F6

Question 0

What is the difference between PBO & ABO? What is the name for the pension plan liability under IFRS?

Answer 0

ABO - Accumulated Benefit Obligation past compensation levels
PBO - Projected benefit obligation - future compensation level.

Under IFRS, the pension plan liability is the defined benefit obligation (DBO).

Question 1

Define two types of pension plans.

Answer 1

Defined contribution plan - Amount of contribution is specified. Defined benefit plan - Amount of benefit to be received is specified or estimated.

Question 2

What is the formula used to calculate the ending projected benefit obligation (PBO)?

Answer 2

Beginning PBO + Service Cost + Interest Cost + Prior service cost from current period amendments + Actuarial losses incurred in the current period - Actuarial gains incurred in the current period - Benefits paid to retirees = ENDING PBO

Question 3

What is the formula used to calculate the ending fair value of plan assets?

Answer 3

Beginning FV of plan assets + Contributions + Actual return on plan assets - Benefit payments = Ending FV of plan assets

Question 4

Name the components of net periodic pension cost (net pension expense) under US GAAP. SIR AGE

Answer 4

Service cost, interest cost, return on plan assets, amortization of prior service costs, gains and losses, amortization of existing unrecognized net obligations or unrecognized net asset at implementation.

Question 5

How are unrecognized gains and losses amortized to pension expenses under US GAAP?

Answer 5

Using the corridor approach. The formula is: Unrecognized gain or loss = EXCESS / Average remaining service life / amortization of unrecognized gain or loss.

Question 6

How is the funded status calculated and reported under US GAAP?

Answer 6

Companies with defined benefit obligation plans must report funded status on the BS. FV of Plan assets = funded status. Overfunded: Report as noncurrent asset Underfunded: Report as a current liability to the extent that benefits payable in the next 12 months exceed the FV of plan assets. A non current liability or both.

Question 7

How is funded status calculated and reported under IFRS?

Answer 7

Defined Benefit Obligation = Funded status

Under IFRS - Overfunded: (DBO FV of plan assets) Report as a net defined benefit liability. IFRS does not spevify where the asset liability should be current or noncurrent.

Question 8

How are changes in the funded status from pension gains and losses and prior service costs reported on the financial statements under US GAAP & IFRS?

Answer 8

US GAAP - Both are recognized as components of OCI in the period incurred, with the related tax effect. Then reclassified to net periodic pension cost as amortized.

IFRS - Prior (past) service costs is reported as a component of service costs on the IS in the period incurred. Pension G/L are reported in OCI in period incurred and are not reclassified (amortized) to IS.

Question 9

Define pension settlements and pension curtailments.

Answer 9

Settlements - A transaction that is an irrevocable action relieves the employer of primary responsibility for a pension BO, and eliminates significant risks related to the obligation and the asssets used to effect the settlement.
Curtailments - an event that significantly reduces the expected years of future service or present employees or eliminates for a sig # of emlpoyees the accrual of defined benefits for some or all of their future services.

Question 10

What are some of the required disclosures for a defined benefit plan? I dread having to disclose this stuff.

Answer 10

Description: Funding policies and types of assets held. Reconciling Items: a schedule of reconciling funded status of the plan including all items (FVPA, PBO, etc) Expenses and OCI Component: Components of net periodic pension cost (pension expense and accumulated OCI) Actuarial Assumptions, and discount rate ( the weighted average discount rate)

Question 11

What are the components of net periodic postretirement benefit cost postretirement expense under US GAAP?

Answer 11

Service cost, interest cost, return on plan assets, amortization of prior service costs, gains and losses, expense/amortization of transition obligations.

Question 12

How do we account for postretirement benefits on the balance sheet under US GAAP?

Answer 12

The funded status of the postretirement benefit plan must be shown as a noncurrent asset/liab (over/under funded), or both. Changes in funded status due to net gains and losses prior service costs or net transition assets or obligations should be shown in accumulated OCI until amortized to net periodic post retirement benefit cost.

Question 13

What are some of the required disclosures for postretirement benefit plans? I dread having to disclose this stuff.

Answer 13

Description: A description of the plan. Reconciling items: A schedule reconciling funded status of all the plan including all reconciling items (FVPA, APBO, EPBO, etc) Expenses and OCI components - Components of net periodic postretirement benefit costs including all components and accumulated OCI. Actuarial assumptions and discount rate. WA Discounted rate.

Question 14

List the four criteria for recognizing postemployment benefits and compensation for future absences.

Answer 14

Employees services already rendered. Rights vest or accumulate, payment of the compensation is probable, amounts can be reasonably estimated

Question 15

Define permanent differences and list some examples.

Answer 15

Permanent differences are transactions that affect either taxable income or financial income, but not both, and only in period in which they occur. They do not affect future financial or taxable income. Premium on key officier life insurance policity when entity is owner and beneficiary, Tax exempt interest on state and municipal bonds, nondeductible portions of meals & entertainment, fines and expenses in violation of laws, and dividend received deduction.

Question 16

Define temporary differences and list some examples.

Answer 16

Temporary differences are differences between taxable income and financial income that result in taxable or deductible amounts in future years and necessitate the recognition of DTA and DTL. Depreciation (financial vs MACRS), Gross profit on LT construction contracts (% completion vs completed contract) Estimated warrant costs Litigation accruals Gross profit on installment sales (accrual vs cash) Bad debt expense using the allowance method vs actual bad debt expense.

Question 17

Define Deffered tax liability.

Answer 17

Anticipated future tax liabilities derived from situations in which future taxable income will be greater than the future financial income due to temporary differences. a DTL is measured by applying the applicable enacted tax rate and provision of the enacted tax law to temporary differences in the periods in which they are expected to reverse.

Question 18

Define deferred tax assets.

Answer 18

Anticipated future taxable income will be less than future income due to temporary differences. A DTA is recognized for all deductible temporary differences, operating losses, and tax credit carryforwards by applying the applicable enacted tax rate and the provisions of the enacted tax law to temporary differences in the period in which they are expected to reverse. DTA are also subject to recording a valuation allowance to reduce the asset to its net realizable value if its more likely than not that its full value will not be recognized.

Question 19

What is the valuation allowance?

Answer 19

If its more likely than not that some portion or all of a DTA will not be realized a valuation allowance needs to be created to recognize the reduction in the carrying amount of the DTA. IFRS prohibts the use of a valuation allowance. Under IFRS a DTA is recognized only when it is probable more likely than not that sufficient taxable profit will be available against which the temporary differences can be utilized.

Question 20

Identify the tax rates used to measure DTA and L under US GAAP and IFRS

Answer 20

US GAAP - The enacted tax rate expected to apply to taxable items (temporary differences) in the periods the taxable item is expected to be paid (liability) or realized(asset). Do not allow examiners to trick you into using the anticipated proposed or unsigned rate. IFRS permits the use of enacted or substantially enacted tax rates.

Question 21

How are DTA and DTL classified on the BS under US GAAP and IFRS

Answer 21

GAAP - Classification between current/noncurrent is based on classification of related asset/liability if there is no related A&L then the timing of reversal is used. Current DTA and DTL should be netted against each other Noncurrent DTA and liabilities should be netted against each other aswell. IFRS - DTA & DTL are reported as noncurrent and relate to same taxing authority.