F6

Question 1

What is a noncontributory plan?

Answer 1

*a plan where only the employer contributes

Question 2

Accumulated Benefit Obligation vs. Projected Benefit Obligation

Answer 2

ABO = current salary
PBO = projected future salary

DBO = IFRS = PBO

Question 3

Prior Service Cost Treatment

Answer 3

*increase PBO and are amortized over the future service periods of affected employees

Question 4

Actuarial Gains/Losses Treatment

Answer 4

Gains = decrease PBO
Losses = increase PBO

Question 5

Components of Pension Expense

Answer 5

S ervice cost
I nterest cost

A mortaization of prior service costs
and losses
E xisting net obligation amortization (rarely seen)

Question 6

Treatment of Prior Service Cost under IFRS

Answer 6

*it is recognized in earnings rather than booked to OCI

Question 7

Corridor Approach

Answer 7

Excess of 10% of the greater of PBO or Plan Assets is amortized over the remaining service life

Question 8

Amortization of Existing Net Obligation

Answer 8

*greater of 15 years or average remaining job life of employees

Question 9

When are costs/gains recognized in earnings rather than OCI with relation to tax assets or liabilities?

Answer 9

*when they are being amortized in the current period or if it relates to the current period pension expense

Question 10

Defined Benefit Pension Plan Funding Status

Answer 10

Overfunded = non-current asset
Underfunded = current, noncurrent, or both liability

Question 11

Which two items directly reduce pension expense?

Answer 11

*returns and amortization of gains

Question 12

Which account to DR or CR with relation to pension items

Answer 12

*DR or CR the net effect (if it is underfunded, use the pension benefit liability)

Question 13

Journal entry to reclassify something out of OCI relating to pension expenses

Answer 13

DR: deferred tax benefit - OCI
CR: deferred tax benefit - income statement

*don’t touch the asset or liability account

Question 14

Pension Settlement, Curtailment, and Termination

Answer 14

Settlement: sell assets and buy annuity
Curtailment: reduce expected remaining years of service or eliminate future accruals for many employees
Termination: lump sum payments + PV termination benefit
**DR: Special term benefit expense
**CR: Special term benefit liability

Question 15

Two Key Items for Pension Disclosures

Answer 15

1. do not repeat information
2. do not predict/project good items

*must also describe components of SIR AGE

Question 16

Disclosure Requirements for Pensions of Nonpublic Entities

Answer 16

*permitted to present less information, essentially eliminating the reconciliations required

Question 17

Should the pension plan present its own financial statements?

Answer 17

Yes, GAAP requires it because the plan and the sponsoring company are two separate entities

Question 18

Postretirement Benefits other than Pensions

Answer 18

Accrual period = begins at the employee’s date of hire and ends at the FULL ELIGIBILITY DATE

Question 19

APBO vs EPBO

Answer 19

APBO: used for interest cost calculation
EPBO: accumulated costs and future benefits that have not yet vested

Question 20

“E” Component of Pensions & Postretirement Obligations

Answer 20

Pension: amortize over greater of 15 years or remaining service life
Postretirement obligations: OPTION
1. expense now
2. amortize over a minimum of 20 years

Question 21

Formula for Funded Status of Postretirement Obligations

Answer 21

Fair value of plan assets

= funded status

*categorization (current vs noncurrent) is the same

Question 22

Unique Disclosure Rule for Postretirement Obligations

Answer 22

*effect on APBO of a 1% increase and a 1% decrease in health care cost trend rate

Question 23

Other Deferred Compensation and Benefits

Answer 23

Vacation: vested or accrued
Sick days: vested only

*estimates must be reliable

Question 24

Shortcut to Finding Total Tax Expense

Answer 24

• tax now + tax later = tax expense

* DO NOT TAKE BOOK INCOME AND MULTIPLY IT BY THE TAX RATE

Question 25

Investment interest expense is limited to __________

Answer 25

*net investment income

Question 26

Estimated costs/liabilities will result in…

Answer 26

deferred tax assets

Question 27

DTL vs DTA

Answer 27

DTL = future tax accounting income > future financial accounting income
DTA = future tax accounting income < future financial accounting income

Question 28

When reversing DTAs and DTLs, make this type of entry

Answer 28

*reverse the original journal entry, including the asset or liability

Question 29

Valuation Allowance for DTAs

Answer 29

*more likely than not that part of all of the deferred tax asset will not be realized

Question 30

Getting rid of a DTA has what effect on tax expense?

Answer 30

It increases the expense, but not the payable

decreases the deferred amount

Question 31

Impact of a Valuation Allowance for DTAs

Answer 31

*decreases the deferred income tax and credits a valuation account

Question 32

Uncertain Tax Positions

Answer 32

1. more likely than not test
2. measurement of cumulative amount over 50% that could be realized (recognize savings of this amount rather than the full amount)
   * *difference should be plugged to a liability

Question 33

Which tax rate is used when calculating deferred taxes?

Answer 33

the ENACTED RATE

NOT: anticipated, proposed, unsigned
*must be signed into law

Question 34

Balance sheet presentation of deferred taxes

Answer 34

*based upon the asset or liability that created the change; otherwise it is the year in which it reverses

• net all current assets/liabilities
• net all noncurrent assets/liabilities

Question 35

Presentation of Deferred Taxes for IFRS

Answer 35

*always noncurrent

Question 36

Investee’s Undistributed Income

Answer 36

• find the difference between net income and dividends
• account for the dividend’s received deduction (1 - exclusion %)
• multiply it by the tax rate
• creates a deferred tax liability

*dividends received deduction is a permanent difference

Question 37

Income Tax Disclosures

Answer 37

• components of a net deferred tax liability or asset
• valuation allowance for deferred tax assets
• benefits of NOL carryforwards