Chapter 6 - Pensions and Income Tax Accounting

Question 0

What classifies an overfunded benefit plan?

Answer 0

Plan has assets that exceed its liabilities

Question 1

Pension plan and sponsoring company are two separate or non-separate legal entities?

Answer 1

Separate legal entities

Question 2

What classifies an underfunded plan?

Answer 2

Plan has liabilities that exceed its assets

Question 3

What base is used to calculate Accumulated Benefit Obligation (ABO)?

Answer 3

Current and past compensation levels

Question 4

What base is used to calculate Projected Benefit Obligation (PBO)?

Answer 4

Use (guess) future salary

Question 5

What are vested benefits?

Answer 5

Pension plan benefits are vested when employees have earned their benefits by reason or by reaching retirement age

Question 6

What is the formula to calculate the Ending PBO?

Answer 6

Beginning PBO
+Service cost
+Interest cost
+Actuarial losses incurred in the current period
-Actuarial gains incurred in the current period
-Benefits paid to retirees
____________________________________________
Ending PBO

Question 7

What is the formula for Ending FV of Plan Assets?

Answer 7

Beginning FV of plan assets
\+Contributions
\+Actual return on plan assets
-Benefits paid to retirees
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Ending FV of plan assets

Question 8

What is the formula to calculate Net Periodic Pension Cost?

Answer 8

"SIRAGE"
Current Service Cost
Interest Cost
Return on Plan Assets
Amortization of Prior Service Cost
Gains and Losses
Amortization of Existing Net Obligation of Net Asset

Question 9

How are the components of net periodic pension cost reported differently under US GAAP and IFRS?

Answer 9

US GAAP - Aggregated, presented as one

IFRS - separately

Question 10

Formula to calculate Interest Cost in SIRAGE

Answer 10

Beginning PBO x Discount Rate

Question 11

Formula to calculate Expected Return on Plan Assets in SIRAGE

Answer 11

Beginning FV of Plan Assets x Expected rate of return on plan assets

Question 12

How to calculate Actual Return on Assets in SIRAGE

Answer 12

Beg. FV of plan assets
\+Contributions
\+ACTUAL RETURN
-Benefit Payments
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
End FV of plan assets

Question 13

How to calculate Amortization of Prior Service Cost in SIRAGE?

Answer 13

Beg. Unrecognized Prior Service Cost/Avg. Remaining Service Life

Question 14

Where do gains and losses in SIRAGE arise from?

Answer 14

(1) Difference between expected and actual return on plan assets when expected return on plan assets is used to calculate pension expense
(2) Actuarial gains and losses

Question 15

How are gains and losses accounted for pensions?

Answer 15

(1) Recognize immediately
OR
(2) The Corridor Approach/amortize

Question 16

How are gains and losses amortized if the corridor approach is chosen?

Answer 16

Beg. Remaining Unrecognized Gain or Loss - (greater of)

= Excess / Avg. Remaining Service Life

Question 17

How are existing net obligation or net asset amortized?

Answer 17

PBO - FV of Plan Assets = Initial unfunded obligation
/
Greater of 15 years OR Avg. Employee Job Life

Question 18

Where are unamortized prior service costs, gains & losses, and existing net obligation/net asset allocated?

Answer 18

AOCI

Question 19

How to record pension plan contributions?

Answer 19

DR. Pension Benefit Asset/Liability

CR. Cash

Question 20

How to determine the funded status?

Answer 20

FV of Plan Assets - PBO

• Positive = overfunded
• Negative = underfunded

Question 21

Pension plan assets and liabilities are classified as current or noncurrent?

Answer 21

Pension Plan Asset = noncurrent (always)
Pension Plan Liability = current, noncurrent, or both –> depends when paid

Pmt = Expected Benefits Pmt > FV of Plan Asset

Question 22

How to record Prior Service Cost and Pension Losses during period incurred?

Answer 22

DR. OCI
CR. Pension Benefit Asset/Liability

*Record deferred tax asset
DR. Deferred Tax Asset
CR. Deferred Tax Benefit - OCI

Question 23

How to record amortization of Prior Service Cost and Pension Losses?

Answer 23

DR. Net periodic pension cost
CR. OCI

DR. Deferred Tax Benefit - OCI
CR. Deferred Tax Benefit - I/S

Question 24

How to record pension gains during period incurred?

Answer 24

DR. Pension benefit asset/liability CR. OCI DR. Deferred tax expense - OCI CR. Deferred tax liability

Question 25

How to record amortization of pension gains?

Answer 25

DR. OCI CR. Net periodic pension cost DR. Deferred Tax Expense - I/S CR. Deferred Tax Expense - OCI

Question 26

Under IFRS, how are gains and losses accounted for?

Answer 26

Included in OCI but not amortized to I/S

Question 27

How are termination benefits calculated and recorded?

Answer 27

Lump sum payments +PV termination benefit ______________________ Special term benefit DR. Special term benefit expense CR. Special term benefit liability

Question 28

What are the required financial statements for defined benefit pension plans?

Answer 28

Stmt of Net Assets Available for Benefits Stmt of Change in Net Assets Available for Benefits Stmt of Accumulated Plan Benefits Stmt of Changes in Accumulated Plan Benefits

Question 29

What are the accrual requirements for post-retirement benefits?

Answer 29

1. Obligation is attributable to employee's services already rendered 2. Employee's rights accumulate or vest 3. Pmt is probable 4. Amount of benefits can be reasonably estimated

Question 30

What period is post-retirement benefit obligation accrued?

Answer 30

Beginning at employee's date of hire and ending at the fully eligible date

Question 31

Formula to calculate interest cost for post-retirement benefits

Answer 31

Beg. APBO * Discount Rate

Question 32

Formula to calculate amortization or expense of transition obligation?

Answer 32

(1) Immediate expense recognition OR (2) APBO - FV of plan assets = Initial unfunded Divided by: Greater of 20 years OR Avg. remaining service period

Question 33

How to determine funded status for post-retirement benefits?

Answer 33

FV of plan assets - APBO

Question 34

What conditions must be met to accrue post-employment benefits?

Answer 34

(1) Employer's obligation is attributable to services already rendered (2) Obligation relates to rights that vest or accumulate (3) Pmt of compensation is probable (4) Amt can be reasonably estimated

Question 35

How are post-employment benefits recorded?

Answer 35

DR. Severance expense | CR. Severance liability

Question 36

What are the conditions to accrue for vacation days and sick days?

Answer 36

Vacation Days - Accrue if vest or accumulates | Sick Days - Accrue only if vests

Question 37

How do permanent differences affect tax computation?

Answer 37

Affect "current"/not "deferred"

Question 38

How do temporary differences affect tax computation?

Answer 38

Affect "current" and "deferred"

Question 39

How is Income Tax Expense calculated?

Answer 39

Tax Income * Current Tax Rate

Question 40

Deferred Tax Asset of Deferred Tax Liability? (1) Revenue or gains included in taxable income then F/S (2) Revenue or gains included in F/S then taxable income (3) Expenses or losses included in taxable income then F/S (4) Expenses or losses included in F/S then taxable income

Answer 40

(1) Deferred Tax Asset (2) Deferred Tax Liability (3) Deferred Tax Liability (4) Deferred Tax Asset

Question 41

What is the valuation allowance account used for?

Answer 41

For amounts of deferred asset that are not expected to be used

Question 42

Under IFRS, are valuation allowances permitted?

Answer 42

No

Question 43

What are the steps to recognize tax benefits when tax position is uncertain?

Answer 43

Step 1 - Recognition of the Tax Benefit - More likely than not: >50% - Based on expected outcome in court of last resort Step 2 - Measurement of Tax Benefit - Based on expected outcome in settlement w/ taxing authority - Recognize the largest amount of tax benefit that has <50% likelihood of being realized * If unambiguous, recognize full benefit

Question 44

What tax rate is applied to temporary differences?

Answer 44

Enacted tax rate in periods the taxable item is expected to be paid (liability) or received (asset)

Question 45

What is the treatment of and adjustment for changes?

Answer 45

Treated as change in estimate. Change in future years, prospectively. Adjustment is reflected in income tax expense as component of income from continuing operations.

Question 46

How to net temporary adjustment?

Answer 46

Ending Bal _______________ Required Adj.

Question 47

How are deferred tax liabilities and assets classified as current or noncurrent?

Answer 47

- Deferred tax items should be classified based on classification of related asset or liability for financial reporting --> "Classify based upon what gave birth to it" - If deferred tax item not related to an asset or liability, it should be based on the expected reversal date of the temporary difference

Question 48

How should deferred tax liabilities and assets be netted against each other under US GAAP and IFRS?

Answer 48

US GAAP: Current w/ Current Noncurrent w/ Noncurrent IFRS: Noncurrent

Question 49

How to record operating loss carrybacks?

Answer 49

DR. Tax Refund Receivable | CR. Tax Benefit

Question 50

How to record operating loss carryforward?

Answer 50

DR. Deferred Tax Asset | CR. Tax Benefit

Question 51

Valuation allowances may be required for operating loss carryback or operating loss carryforward?

Answer 51

Operating loss carryforward

Question 52

Dividends Received Deduction Rules for Tax Return

Answer 52

Ownership: 0-19% --> 70% exclusion 20%-80% --> 80% exclusion >80% --> 100% exclusion

Question 53

Investee's income for GAAP financial statements

Answer 53

20-50% ownership = use equity method --> % of sub's income

Question 54

Deferred income tax expense or benefit is equal to

Answer 54

Sum of net change in deferred tax asset and tax liabilities

Question 55

What is the formula to calculate effective tax rate?

Answer 55

Tax Income Expense/Pretax Income Pretax Income = Income in FS

Question 56

Which item is not subject to the application of intraperiod income tax allocation?

Answer 56

Operating income | *Only items net of tax on I/S

Question 57

Under IFRS, when are prior service costs recognized when a defined benefit plan is being amended?

Answer 57

Recognized on the I/S in period of plan amendment