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38 Cards in this Set

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2261 Compensated Absences
Compensated absences are employee's absence, such as vacations, illness and holidays, for which it is expected that the employees will be paid
2261 Compensated Absences

The employer should accrue a liability for such future absences if all the following conditions are met


1) The employer's obligation relating to employee's rights to receive compensation for future absences is attributable to employee's services already rendered.


2) The obligation relates to rights that vest or accumulate


3) Payment of the compensation is probable


4) The amount can be reasonably eestimated

2261 Compensated Absences

The rights vest if the employer is obligated to make payment, even if the employee terminates. The rights accumulate if earned, but unused rights to compensated absences may be carried forward to one or more periods subsequent to that in which they are earned
2261 Compensated Absences

The estimated liability for compensated absences would normally be disclosed as a current liability. However any portion of the liability related to payments expected to be made beyond one year should be classified as long-term liability
2262 Deferred Compensation Arrangements


Rabbi Trust


This term is in reference to a tax arrangement allowed by a private letter ruling involving a rabbi.


A grantor trust is set up to fund compensation for a group of managers or executives. The goal is to provide a benefit that is not taxable to the recipients until some later datewhen they actually receive compensation.

2261 Compensated Absences


To the extent the cost of deferred compensation benefits is attributable to an employee's service in a specified year, thee costs must be expensed in that year.


If the benefits are for services of more than one year the cost must be allocated and expensed in a rational and systematic way over those years

2262 Nonretirement Postemployment Benefits

Including:


-postretirement health care


-life insurance


-tuition assistance


-day care


-legal services


-housing subsidies

2262 Nonretirement Postemployment Benefits

Required that the accumulated obligation is the measurement of future benefits for the projected benefit obligation required to be recognized. The accumulated benefit obligation utilized current compensation levels whereas the projected benefit obligation is based on future compensation levels
2262 Nonretirement Postemployment Benefits

A sponsor of a defined benefit postretirement plan must recognize an overfunded plan in its balance sheet as an asset or an underfunded plan as a liability.

2262 Nonretirement Postemployment Benefits


Accounting for Postretirement Benefits


- Salary continuation


- supplemental unemployment benefits


- severance benefits


- disability-related benefits


- job training


- counseling


- continuation of benefits




2262 Nonretirement Postemployment Benefits
Postemployment benefits may be paid immediately on cessation of active employment or over specified period of time
2262 Nonretirement Postemployment Benefits


Postemployment benefits that meet the condition of compensated absences are required to be recognized as expense and related liability in accordance with criteria for recognition including:


1) the employer's obligation relates to employee benefits that are attributed to services already rendered


2) the obligation relates to rights that vest or accumulate


3) payment of the compensation is probable


4) the amount can be reasonably estimated

2262 Nonretirement Postemployment Benefits


If the criteria are not met for compensated absences, the postemployment benefits are accounted for in accordance with the criteria for loss contingencies. Those criteria require recognition of expense and liability if:


1) Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at a date of the financial statements


2) The amount of loss can be reasonably estimated

2262 Nonretirement Postemployment Benefits

If an obligation for postretirement benefits is not recognized in accordance with either because the amount cannot be reasonably estimated, the financial statements must disclose the fact
2263 Retirement Benefits


Pension Plan


An arrangement whereby a company provides benefits that can be determined or established in advance to its it's retired employees.



2263 Retirement Benefits
A pension plan is best thought of a deferred compensation in which employees receive a portion of their earned compensation after retirement. The determination of amounts to be paid results form provisions of the plan and from established company practices
2263 Retirement Benefits


Pension Plans


1) Employer (sponsor) - the company establishing the plan for the benefit of its employees


2) Employees - Those individuals who qualify to receive benefits under the pension plan


3) Trustee - a financial institution that accepts contributions from the employer, invests those funds, and administers payments to employees

2263 Retirement Benefits
Under current GAAP pension plans are accounted for by accrual accounting.
2263 Retirement Benefits

2 types of pension plans


1) Defined contribution plans


2) Defined benefit plans


2263 Retirement Benefits


Defined contribution plans


Payments to employees are based on the amounts contributed into the plan that, in turn, are based on an agree-upon formula between the employer and the employees.


Few difficult accounting problems exist because the periodic expenses of the employer is the amount funded to the trustee as a result of employee services rendered during the year. The employees assume the investment risk, and the employer's obligation is satisfied on funding the specified amount of contribution

2263 Retirement Benefits

Defined Benefit Plan


Benefits to be received by employees in the future are defined, rather than the contribution the employer must make. Denefits to be paid are based on an estimate of future benefits rather than contributions. The employer bears the risk of return on plan assets because the employer's contribution is to provide funds sufficient to pay a defined level of benefit rather than to contribute a specified amount into the pension fund

2263 Retirement Benefits


Defined Benefit Pension Plan Definitions


1) Actuarial assumptions


2) Projected benefit obligation


3) Accumulated benefit obligation


4) Fair value of plan assets


5) Prior service cost


2263 Retirement Benefits


Recognition of pension expense and other changes in plan assets and obligations


Entity is required to recognize on its balance sheet the full overfunded or underfunded status of its defined benefit pension plans. The overfunded or underfunded status is the difference between the fair value of the plan assets and the projected benefit obligation

2263 Retirement Benefits


Nature and Composition of Pension Expense


1) Service Cost


2) Interest Cost


3) Return on plan assets


4) Gain or loss recognition


5) Prior service cost amortization



2263 Retirement Benefits


Service Cost


The portion of pension expense that represents an estimate of the increase in pension benefits payable as a result of employment services rendered during the current period

2263 Retirement Benefits


Interest Cost


The portion of the pension expense that represents the increase in the projected benefit obligation as a result of the passage of time. The fact that at the end of the year the payment of the pension benefits is closer in time than it was at the beginning of the year causes the present value of the pension benefit obligation to increase. The interest cost component causes an increase in pension expense

2263 Retirement Benefits


Return on plan assets


An increase in the plan assets causes the net cost of the pension plan to the employer to be less than it otherwise would be. The amount recognized in the current period as a reduction of pension expense is the estimated return on plan assets, not the actual return. The estimated return on plan assets that is credited to pension expense during the period is calculated by multiplying the expected rate of return times the fair value of the plan assets at the beginning of the year. The actual return, which may be different than the actual return, is recognized as a component of other comprehensive income.

2263 Retirement Benefits


Gain or Loss recognition


The unrealized gains and losses associated with changes in the fair value of the plan assets and with changes in the projected benefit obligation are recognized as components of other comprehensive income. GAAP may require recognition of a gain would decrease pension expense, whereas the recognition of a loss would increase pension expense. THe amount of gain or los included in pension expense would also be reflected as a reduction of the remaining unrecognized gain or loss included in accumulated other comprehensive incomce

2263 Retirement Benefits


Prior Service cost amortization


When plan amendments are made, additional benefits are sometimes applied retroactively to employees for services rendered in prior years. This increase in the benefits to be paid to employee represents a cost to employer. GAAP requires that this cost be recognized as a component of pension expense over the remaining service years of the affected employees. The unrecognized prior service cost must be recognized as a component of other comprehensive income. The amortization of the unrecognized prior service cost is recognized as an increase in pension expense and as a reduction of the unrecognized amount remaining in accumulated other comprehensive income.

2263 Retirement Benefits


Corridor for Unrecognized Gains/Losses


To prevent the accumulated other comprehensive income related to unrealized gains and losses from getting too large, current GAAP utilizes a corridor approach. The accumulated other comprehensive income related to unrealized gains and losses does not have to be amortized as long as the balance in that particular AOCI does not exceed 10% of the lager of the beginning-of-year balance in the projected benefit obligation or the market-related value of the plan assets. If it does not exceed this limit the excess must be amortized over the average remaining service period of active employees who are expected to receive benefits under the plan.

2263 Retirement Benefits


In summary, except for contributions and benefits paid, the changes in the plan and/or projected benefit obligation fall into 3 categories


1) Changes due to unrecognized gains and losses


2) Changes due to prior service cost


3) Changes associated with transition asset or obligation


2263 Retirement Benefits

Any unrecognized transition asset or obligation should be recognized at the time it is adopted by including it in other comprehensive income.
2263 Retirement Benefits


Settlement and Curtailment of defined benefit pension plans


A settlement of a pension plan is defined as an irrevocable action that relieves the employer of primary responsibility for an obligation and eliminates significant risks related to the obligation and the assets used to effect the settlement. A curtailment is defined as a significant reduction in, or elimination of defined benefit accruals for present employees' future services

2263 Retirement Benefits


Amounts resulting from the settlement or curtailment of defined benefit plans are generally required to be recognized immediately rather than being delayed




2263 Retirement Benefits

The financial statements of defined benefit pension plans must include the following information


1) The net assets available for benefits as of the end of the plan year


2) the changes in net assets during the plan year


3) The actuarial present value of accumulated plan benefits as of either the beginning or end of the plan year


4) The effects, if significant, of certain factors affecting the year-to-year change in the actuarial present value of accumulated plan benefits

2263 Retirement Benefits


Misc additional provision of Plan accounting-defined benefit pension plans are


1) Information regarding net assets is to be prepared on the accrual basis


2) Plan investments are to be presented at fair value.


3) Participants' accumulated plan benefits are those future benefit payments that are attributable under the plan's provisions to employee services rendered to the benefit information date. The primary information regarding participants' accumulated plan benefits reported in plan financial statement is their actuarial present value.


2263 Retirement Benefits

FASB requires a defined benefit pension plan to report an investment contract issued by either an insurance enterprise or other entity at fair value. It permits a defined benefit pension to report only contracts that incorporate mortality or morbidity risk at contract value.