ACC 603 Module 10
Service cost is, arguably, more related to operating activities The other components of pension expense are to be presented in the income statement separately from the service cost component and outside of income from operations funded status liability as operating
Should pension costs and funded status be treated as operating or nonoperating?
Payments often do not occur for many decades into the future number of eligible employees is uncertain employees longevity with a company is unknown payments depend on employees final salary levels, which must be estimated
What are four reasons that make it difficult to project future payments
Transfer of ownership, purchase option, lease term, present value, specialized asset
What are the five different criteria to meet for finance leases?
Defined contribution plan defined benefit plan
What are the two general types of post retirement benefit plans for employees
-lessor grants the lessee the unrestricted right to use the asset during the lease term -Lessee agrees to maintain the asset and make periodic payments to the lessor -title to the asset remains with the lessor, who usually takes physical possession of the asset at lease end unless the lessee negotiates the right to purchase the asset at its market value or other predetermined price
What are three things that leases generally include in their terms
Service cost, interest calls, return on plan assets, actuarial adjustments
What four items create pension expense in the income statement
401(k)
What is a typical example of a defined contribution plan
The company becomes liable to make it to contribution and accrue the liability and related expense. Later when a company makes the payment it's cash and liability are reduced. The amount of liability is certain any companies obligation is fully satisfied once payment has been made
What is the accounting look like for a defined contribution planned in the form of debits and credits
Amount of the lease obligations + lease payments made to the lessor at or before the lease commitment date - lease incentives received from the lessor + initial direct cost of right of use asset incurred by the lessee
What is the calculation for right of use asset
Determine whether the lease is operating or financing
What is the first step in lease accounting?
Companies classify all leases as either a finance lease or an operating lease and the assets and liabilities are included on the company balance sheets
What now must be done in terms of the balance sheet for the current GAAP regarding leases
Balance sheet did not include the lease assets and lease liabilities if the company classify the lease as an operating lease
What was different under the pre-2019 accounting standards toward leases in terms of the balance sheet?
reduced, increased
When a company depreciates assets at an accelerated rate for tax purposes, the depreciation deduction for tax purposes is higher and taxable income is lower in the early years of the assets' lives. As a result, taxable income and tax payments are__________ and after‑tax cash flow is _________________.
Retroactive and prospective
When adapting to the new standard for leases companies must choose between what two transition options
Defined benefit plan
Which pension plan is more difficult to count for
Fiance
Which type of lease is when they are affectively purchasing the asset in financing the purchase with a collateralized loan
Defined benefit plan
Which type of pension can be overfunded or underfunded
intermediate
While a higher discount rate reduces the present value of the PBO, the ensuing annual interest cost is at a higher rate but accrued on a lower PBO. The net effect on the pension liability is, therefore, ____________ An increase in the discount rate may or may not create additional pension expense.
IFRS
________does not allow an option to recognize actuarial gains and losses in income at all, but requires actuarial gains and losses be deferred in accumulated other comprehensive income with no subsequent amortization. As a result, these gains are deferred indefinitely.
Projected benefit obligation, beginning balance + Service cost + Interest cost +/− Actuarial losses (gains) − Benefits paid to retirees
how is projected benefit obligation calculated?
term
the lease _______________is for the major part of the remaining economic life of the underlying asset
deferred tax asset
the restructuring accrual is not a liability for tax reporting until the company makes the payment, and the write‑ down of assets is not a deductible expense for tax purposes until the assets are sold. Both of these differences (the liability and the assets) give rise to a______________
false
true or false: In financial statement footnotes, companies do not have to disclose the components of deferred tax liabilities and assets
true
true or false: Reporting the funded status net liability, rather than reporting pension assets and the pension benefit obligation (PBO) separately, was a concession by the FASB to gain support for passage of the pension accounting standard
To what extent will the company's pension plans compete with investing and financing needs for the available cash flows? In what ways has the company's choice of estimates affected its profitability? Should pension costs and funded status be treated as operating or nonoperating?
what are the three analysis issues relating to pensions?
service cost + interest cost - expected return on pension plan asses +/- amortization of deferred amounts, if any
what is the calculation for net pension expense?
Treatment of operating leases prior to adoption of the 2019 accounting standard different accounting treatments for operating and finance leases
what is the two significant analysis issues relating to leases
current income
Only the amortization of excess deferred gains or losses is recognized in ____________
Operations
Amortization of the right of use asset will be included in income from_______________
tax loss carryforwards
Another common deferred tax asset relates to _________________, where a company reports a loss for tax purposes, it can carry the loss forward indefinitely to reduce future taxable income.
Operating lease
Any lease of 12 months or more not classified as a finance lease is classified as_______________
Yes
Are the effects of on the balance sheet for operating lease and finance and leases the same
accumulated other comprehensive income
FASB agreed to a mechanism that would smooth pension expense: companies could hold certain gains and losses in _____________________ in the equity section of the balance sheet and transfer them to the income statement over time
PPE, debt
Financed lease assets are typically included in _______________and lease liabilities are included with_______________
interest on the lease liability plus straight line amortization of the right of use asset
For a finance lease how is the expense treated for income statement
Lease payments are classified as operating cash flow
For a operating lease What is the impact on the statement of cash flows
Rent expense is recognized for the straight line amortization of the total lease payments plus upfront costs
For an operating lease how is lease expense treated on the income statement
Projected benefit obligation - pension plan assets
For defined benefit plan the amount reported on the balance sheet for pension and other post employment obligations is the net amount called funded status and is calculated how
Interest portion is included in net income - operating activities portion representing the payment of the principal balance of the lease liability - financing activity
For financing lease what are the effects on the statement of cash flows
balance sheet
GAAP requires that the unfunded APBO liability, net of any unrecognized amounts, be reported on the _______________ and the annual service costs and interest costs be accrued as expenses each year.
higher, increases
If a company increases its assumption about the level of wage inflation, estimated salary levels at retirement will be _____________and the pension liability_______________, resulting in expense in the income statement.
investment returns
If a pension investment portfolio generates a positive _______________, plan assets increase and the funded status liability decreases. This creates income (a reduction of pension expense). However, if the pension investment portfolio reports a loss, plan assets decrease and the funded status liability increases, resulting in additional pension expense.
increases
If the company assumes a longer period of time for the payment of benefits to retirees, the pension liability ____________, resulting in expense in the income statement.
Net asset
If the funded status is over funded then a _______________is reported on the balance sheet
Net liability
If the funded status is underfunded then a _______________is reported on the balance sheet
other post-employment benefits (OPEB
In addition to pension benefits, many companies provide healthcare and insurance benefits to retired employees. these are called_______________
other comprehensive income, AOCI
In particular, the income effects relating to the following two items would be included in ________________(rather than in net income) and carried in ____________(rather than in retained earnings): 1. Large investment gains and losses on pension assets. 2. Changes in the PBO that arise from changes in estimates in actuarial assumptions.
Each of these assumptions(discount rate, wage rate inflation, expected returns) affects reported profit, and analysts must be aware of changes in these assumptions and their effects on profitability. An increase in reported profit that is due to an increase in the expected return on pension investments, for example, is not related to core operating activities and, further, might not be sustainable. Such changes in estimates must be considered in our evaluation of reported profitability.
In what ways has the company's choice of estimates affected its profitability?
expected return
Instead of recognizing actual returns on pension assets in the income statement, companies recognize an ______________ that represents the long‑term rate of return that the company expects to earn on pension investments given the expected composition of the investment portfolio.
pension expense
Investment returns on plan assets offset ________________
Net liability because pension obligations are typically greater than the pension plan assets set aside to pay those liabilities
Is the funded status usually a net liability or net asset and why
Less
Leases often require more or less equity investment by the (lessee) borrower
Secured bank loan
Leases serve as a financing vehicle similar to a_______________
Acquisition
Leasing can be utilized to finance the _______________of any asset, including vehicles, equipment, and real estate
interest cost
The PBO is computed as the present value of the expected benefit payments. Each year, the liability increases by the interest accrued on the PBO liability, computed using the discount rate. This expense is called __________
Specialized asset
The _______________ is of such a specialized nature that it is expected to have no alternative used to the lessor at the end of the lease term
Present value
The _______________ of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all the fair value of the underlying asset
Subjective
The accounting for defined benefit plan is _______________, announcer uncertain, and companies frequently revise their estimates
reducing
The dollar amount of expected return on plan assets is the product of the plan assets balance and the expected long-term rate of return. Increasing the return increases the expected return on plan assets, thus ________________pension expense
increases
The expected rate of wage inflation affects future wage levels that determine expected pension payments. An increase, thus, increases PBO, which ______________ both the service and interest cost components of pension expense
Lessor
The owner of the asset to be leased is called the
Lessee
The party desiring to use the asset in a lease is called the
amortized, amortization
These deferred amounts remain in AOCI unless they became very large, at which point, they are reclassified from AOCI into the current period income statement as either income or expense. (To avoid reclassification, the deferred amounts must be less than 10% of the PBO or pension plan asset investments, whichever is greater. The excess, if any, is _______________to the income statement until no further excess remains. When the excess is eliminated, for example, by investment returns or company contributions, the _______________ ceases
deferred tax assets
__________arise when the tax payment is greater than the tax expense for financial reporting purposes
pension plan assets are the source of funds to pay benefits to retirees, and federal law (Employee Retirement Income Security Act) sets minimum standards for pension contributions
To what extent will the company's pension plans compete with investing and financing needs for the available cash flows?
Total amortization
Total expense over the lifetime of the lease is recognized in the income statement in an amount equal to the total remaining lease payments plus _______________of any upfront costs
True
True or false Operating lease assets and liabilities are each reported in a separate line item if material
True
True or false both operating and finance leases are recognized on the balance sheet
True
True or false net cash flow from operating activities will therefore be higher for finance leases by the amount of the payment allocated to reduction of the lease liability
False
True or false the right of use asset will never be greater than the related lease liability at inception of the lease
pension expense
Under U.S. GAAP, companies must disclose the rates and assumptions used to estimate PBO and ______________.
401(k)
Under a _______________plan, the employer makes contributions that are exempt from federal taxes until they are withdrawn by the employer after retirement
actuarial adjustments
______________:The computation of the PBO requires a number of estimates about future payments, pension investment portfolio returns, and discount rates. Companies can, and often do, change these estimates, which affects the amount of the PBO and the funded status liability.
Retroactive adoption
_______________ :implement the new standard in the current year and restate all prior periods presented in the financial statements. this means the current year financial statements and the comparative financial statement all conform to the new standard
Defined contribution plan
_______________ Requires the company to make periodic contributions to my employees account and many plans require an employee matching contribution. Following retirement, the employee makes periodic withdrawals from the account.
Defined benefit plan
_______________ The company makes periodic payments to a third-party, which then makes payments to an employer after retirement. Payments are usually based on years of service and the employee salary. The company may or may not set aside sufficient funds to cover these obligations (federal law does not set minimum funding requirements)
Finance leases
_______________ Transfer control of the lease asset to the leesee
Lease liability
_______________ is recognized at the present value of the remaining lease payments
Operating leases
_______________ transfers control of the use of the lease asset, but not the asset itself
Projected benefit application (PBO)
_______________-Liability represents the present value of the companies estimated future payments to retirees
Purchase option
_______________-The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise
Pension plan assets
_______________-similar to investment portfolio with a variety of marketable debt and equity securities. The portfolio provides a return that will fund future payments to retirees. Each. The investment account increases with investment income (interest, dividends, and gains) and as the company contributes additional cash to the portfolio. The investment account decreases with investment losses and as cash is paid to retirees
Transfer of ownership
_______________-when the lease transfers ownership of the underlying asset to the lessee by the end of the lease term
Prospective adoption
_______________: Implement the new standard without restatement of the prior periods. This means that the company reports current period Leasing activities under the new accounting standard and leasing activities in the prior period under the old standard
defined benefit plan
_______________: The company makes a promise to make annual payments to retirees based on a formula that typically includes the employees final salary level and years of service, both of which are not determined for maybe 30 to 40 years in the future. Estimating the amount of liability is difficult and prone to error
Lease payments
________________-Are set at an amount that yields an acceptable return on the lessors investment in the leased asset, commensurate with the lessee's credit rating
Lease
________________-is a contract between the owner of an asset in the party desiring to use that asset
fair value accounting for pensions
____________________ means to now recognizes in current income the actual returns on pension assets (rather than expected returns) and gains (losses) arising from changes in actuarial assumptions
interest cost
________________is the product of the PBO and the discount rate
pension plan assets
______________increase by actual investment returns or decrease by investment losses and by additional contributions by the company.
accumulated post- employment benefit obligation (APBO),
_____________is largely, if not totally underfunded because companies most often provide healthcare an insurance benefits on a "pay‑as‑you‑go" basis and it is rare for companies to make contributions in advance for OPEB
projected benefit obligation (PBO)
___________increases to recognize additional service provided by employees (service cost) and by interest accrued on the PBO liability. It also increases (decreases) as deferred losses (gains) are recognized in income, and it decreases by any benefit payments paid to retirees.
AOCI
as long as the total deferred gains or losses are not excessive, they remain on the balance sheet in ________________and are, therefore, not included in the income statement.
tax
for _______ purposes, restructuring costs are not deductible until paid in the future, and asset write‑downs are not deductible until the loss is realized when the asset is sold.
by any benefits paid to retirees
how do plan assets decrease
Pension plan assets, beginning balance + Actual returns on investments (interest, dividends, gains and losses) + Company contributions to pension plan − Benefits paid to retirees
how is pension plan assets calculated?
Operating income
interest expense will be reported after_______________
service cost
pension benefits are usually based on years of service and salary levels at retirement. As employees work another year for the company, their cumulative years of service increase as does their salary level. This increases the benefits due to them at retirement. The increase in the funded status liability results in pension expense, and this expense is called_____________
