Which of the pension costs must be recorded within the B/S first before moving to the I/S?
“AGE”
Prior pension, gains/losses, net obligation/net assets
In the B/S, what is the JE for prior service cost & losses?
In the B/S, what is the JE for this deferred tax asset?
DB: OCI
CR: Pension benefit asset/liability
DB: Deferred tax asset
CR: Deferred tax benefit - OCI
In the I/S, what is the JE when amortizing out of the B/S the prior service cost & losses?
What is the deferred tax JE?
DB: net periodic pension cost
CR: OCI
DB: Deferred tax benefit - OCI
CR: Deferred tax benefit - I/S
In the B/S, what is the JE for gains?
In the B/S, what is the JE for this deferred tax liability?
DB: Pension benefit asset/liability
CR: OCI
DB: Deferred tax expense - OCI
CR: Deferred tax liability
In the I/S, what is the JE when amortizing out of the B/S the gains?
What is the deferred tax JE?
DB: OCI
CR: Net periodic pension cost
DB: Deferred tax expense - I/S
CR: Deferred tax expense - OCI
What is a pension plan settlement?
Pension plans assets are sold and proceeds are used to buy annuity contracts
What are termination benefits?
How are they calculated?
Employees are paid to terminate rights to future pension payments
Lump sum payments + PV termination benefit
Under IFRS, how is prior service cost recorded?
Recorded in the current year I/S only.
Under IFRS, how is gains recorded?
Recorded in AOCI only, not amortized to I/S.
How should plan investments be reported in a defined benefit plan’s financial statements?
At fair value.
The funded status of a defined benefit pension plan should be reported in?
The statement of financial position (B/S)
What are the two type of tax differences?
What periods do they affect?
Permanent: Current only
Temporary: Current & Deferred
Formula for Current Tax Liability?
Tax Return amount * Current tax rate
Formula for Deferred Tax Liability/Asset?
Temporary Differences * Future Enacted Tax Rate
Formula for I/S Total Tax Expense?
Current Tax Liability
+ Deferred Tax Liability OR
- Deferred Tax Asset
Examples of permanent differences?
Tax-exempt interest (municipal, state) Life insurance proceeds & premiums when beneficiary Penalties & Fines Dividend received deduction Nondeductible items
What makes up a deferred tax liability?
Future tax accounting income > future financial accounting income
What makes up a deferred tax asset?
Future tax accounting income < future financial accounting income
What are the JE to record Income tax liability? Income tax expense?
DB: DTA OR
CR: DTL
CR: Income Taxes Payable
DB: Income tax expense current
DB: Income tax expense Deferred OR
CR: Income tax benefit Deferred
What are examples of revenues included in taxable income first (DTA)?
Unearned revenues
What are examples of expenses included in taxable income first (DTL)?
depreciation
prepaid
amortization
What are examples of revenues included in financial income first (DTL)?
installment sales equity method (dividends)
What are examples of expenses included in financial income first (DTA)?
bad debt expenses
start-up expenses
warranty expenses
How do you treat operating losses?
Carried back 2 years or carried forward 20 years and apply against taxable income
Under current generally accepted accounting principles, which approach is used to determine income tax expense?
Asset and liability approach
