Set 6 FR 21 Employee Benefits

Question 1

Define short-term benefits. How are they accrued? And measured?

Answer 1

Anything due within 12 months of year-end. Accrued as expense when employee earns right to benefits. Measured at undiscounted value.

Question 2

When are profit-sharing and other bonuses recognized?

Answer 2

When entity has a legal or constructive right to pay and reliable estimate can be made

Question 3

DC plans - what expense is recognized each period? How are contributions due more than 12 months after period in which service is granted handled?

Answer 3

• current service cost
• past service granted for any amendments
• net interest cost on discounted current service or past service costs
• At PV of future contributions required

Question 4

What happens if DC actual turn out to be lower than accrued?

Answer 4

Left as prepaid asset on B/S

Question 5

DB plans - what two items are tracked “off balance sheet?”

Answer 5

Defined benefit obligation

Plan assets

Question 6

What is measured each period for DB plans?

Answer 6

Current pension expense
Past pension expense
Net interest cost
Remeasurement gains/losses (OCI)
Net DB Liability/Asset (Balance Sheet)

Question 7

DBO - what is this? how is it measured? what does the actuary look for?

Answer 7

measurement of the PV of all future payments due as valued by the actuary. they will look for:

• how long will employee live?
• when they will retire?
• how long will employee work for?
• any difference in future salary and benefit levels

Question 8

Why are plan assets not on the balance sheet?

Answer 8

They are not owned by the company - they are held in trust

Question 9

Define current service costs in terms of a DB

Answer 9

Acturial PV of future benefits earned by employee for providing service in current year, net of employee contributions

Question 10

Define past service costs. When are they expensed?

Answer 10

NPV of

• future benefits attributable to years of service for which past service was granted
• increase in future retirement benefits to be provided

Expensed in year amendment is made

Question 11

Net interest cost - what does this consist of?

Answer 11

Interest expense on DBO less interest income earned on plan assets

Question 12

Net interest cost - measurement of expense

Answer 12

Use market rate for high-quality corporate bonds as discount rate to determine PV on weighted average DBO

Question 13

How to calculate weighted DBO for interest expense

Answer 13

DBO at beginning of year
ADD current service cost, included at 1/2 assuming costs incurred evenly throughout the year
PLUS past service awarded to employees in period assumed outstanding from beginning of year
LESS weighted benefits paid in the period

Question 14

Net interest cost - measurement of income

Answer 14

Use market rate for high-quality corporate bonds as discount rate to determine PV on weighted average plan assets

Question 15

How to calculate weighted plan assets for interest income

Answer 15

FV of assets at beginning of year
PLUS weighted funding contributions made in period
LESS weighted benefits paid to retired employees in period

Question 16

Define asset ceiling

Answer 16

NPV of the sum of:

• a future reduction in funding due to current surplus
• cash refund of all or part of the surplus

Question 17

Net DBO asset/liability - recognition on balance sheet

Answer 17

Liability : DBO > fair value of plan assets.

Surplus : FV of plan assets > DBO. Recognize an asset to lesser of surplus and asset ceiling.

Question 18

Journal entries

Answer 18

DR Finance expense, CR NDBL (for net interest cost)
DR current service expense, CR NDBL
DR past service expense, CR NDBL
DR Reasurement in OCI, CR NDBL (if net loss)
DR CR NDBL, CR Cash (for any funding payments)

Question 19

ASPE vs IFRS

Answer 19

IFRS : immediately recognize in OCI any acturial gain or loss on DBO/plan assets.
ASPE: recognize the above in net income in period in which it occurs