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37 Cards in this Set

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Pension Plan
-Agreement in which the employer provides employees with defined or estimated retirement benefits in exchange for current or past services.
-Not paid currently, they are a form of deferred compensation and paid to retired employees usually on a deferred basis.
-Accounting for is primarily concerned with determining amount of:
1. Pension expense that appears in the sponsor company's I/S
2. Any related accounts (asset, liability, and/or OCI) that appear on the B/S.
Defined Benefit vs. Defined Contribution Plan
1. Defined Benefit: benefits employees receive at retirement determined by a formula. Sponsor company's responsibility to ensure contributions are sufficient to pay benefits as they come due. Complex Accounting.
-Computations computed using actuarial assumptions of future benefit payments based on
1. Employees' compensation levels at or near retirement
2. Number of years of service and until retirement
3. Number of years the plan expects to pay benefits after an employee retires.
2. Defined Contribution: contributions that sponsor company makes to the plan are determined by a formula. Employees' retirement benefits based on the amount of funds in the plan. Simple Accounting.
-Factors Considered: (1) Employees' length of service, (2) Compensation amounts (Ex: 401-(k))
Pension Plan Characteristics
1. May be written or implied.
2. Contributory (employees required to contribute) or Noncontributory (only employer does)
3. Overfunded vs. Underfunded: applies only to defined benefit plans.
4. Funded or Nonfunded: "funding" is when company makes contributions, amount funded doesn't have to equal plan expense for period.
Non-GAAP Plans
1. Terminal Funding: company pays entire pension liability upon retirement of employee generally by purchasing an annuity-type insurance policy. Cash basis.
2. "Pay-As-You-Go:" method of expensing pension plan payments after someone has retired. Also cash basis.
Accumulated Benefit Obligation (ABO)
-Actuarial PV of benefits based on current and past compensation levels.
-Differs from PBO only in that it contains no assumption about future salaries.
Projected Benefit Obligation (PBO)
-Actuarial PV of all benefits attributed by the plan's benefit formula to employee service rendered prior to that date.
-PBO only uses an assumption as to future compensation levels.
-Under IFRS, defined benefits obligation (DBO) is the defined benefit pension plan liability.
-The DBO (IFRS) and the PBO (GAAP) are calculated in a similar manner.
Vested Benefits
-Pension plan benefits are vested when employees have earned their benefits by reaching retirement age and/or having otherwise met unique pension plan requirements.
-Vested whether or not they're actually retired. Generally require money to be left in the plan until retirement.
Service Cost
-PV of all pension benefits earned by company employees in the current year.
-Provided by the actuary. Increases the PBO.
Interest Cost
-The increase in the PBO due to the passage of time.
-Measuring PBO as a PV requires accrual of an interest cost on the PBO at rates equal to the assumed discount rates.
Prior Service Cost
-Cost of benefits based on past service granted for:
1. Service prior to initiation of pension plan that employees retroactively get credit for.
2. Subsequent plan amendment, reflecting new or increased benefits, that is also applied to service already provided.
-Increases the PBO in the period of plan initiation or amendment and should be amortized to pension expense over the future service periods of the affected employees.
Actuarial Gains and Losses
-Adjustments to the PBO when the actuary changes one or more of the assumptions to calculate the PBO.
-Gains decrease the PBO and losses increase the PBO.
Benefit Payment
-Paid to plan participants after retirement. Payment reduces the PBO and reduces plan assets.
-Key at bottom has formula to determine the PBO.
Plan Assets
-The assets (stocks, bonds, other investments) set aside to provide for pension benefits. Should be reported at FV.
-Increase each period by contributions to the plan (funding) and by the return. Decrease by amount of benefits pair to retired employees.
Actual Return on Plan Assets
-Calculated based on the FV of the plan assets at the beginning and ending of the period, adjusted for contributions and benefit payments (a squeeze).
-Key at bottom has formula to determine actual return squeeze.
Income Statement Accounting
-Under GAAP, pension expense (or "net periodic pension cost") is the increase in the PBO during the period offset by earnings on plan assets, and adjusted for the effects of certain smoothing mechanisms (AGE items).
-Key at bottom has formula.
-Under IFRS, defined benefit cost includes service cost and net interest on the defined benefit liability (asset).
-Components of cost generally reported separately on I/S, no requirement that they must be aggregated as one amount.
Components of Pension Expense- SIR
1. S: Current Service Cost- PV of all benefits earned in period (or increase in PBO from employees working).
2.+ I: Interest Cost- (Discount Rate) = Beg. of Period PBO x Discount Rate
3. - (R: Return on Plan Assets)- can use actual* or expected return**. If using the latter, difference between the two must be recognized in OCI each period and then amortized to pension expense over time with any actuarial gains or losses.
*Most companies choose not to use b/c can vary drastically from period to period. Calculation shown in key at bottom.
**Most Companies use to "smooth" earnings. Expected Return on Plan Assets = Beg. FV of Plan Assets x Expected Rate of Return on Plan Assets.
-Under IFRS the "service" cost component of DBO cost includes both current and past service cost. "Net interest on the defined benefit liability (asset)" component of the DBO is calculated as:
= Net defined benefit liability (asset) x Discount Rate
-Net defined benefit liability (asset) is the difference between the DBO and the FV of the plan assets. Net interest on the defined benefit liability (asset) includes interest cost on the DBO and the plan assets.
Components of Pension Expense- AGE
4. + A: Amortization of Unrecognized PSC = Beg. Unrecognized PSC ÷ Average Remaining Service Life*
5. ± (G: Gains) & Losses: arise from two sources- (1) difference between the expected and actual return on plan assets when expected is used to calculate pension expense, (2) Changes in actuarial assumptions.
6. + E: Amortization of Existing Net Obligation or Net Asset at Implementation: funded status required to be amortized over the greater of 15 years or the average remaining job life of the company's employees.**
*In a period that pension plan is initiated or amended, the resulting PSC increases the PBO and is recorded as unrecognized PSC in OCI.
-The unrecognized PSC in AOCI is amortized to pension expense over the plan participant's remaining service life.
-Amortization is calculated using the unrecognized PSC balance at the beginning of the period.
**Calculation key- bottom
-Under IFRS, PSC is referred to as past service cost. When plan is amended past service cost increases the DBO and reported as defined benefit service cost on the I/S.
-Under IFRS, past service cost is not booked to OCI.
Accounting for Gains & Losses
-2 Choices of how to account for:
1. Recognize on the I/S in the period incurred
2. Recognize in OCI in period incurred and then amortize the unrecognized gains and losses to pension expense over time using the corridor approach*. Most companies use this way to smooth earnings.
*Entity's net unrecognized gain or loss is amortized over the employees' average remaining service period, if as of the beginning of the year, this amount exceeds 10% of the greater of the beginning of the year balances of:
1. Market related value of plan assets = Assets
2. Projected Benefit Obligation (PBO) = Liabilities
-Calculation key at bottom
IFRS vs. GAAP- Gains & Losses
-Under IFRS, gains and losses are referred to as remeasurements of the net defined benefit liability (asset). Remeasurements include the same gains and losses as GAAP.
-All remeasurements are reported in OCI and are NOT reclassified (amortized) to the I/S in subsequent periods.
B/S- Pension Plan Contributions
-Company's contribution to its defined pension plan(s) increases the pension plan asset (overfunded plans) or decreases the pension plan liability (underfunded).
-Company J/E to fund the pension:
DR. Pension benefit asset/liability
CR. Cash
B/S- Funded Status
-Companies must report the funded status of their pension plan on the B/S as an asset, liability, or both. If company has multiple, funded status of each plan is calculated separately and the FV of plan assets and PBO must be disclosed in notes.
-Formula: Funded Status = FV of Plan Assets - (PBO)
1. Pension Plan Asset (always noncurrent): = Overfunded, FV of Plan Assets > PBO.
2. Pension Plan Liability (current , noncurrent, or both): = Underfunded, FV of Plan Assets < PBO. Reported as current liability to the extent that the benefit obligation payable w/in the next 12 months exceeds the FV of Plans' Assets.
-All overfunded, and underfunded (current & noncurrent) are aggregated.
IFRS vs. GAAP- Funded Status
-Under IFRS, funded status (DBO - FV of Plan Assets) is reported on the B/S as the net defined benefit liability (asset). Liability is reported if underfunded, asset is overfunded.
-If asset is reported, amount of asset can't exceed the PV of future economic benefits available to the entity in the form of cash refunds or reductions in future contributions that result from the overfunding.
-Doesn't state whether to classify the asset as current or noncurrent
-GAAP requires that changes in the funded status of a pension plan due to PSC and pension gains & losses be reported in OCI in the period incurred unless company chooses to recognize the gains & losses immediately on the I/S.
-Tax effects of these items must also be recognized in OCI.
AOCI- PSC and Pension Losses
1. Recognize in Period Incurred: decrease the funded status of the pension. J/E:
CR. Pension benefit liability
-Deferred tax asset must also be recognized b/c they will result in a future tax deduction. Benefit is recognized in OCI as an offset to the loss. All items in AOCI are reported net of tax.*
*DR. Deferred Tax Asset
2. Amortization to Pension Expense: when PSC, pension losses, and other obligations are amortized they are classified out of AOCI and recognized as a component of pension expense ("AGE")
DR. Net Periodic Pension Cost
-Related tax benefit must also be removed from AOCI and recorded on the I/S
DR. Deferred Tax Benefit- OCI
CR. Deferred Tax Benefit- I/S
AOCI- Pension Gains
1. Recognize in Period Incurred: increase funded status of the pension plan. J/E:
DR. Pension Benefit Asset
-Deferred tax liability must also be recognized b/c they will decrease the tax deduction of future payments, increasing future taxes. Deferred tax expense recognized in OCI as an offset to the unrecognized pension gain. Reported net of tax*
*DR. Deferred Tax Expense- OCI
CR. Deferred Tax Liability
2. Amortization to Pension Expense: when gains are recognized in net periodic pension cost, a reclassification adjustment is recorded:
CR. Net Periodic Pension Cost
-Related deferred tax expense must be removed from AOCI and recorded on the I/S:
DR. Deferred Tax Expense- I/S
CR. Deferred Tax Expense-OCI
IFRS vs. GAAP- Gains & Losses
-Under IFRS, remeasurements of the net defined benefit liability (asset) are included in OCI and are NOT reclassified (amortized) to the I/S in subsequent periods.
-However, an entity can transfer those amounts recognized in OCI within equity.
Measurement Date
-GAAP requires that the measurement date of the plan assets and benefit obligations of a defined benefit pension plan must be aligned w/ the date of the employer's B/S.
-Exceptions: when plan is sponsored by a subsidiary or equity method investee that has a different fiscal year-end.
-Occur when the pension plan assets increase in value to the point that sale of the pension plan assets allows a company to purchase annuity contracts to satisfy pension obligations.
-Remaining funds from the sale of assets may, with restrictions, be used by the corporation.
-Events that reduce the expected remaining years of service for present employees.
-Or events that eliminate accrual of defined benefits for future services of a significant number of employees.
Termination Benefits
-Arise when employees are paid to terminate their right to future pension payments.*
DR. Special term benefit expense
CR. Special term benefit liability
*Formula: Lump sum payments + PV of termination benefits = Special term benefit
GAAP Pension Plan Disclosures
-Rule of thumb: (1) More disclosure is better, (2) Disclose as much as reasonably possible
-Don't repeat information or predict/project good items.
1. Reconciliations of Beginning and Ending Balances: (1) of the Benefit Obligation, (2) of the FV of Plan Assets
2. Funded Status
3. Plan Assets
4. Components of Net Periodic Pension (Benefit) Cost
5. Benefit Payments and Contribution
6. Impact on OCI
7. Rates & Assumptions
8. Employer and Related Party Transactions
9. Amortization Methods
10. Assumptions and Commitments
11. Termination Benefits
12. Nonpublic Entities: permitted to present less info, essentially eliminating reconciliations required.
Defined Benefit Pension Plan F/S's
-In addition to the accounting and reporting done by the sponsor company, GAAP requires that F/S's be presented by the pension plan itself.
1. Statement of Net Assets Available for Benefits
2. Statement of Changes in net Assets Available for Benefits
3. Statement of Accumulated Plan Benefits
4. Statement of Changes in Accumulated Plan Benefits