Flashcards in FAR 33 - Deferred Comp Arrangements 2 - Settlements/Nonretirment/Post Retirement Deck (30):
At the end of the current year, after all adjusting and closing entries had been made, a firm applying international accounting standards to its defined benefit pension plan reports the following:
Defined-benefit obligation, $4mn
Plan assets at fair value, $3mn
Unrecognized net pension gain, $120,000
Unrecognized prior service cost, $80,000
Pension expense, $2.2mn
What amount of (net) defined benefit liability is the firm reporting in its balance sheet?
The net defined-benefit liability is the difference between DBO and plan assets, adjusted for the contra (adjunct) account balances: $4mn - $3mn + $120,000 - $80,000 = $1.04mn. The unrecognized net pension gain is an adjunct to the defined-benefit liability account and the unrecognized prior service cost is contra.
A firm is applying international accounting standards to its defined-benefit pension plan. Owing to an amendment to the plan at the end of the current year, prior service cost (PSC) of $1mn is recognized (60% of which is vested). The appropriate period for amortization is ten years. As a result of the amendment, by what amount is pension expense for the following year increased?
The vested portion of PSC is recognized immediately. The remainder (40% or $400,000) is gradually amortized to pension expense over ten years, or $40,000 per year.
A firm is applying international accounting standards to its defined-benefit pension plan. The firm has chosen to recognize its pension gains and losses in other comprehensive income. As a result,
A. A valuation account will be debited.
B. A valuation account will be credited.
C. The firm's earnings will not be affected.
D. The gain will be amortized as a gradual reduction in pension expense.
C. Under this option, pension gains and losses are treated as accumulated other comprehensive income. They are not subsequently transferred to earnings. Another option is available under international standards. Under that option, pension expense (and therefore earnings) would be affected.
Choose the correct statement regarding the treatment of prior service cost (PSC) for defined benefit plans under international accounting.
A. Firms have an option to record PSC directly into other comprehensive income or in earnings.
B. The entire PSC amount, at present value, is recognized immediately in pension expense.
C. The entire PSC amount, at present value, is recognized immediately in other comprehensive income, as per U.S. standards.
D. The vested portion of PSC, at present value, is recognized immediately in pension expense.
D. The vested portion of PSC is immediately recognized in pension expense, and therefore earnings. The unvested portion is gradually recognized, under delayed recognition, in pension expense.
A firm is applying international accounting standards to its defined-benefit pension plan. At the end of the current year, the actuary informs the firm that the plan has experienced an actuarial gain of $2mn. The average remaining service period of plan participants is ten years. Therefore,
A. Defined-benefit obligation does not reflect the decrease of $2mn immediately.
B. Pension expense will be reduced by $200,000 the following year.
C. Other comprehensive income is immediately increased.
D. The unrecognized net gain or loss account is immediately debited.
C. OCI is increased through the increase in pension gains/losses—OCI.
T/F: Both U.S. and international accounting standards account for multiemployer plans as defined benefit plans, if there is sufficient information to do so.
US - each participant firm accounts for the plan as a defined contribution plan. pension expense is simply the required contribution for the period, and any unpaid amount at year end is reported as a liability.
IFRS - allow plan to be accounted for as a defined benefit plan if there is sufficient info.
T/F: Under international accounting standards, the full amount of prior service cost typically is immediately recognized in pension expense.
US = prior service cost
IFRS = past service cost
T/F: A pension plan curtailment occurs when the sponsor stops accruing the pension benefits for a portion of the future services of plan participants.
Which of the following is not a criterion that must be met in order for nonretirement postemployment benefits to be accrued, rather than be treated as a cash expense upon payment.
A. The benefits are attributable to services rendered
B. The benefits accumulate or vest
C. The benefits are contingent on continued employment
D. The benefits are estimable
C. This answer is a description of vested benefits. Benefits need not vest for accrual to be mandatory.
Accounting for non-retirement post-employment benefits is an example of :
A. Accrual accounting.
B. Cash-basis accounting.
C. Fair-value accounting.
D. Historical-cost accounting.
A. Until the specific accounting standard was adopted, firms often used the pay-as-you-go basis (cash basis) for the accounting, but now, firms must record the relevant expense in the period in which the benefits are earned by the employee, provided that the appropriate criteria are met.
Under certain circumstances, a firm provides severance pay and tuition assistance to employees who are laid-off. The beginning balance in the associated liability for the current year is $112,000. During the year, employees earned $48,000 of additional benefits, 60% of which are expected to be used by terminated employees, based on past experience. During the year, the firm paid $38,000 to reimburse previous employees for benefits taken. Compute the ending balance of the benefit liability.
Only 60% of the benefits earned are expected to be taken by the covered employees. The amount recognized as expense is limited to this amount, because the criteria for recognition require that payments be probable in order for accrual to take place. The following equation (or T-account) provides the solution: $112,000 + (.60)($48,000) - $38,000 = $102,800.
Which of the following is not covered by the accounting standard applicable to non-retirement post-employment benefits?
A. Severance-pay benefits.
B. Post-retirement healthcare benefits.
C. Salary-continuation benefits.
D. Job-training benefits.
B. Accounting for post-retirement healthcare benefits is covered by a different standard, and involves a much different type of accounting, similar to accounting for defined-benefit pension plans. Such benefits include coverage for all or a portion of a retiree's healthcare costs for the rest of the retiree's life.
T/F: In comparison with compensated absences (such as paid vacation and holiday benefits), nonretirement postemployment benefits tend to be less uniform and predictable.
T/F: All earned nonretirement postemployment benefits that are estimable must be accrued.
Not if they don't vest or accumulate
T/F: Nonretirement postemployment benefits cannot be accounted for on a pay-as-you-go basis under any circumstances.
This would be the most likely basis to account.
T/F: If nonretirement postemployment benefits are not estimable, they cannot be accrued.
An employer's obligation for post-retirement healthcare benefits that are expected to be fully provided to or for an employee must be fully accrued by the date the
A. Benefits are paid.
B. Benefits are utilized.
C. Employee retires.
D. Employee is fully eligible for benefits.
D. Post-retirement healthcare benefits often are provided in terms of percentage of total coverage. For example, an employee may have to work 20 years to attain 50% healthcare coverage during retirement, and 30 years to attain 100% coverage.
If the employee is expected to work 25 years, then the 50% coverage is the level built into the expense and liability computations, and the accrual period is the first 20 years of service. After serving 20 years, the employee earns no more benefit.
Therefore, the full eligibility date is the date by which the employee has served the required number of years to attain the level of benefits the employee is expected to attain.
Which of the following costs is unique to post-retirement healthcare benefits?
A. Per capita claims.
C. Prior service.
A. The per capital claims cost is the basis for computing the obligation reported for a post-retirement healthcare plan. These costs are estimated based on historical norms adjusted for estimated healthcare cost-trend rates and are affected by the estimated age of employees at retirement, their health, and other factors. Only post-retirement healthcare plans require this type of estimate. Pension benefits, for example, are based on variables such as age at retirement, number of years of service, and final salary. Both defined-benefit pension plans and post-retirement healthcare plans involve the other three answer alternatives. Both have service-cost and interest-cost components for their respective expenses, and both can incur prior-service cost.
An employee covered by a post-retirement healthcare plan just completed her 18th year of service for a firm. Each year of employment to full eligibility provides credit for post-retirement healthcare benefits for this firm. She must work an additional seven years from today to be eligible for 75% healthcare coverage during retirement. She is expected to work ten more years from today. If this employee worked 15 more years from today, the firm would pay all her healthcare costs during retirement. Choose the correct statement.
A. The employee's full eligibility date is reached when she has worked 33 years in total.
B. Accumulated post-retirement benefit obligation equals expected post-retirement benefit obligation for the employee, as of today.
C. Service cost will not be computed for the employee during her last three years of service to the firm.
D. Expected post-retirement benefit obligation reflects only 18 years of service, as of today, for the employee.
C. The employee's full eligibility date occurs seven years from today. At that time, she is fully eligible for 75% coverage. The last three years of her service do not increase the level of her benefit. There is no additional service cost beyond that date, although interest cost will continue. If she were expected to work 15 years after today, her full eligibility would not occur until 15 years from now, at which time she would be fully eligible for 100% coverage and service cost would continue through that date.
An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a
A. Noncurrent liability.
B. Current liability.
C. Noncurrent asset.
D. Current asset.
C. The excess of plan assets over the benefit liability (accumulated postemployment benefit liability or APBO) is reported as an asset and is classified as noncurrent. The plan assets and APBO are not reported separately but rather are offset. Given the long-term nature of such plans, the asset is classified as a noncurrent asset.
T/F: The amortization of prior service cost in a postretirement benefit plan causes income to decrease and other comprehensive income to decrease.
Initial full recognition of PSC is recorded in PSC-OCI and postretirement benefit liability.
T/F: When actual return for a period exceeds expected return in a postretirement benefit plan, the difference is recognized as a decrease in APBO.
APBO and plan assets are reported in the footnotes only, not in the BS.
T/F: When actual return is less than expected return in a postretirement benefit plan, the difference is recognized as an increase in postretirement benefit liability.
T/F: Postretirement liability equals APBO less plan assets at fair value.
T/F: Service cost and interest cost increase postretirement benefit liability.
T/F: Amortization of net loss for a postretirement benefit plan causes postretirement benefit expense to increase but has no effect on postretirement benefit liability.
T/F: When healthcare cost trend rates increase, there is an immediate increase in postretirement benefit liability, and postretirement benefit expense is immediately affected.
The expense is not affected immediately.
T/F: When a postretirement benefit plan is amended and provides a retroactive increase in benefits for service already rendered, the increase in APBO is immediately recognized in other comprehensive income.
T/F: Postretirement liability equals EPBO less plan assets at fair value.
APBO - not EPBO.