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F7 Flashcards

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1
Q

What is a pension from the employees perspective?

Employer persepctive?

A

Employee = Deferred compensation

Employer = Deferred obligation

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2
Q

What is an example of a defined contribution plan?

A

401(k)

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3
Q

What is an example of a defined benefit plan?

A

Pension.

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4
Q

What does it mean if a pension plan is over funded?

A

Plan assets exceed liabilities (PBO).

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5
Q

What does it mean if a pension plan is under funded?

A

Plan liabilities (PBO) exceed plan assets.

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6
Q

What does “SIR AGE” stand for, and what is it used to calculate?

A 
Service Cost
Interest Cost
(Return on Plan Assets)
Amort. of Prior Service Costs
(Gains) / Losses
Amort. of Existing net obligations/assets

**Used to come up with pension expense for the CY.

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7
Q

What are some items that increase/decrease the PBO year to year?

A 
Beg. PBO
\+ Service Cost
\+ Interest Cost
\+ Prior service costs from current plan amendment (bump in benefits)
\+ Actuarial losses incurred in CY
(-) Actuarial gains incurred in CY
(-) Benefits paid to retirees
= Ending PBO
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8
Q

What are some items that increase/decrease the Plan assets year to year?

A 
Beg. FV of Plan Assets
\+ Contributions
\+ Actual return on plan assets
(-) Benefits paid to retirees
= Ending Plan Assets
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9
Q

Please explain what a prior service cost is…

A

The costs to the entity based on prior service performed by an employee.

Parked in OCI, and slowly taken out over time.

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10
Q

How would you go about calculating the interest cost that increases pension expense and PBO?

A

Discount Rate X Beg. PBO

**Do not use prime or market rate!!!

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11
Q

How would you calculate expected return on plan assets?

A

Beg. FV of plan assets X Expected Rate of Return = Expected Return

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12
Q

Prior service costs sit in OCI until they are amortized out as a part of pension expense.

At what rate are they amortized out at?

A

Beg. unrecognized prior service costs / Avg. remaining service life = Amort. of prior service costs

*Use AVERAGE REMAINING SERVICE LIFE

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13
Q

What is the JE when plan amendments happen that increase benefits?

“bump up in benefits”

A

DR: OCI (exp. over time) $
CR: Pension Liability $

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14
Q

What is the JE to amortize plan amendments that increased benefits?

A

DR: Pension Exp.
CR: OCI

**Amortized out of OCI every year over the avg. remaining service life of the employees

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15
Q

What is a significant difference between GAAP and IFRS regarding prior service costs?

A 
GAAP = amortize out of OCI "smoothing"
IFRS = expense immediately, no smoothing
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16
Q

What are the two options under U.S GAAP an entity has to account for gains and losses regarding pensions?

A
  1. ) Income stmt in period incurred (immediate)

2. ) Put to OCI and amortize out over time

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17
Q

What causes gains and losses regarding pensions?

A
  1. ) Difference between actual and expected return

2. ) Changes in actuarial assumptions

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18
Q

What is the technique to amortize gains and losses out of OCI regarding pensions called?

A

The Corridor Approach.

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19
Q

Said simply, what is the corridor approach?

A

A cap to how much you’re able to amortize out of OCI regarding G/L’s in the current year.

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20
Q

How is the corridor approach calculated?

A

Unrecognized G/L in OCI
(10% of greater of PBO or PLAN ASSETS)
= Excess

Excess / Avg. remaining service life = Amortization $

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21
Q

When calculating your pension expense, off the top of your head, what are components of it that you know will decrease it?

A
  1. ) Return on plan assets

2. ) Actuarial gains

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22
Q

When amortizing pension items out of OCI, why do you not make a credit to the pension liability and instead credit OCI?

Don’t these items increase the liability?

A
  1. ) Amortization of unrecognized prior service cost
  2. ) Gain/Loss
  3. ) Existing net obligation amortization

**When going into OCI, these items already hit the liability:

DR: OCI
CR: Pension Liability

If you hit the liability again with a credit, you’d be double counting.

Instead, you need to reverse them out of OCI and DR the Pension Expense to make it impact the income statement.

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23
Q

When finding net periodic pension cost (pension exp.) ,do you use expected rate of return on plan assets or actual?

A

Use expected rate of return.

The difference between the expected and actual return on plan assets will be amortized as a G/L in the following years out of OCI.

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24
Q

Assume plan amendments happen in the CY resulting in a bump up in benefits, how will this impact pension expense differently for GAAP & IFRS?

A

GAAP = smooth out of OCI over greater of 15 yrs or avg. employee service life

IFRS = expense immediately on income statement in same year, no smoothing

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25
Calculate pension exp: ``` Service Cost = 286,000 Interest Cost = 156,000 Return on plan assets = 273,000 Amortization of prior service cost = 13,000 Gain amortization = 1,300 Existing net transition obligation = 0 ``` What would the JE look like to record?
$180,700 (remember to subtract return on plan assets and the gain amortization) DR: Net periodic pension cost (pension exp CR: Pension Benefit Liability
26
Expected Return on Plan Assets = 8% Actual Return on Plan Assets (after doing squeeze formula) = $140,000 Which is used to calculate pension expense?
Expected. 8% X Beg. Plan Assets = Return on Plan Assets used for Pension Expense
27
What is the JE when funding a pension plan?
DR: Pension Liability CR: Cash
28
What is the JE to recognize service cost & pension losses in the period incurred?
DR: OCI (decreasing) CR: Pension benefit asset/liability **In the period incurred under US GAAP, you can't recognzie in income (pension exp) immediately. Instead, you must record to OCI and amortize out over time. **Recognize the liability in the period incurred, but not the expense.
29
What is the JE to amortize items to pension expense?
DR: Net periodic pension cost (pension exp) CR: OCI (taking out) **now hitting the income statement.
30
What is the JE to recognize pension gains in the period incurred?
DR: Pension benefit asset/liab CR: OCI (increasing) *Increases the funded status of the plan
31
What is the JE to amortize pension gains to pension exp?
DR: OCI (taking out) CR: Net periodic pension cost (pension exp)
32
What is the balance sheet classification for an over funded pension plan?
Non-current asset.
33
If a plan can meet its obligations for the current year, but the PBO is larger than the Plan Assets, what is the balance sheet classification of the pension plan?
Non-current liability.
34
If a plan can't meet its obligations for the current year, and the PBO is larger than the Plan Assets, what is the balance sheet classification of the pension plan?
Current Liability = Amount short by for CY | Non-current liability = Amount short by in total, net of the current liability.
35
Once gains are amortized from OCI, what affect does it have on pension expense?
DR: OCI CR: Pension Exp.
36
Where does the funded status of a pension plan need to be shown in the financials?
The statement of financial position (balance sheet)
37
Common shareholders have the ultimate risk of loss, what does this mean?
They are last in line to be paid if the company goes under.
38
What is the difference between cumulative and noncumulative preferred stock?
Cumulative has dividends in arrears to be paid out in later periods, not a legal obligation but must be disclosed. Noncumulative do not accumulate dividends not declared in the CY, and the shareholder loses the right to receive what is not declared.
39
What is the difference between participating and nonparticipating preferred stock?
Participating means preferred shareholders participate in excess dividends without limit. Dividends are shared equally, then pro-rata distribution made on any excess.
40
If a company has no retained earnings, are you allowed to go into the stated capital (common stock) to pay dividends? What about APIC?
Never allowed to touch stated capital. APIC is separated from Common Stock bc sometimes you can pay dividends from APIC when earned capital (Retained Earnings) is zero.
41
How would you roll retained earnings into the CY?
``` Beg. R/E + Net income from CY (-) Dividends/Distributions paid +/(-) Accounting Changes reported retrospectively = ENDING RETAINED EARNINGS ```
42
What is the purpose of appropriating retained earnings?
To disclose to shareholders that some of the retained earnings are not available to pay dividends because they have been restricted for other uses.
43
What is the normal balance of treasury stock and what kind of account is it in the financials? (Asset, liab, rev, exp, etc)
Normal DR balance. Contra-equity account. Decreases Stockholders Equity.
44
What are the two methods to account for treasury stock?
Cost method & Par Value (legal) method.
45
When is the G/L calculated using the cost method of accounting for treasury stock?
Upon reissue. Record initially @ cost, and then when reissued plug G/L to APIC/RE.
46
When is the G/L calculated using the par value method of accounting for treasury stock?
G/L immediately calculated upon repurchase. Plug to RE/APIC.
47
What is comprehensive income?
Net income from CY + OCI from CY = Comprehensive income
48
What is the major difference between the par value method and cost method of accounting for treasury stock?
When to calculate and record the G/L.
49
Why do they call it the "cost method" when accounting for treasury stock?
When you repurchase, you record at cost. You don't record a G/L until reissued.
50
Which method of accounting for treasury stock does not have an impact on retained earnings when calculating gain/loss?
Cost method has no impact on retained earnings. Par value method plugs retained earnings for a loss.
51
Where do gains an losses go into the financials when accounting for treasury stock?
NEVER touch the income statement. Only net in equity section of the balance sheet.
52
How is book value per share calculated?
Common stockholder's equity / Common Shares Outstanding | ``` Components of Common SE include: C/S APIC C/S RE Treasury Stock = TOTAL ```
53
What is the threshold to classify a stock dividend as small?
< 20% of previously issued shares outstanding and distributed
54
What is the threshold to classify a stock dividend as large?
> 25% of previously issued shares outstanding and distributed
55
What if a stock dividend falls between 20% - 25%?
Option to treat as a small or large stock dividend.
56
Stock dividends reduce Retained Earnings, but what amount is this reduction for: 1. ) Small Stock Div 2. ) Large Stock Div
1. ) Small = reduce RE by FMV (Common stock & APIC) | 2. ) Large = reduce RE by Par value (C/S only)
57
What is the JE to record a small stock dividend on the entities books who are declaring?
DR: Retained Earnings (decrease) CR: C/S (@ par) CR: APIC (excess of par)
58
What is the JE to record a large stock dividend on the entities books who are declairng?
DR: Retained Earnings (shares * par) CR: C/S
59
When should an entity decrease retained earnings by the amount of a dividend?
When the dividend is DECLARED: DR: Retained Earnings CR: Dividends Payable When paid: DR: Dividends Payable CR: Cash
60
What is a liquidating dividend?
Anytime the dividends declared exceeds retained earnings.
61
Does a property dividend reduce retained earnings?
YES.
62
A property dividend reduces retained earnings, but when should it be recorded? And at what value?
At the market value @ the date of declaration.
63
When a stock option plan is noncompensatory, what is the JE to record compensation exp? (GAAP)
No JE to record. No compensation expense if the plan is noncompensatory. No JE until the employee actually buys the stock.
64
When a stock option plan is noncompensatory, what is the JE to record compensation exp? (IFRS)
IFRS does not have noncompensatory stock option plans, compensatory only.
65
What is the JE @ the grant date of a compensatory stock option plan?
No JE at the grant date.
66
What is the JE to allocate amounts to compensation expense? And what amounts are you allocating?
Allocating the FV of the options over the service period. Service period = 2 years FV = $50,000 DR: Compensation Expense 25K CR: APIC - stock options 25K
67
What is the JE to expire options that have no been exercised by the exercise date?
DR: APIC - stock options CR: APIC - expired stock options **Compensation expense is not affected by expiration of options.
68
What is the JE to record the exercise of stock options?
DR: Cash (shares X exercise price) DR: APIC - stock options (reverse previous) CR: C/S (@par) CR: APIC (plug)
69
When calculating compensation expense related to stock options (compensatory), what is the period they need to be allocated over?
From grant date to exercise date. Date of expiration is irrelevant in the calculation.
70
Assume that an entity has a FV of stock options at the grant date, and the options have a different FV a year later, how does the allocation to compensation expense change?
NO CHANGE. The stock options are valued at the FV at the time they are issued (granted). The FV should be based on the FV at the time of the grant date, and not changed. Take the FV and divide over the vesting period to get amount recorded to compensation expense every year.
71
What is the attribution period, in relation to other post retirement benefit obligations?
Date of hire to date vested.
72
When must an employer's obligation for post retirement health benefits that are expected to be provided to an employee be fully accrued for by?
The date the employee is fully eligible for the benefits. The accrual will begin when the employee is hired through the eligibility (vesting) date.

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