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_____________