Far 2 Test 3

Front 1

Stock Appreciation Rights (SARs)

Back 1

Awards that enable an employee to benefit by the amount that the market price of the company's stock rises above a specified amount without having to buy shares.

Front 2

True or False?
If an employer can elect to settle in shares of stock rather than cash, the award is considered to be equity.

Back 2

True.

Front 3

True or False?
If an employee can elect to receive cash, the award is considered to be a liability.

Back 3

True.

Front 4

True or False?
The fair value of an SAR (where the employer can elect to settle in shares of stock rather than cash) is grossly different than the fair value of a stock option with the same terms.

Back 4

False. Normally, the fair value of an SAR is the same as the fair value of a stock option with the same terms.

Front 5

True or false?
Once the service period is over, even if the rights have not been exercised, the liability for a Debt SAR does not continue to be adjusted.

Back 5

False.
The liability continues to be adjusted after the service period if the rights haven't been exercised yet.

Front 6

Qualified Pension Plans

Back 6

pension plans that qualify for favorable tax treatment. In a qualified plan, the employer is permitted an immediate tax deduction for amounts paid into the pension fund (within specified limits).

Front 7

What are pension plans?

Back 7

Pension plans are arrangements designed to provide income to individuals during their retirement years. Funds are set aside during an employee's working years so that the accumulated funds plus earnings from investing those funds are available to replace wages at retirement. An individual has a pension fund when she or he periodically invests in stocks, bonds, CDs, or other securities for the purpose of saving for retirement. When an employer establishes a pension plan, the employer provides some or all of the periodic contributions to the retirement fund.

Front 8

What motivates a corporation to offer a pension plan for its employees?

Back 8

The motivation for corporations to establish pension plans comes from several sources. Pension plans provide employees with a degree of retirement security. They may fulfill a moral obligation many employers feel toward employees. Pension plans often enhance productivity, reduce turnover, satisfy union demands, and allow employers to compete in the labor market.

Front 9

Lamont Corporation has a pension plan in which the corporation makes all contributions and employees receive benefits at retirement based on the balance in their accumulated pension fund. What type of pension plan does Lamont have?

Back 9

This is a noncontributory plan because the corporation makes all contributions. When employees make contributions to the plan in addition to employer contributions, it's called a "contributory" plan. This is a defined contribution plan [also] because it promises fixed annual contributions to a pension fund, without further commitment regarding benefit amounts at retirement.

Front 10

What are five events that may change the balance of the PBO?

Back 10

The Projected Benefit Obligation can change due to periodic service cost, accrued interest, revised estimates, plan amendments, and the payment of benefits.

Front 11

What is the definition of prior service cost?

Back 11

Prior service cost is the obligation (PV of benefits) due to giving credit to employees for years of service provided before either the date of an amendment to (or initiation of) a pension plan.

Front 12

How is Prior Service Cost reported in the financial statements?

Back 12

Prior service cost is recognized as "other comprehensive income" as incurred and then as a component on "accumulated other comprehensive income" in the company's balance sheet.

Front 13

How is Prior Service Cost included in pension expense?

Back 13

The "accumulated other comprehensive income" account is allocated (amortized) to pension expense over the service period of affected employees. The straight-line method allocates an equal amount of the prior service cost to each year. The service method recognizes the cost each year in proportion to the fraction of the total remaining "service years" worked in each of these years.

Front 14

Which method of allocating prior service cost, between Straight Line & Service Method does FASB recommend and why?

Back 14

FASB recommends the Service Method. Conceptually, the service method achieves a better matching of the cost and benefits. However, the straight-line method is the approach most often used in practice.

Front 15

How do you find the Average Service years needed by the Straight-Line method when allocating (amortizing) prior service cost?

Back 15

You take the total number of service years and divide it by the Total number of Employees.

Front 16

TFC, Inc. revises its estimate of future salary levels, causing its PBO estimate to increase by $3 million. How is the $3 million reflected in TFC's financial statements?

Back 16

PBO = Projected Benefit Obligation

TFC, Inc. revises its estimate of future salary levels causing its PBO estimate to increase by $3 million. The $3 million is considered a loss and is reported in the "Statement of comprehensive income" rather than being reported as part of traditional net income as would occur if included as part of pension expense. It then becomes part of accumulated other comprehensive income in the balance sheet as part of the net loss--AOCI or net gain--AOCI. A portion of that balance might possibly be amortized to pension expense if the net loss--AOCI or net gain--AOCI exceeds an amount equal to 10% of the PBO, or 10% of plan assets, whichever is higher.