Financial 6 (Pensions, Contingencies and Income Tax)

PENSION PLANS Types of plans: Defined Contribution Plan (401k) o The periodic amount of contributions to the plan and the way the contributions should be allocated to employees Defined Benefit Plan o Defines the benefits to be paid to employees at retirement (computed by future benefit payments) Definitions Accum. Benefit Obligation (ABO) use current salary o Present value of benefits attributed on current and past compensation Project Benefit Obligation (PBO) use (guess) future salary o Present value of all benefits attributed for services rendered prior to that date Assume future compensation levels I/S Accounting

Unamort.

AOCI

Current Service Cost PV of all benefits earned in the current period Interest Cost (discount rate) -

(Return on Plan Assets) offset pension exp by: Actual return on plan assets

or

expected return on assets

Amort. Of Unrecognized Prior Service Cost AOCI (Gains) & Losses AOCI Diff between the expected and actual return (use when expected returns used) o Earn more on plan than expected = gain (actual return > expected return) o Employees are expected to live longer after retire = bad (more retirement payments) Corridor Approach

Amort. of Existing Net Obligation or Net Asset at Implementation AOCI Funded status of the pension plan (FV plan asset PBO)

B/S Accounting Fund the pension Pension plan contribution: o Fund Status: FV of plan asset PBO = Fund Status o 1) Increases pension plan asset (overfunded) - ALWAYS noncurrent (FV of plan asset > PBO) o 2) Decreases pension plan liability (underfunded) current, noncurrent or both (FV of plan asset < PBO) Report current to the extent that can be payable within 12 mos. up to FV of plan Prior Service Cost & Pension Losses (deferred tax setup) Amortization Occurs

Defined Benefit Pension Plan Financial Statements Pension plan and sponsoring company are 2 separate legal entities o F/S for Pension Plan itself Statement of Net Assets Available for Benefits (B/S) Statement of Changes in Net Assets Available for Benefits (I/S) Statement of Accum Plan Benefits Statement of Changes in Accum Plan Benefits Disclosures 1) MORE is BETTER! 2) Disclose EVERYTHING! POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Note: accting for postretirement benefits mirrors pension accting under both IFRS & GAAP Accrual requirements cost of retiree health and other postretirement benefits must be ac accrued if: Obligation is attributable to employee services already rendered LIABILITY Employee rights accumulate or vest Payment is probable CO CONTIN CONTINGENCY RULES Amount of benefits can be reasonably estimated Definitions Accum. Postretirement Benefit Obligation (APBO) use discount rate o PV of future benefits that have vested as of the measurement date Expected Postretirement Benefit Obligation (EPBO) o PV of all future benefits expected to be paid as of the measurement date Amort. Or Expense of the Transition Obligation 2 big differences to Pension Plans

o o

1) Option to expense 2) 20 year (min)

OTHER DEFERRED COMPENSATION AND BENEFITS Types of Postemployment Benefits Salary & fringe benefits continuation, severance benefits Liability recognition accrue is ALL of the following are met Obligation is attributable to employee services already rendered LIABILITY Employee rights accumulate or vest Payment is probable CO CONTIN CONTINGENCY RULES Amount of benefits can be reasonably estimated Dr: Severance Expense Cr: Severance Liability Note: Footnote disclosure is required if all four criteria are not met CONTINGENCIES Loss Contingencies Loss is probably and can be reasonably estimated Record J/E (Likely to occur) o Record when probable and amount can be reasonably estimated o Use min. value if given range (i.e. 100,000 to 150,000 use 100,000 to record lose) IFRS use midpoint in range Loss is reasonably possible Disclose (More than remote, but less than likely) o If one of the two requirements above cannot be met, DISCLOSE Loss is remote Ignore (Slight change of occurring) unless guarantee type remote loss Debts of others guaranteed (officers/related parties) Obligations of commercial banks under standby letters of credit Guarantees to repurchase receivables that have been sold or reassigned Under IFRS, probable (>50%) =more likely than not to occur and possible = probably will not occur Gain Contingencies wait Avoid misleading implications as to the likelihood of realization Rule of conservatism

SUBSEQUENT EVENTS An event or transaction that occurs after B/S date but before the F/S are issued or available to be issued Recognize Subsequent Events record & disclose

o Conditions that existed at the B/S date Non-recognize Subsequent Events disclose o Conditions that occurred after the B/S date and did not exist at the B/S date

ACCOUNTING FOR INCOME TAXES Comprehensive Interperiod Tax Allocation Current Year taxes: Payable (liab.) or Refundable (asset) Future Year taxes: Deferred tax liab. or Deferred tax asset / benefit Differences 1. Permanent Differences affect current / not deferred Interest income, municipal obligations, dividends received deductions 2. Temporary Differences affect current & deferred Depreciation Deferred tax liabilities and assets recognition DTL Future tax accounting income > Future financial accounting income o Tax deductible first / F/S expense later o F/S income first / taxable income later

DTA o

Future tax accounting income < Future financial accounting income Amount of taxes paid in the current period exceeds the amount of income tax expense in the current period

Under IFRS, all DTA & DTL are netted and the net amount is reported as NON-CURRENT on the B/S

Operating losses Operating loss carry back (back 2 forward 20)

Operating loss carry forward o Tax effects are recognized to the extent that the tax benefit is more likely than not to be realized