1. amount of employer contribution is defined by the contract
2. benefits paid during retirement depend on return on pension fund asset and therefor are not defined
3. employee bears risk of fund performance
4. sponsoring firm has no obligation to employee beyond total annual contribution
5. earnings are tax exempt until withdrawals are made

1. benefit paid during retirement are based on a formula and therefor are defined
2. contributions are not defined
3. employer bears risk
4. uses accrual accounting: pension expense recognized as benefits are earned and pension obligation is recognized for unpaid benefits

1. pension expense
2. projected benefit obligation
3. pension assets at MV
4. pension liability

• present value of unpaid pension benefits promised for work done through BS date
• future salaries if they are used in formula, but only service credits earned through BS date
• reported in footnotes

• reported in footnotes
• =contribution by firm to date + investment return to date - benefits paid to date

• =difference in PBO and plan assets at BS date
• if overfunded plan, then pension asset is reported

• excess of benefits payable for coming year over FV of plan assets = current portion of pension L
• PBO<plan assets, reported pension asset is classified as noncurrent

1. discount rate- rate used for actuarial PV pension calculations
2. expected rate of return- rate used to calculate expected return on plan assets

=service costs + interest cost - expected return + amortization of prior service cost +/- amortization of gain or loss

*doesn't affect PBO or assets

1. service cost
2. interest cost
3. expected return on plan assets

1. statement of NA available for benefits as of end of plan year
2. statement of changes in NA available for benefits
3. SOCF encouraged, not required
4. description of plan agreement

1. statement reporting net plan assets at FV available to pay pension benefits at beginning or end of year
2. statment reporting changes for year in net PA @ FV
3. statement of actuarial PV of accumulated plan benefits
4. additional info affecting number 3
5. SOCF encouraged
6. description

1. prior service cost (PSC)- immediate increase in PBO for services already renderred
2. pension gains and losses- 2 sources- (a) change in PBO due to estimate change and experience change and (b) difference between actual and expected return

1. amortize initial PV amount for PSC
2. usually increases pension expense but retroactive amendments decrease it
3. 1 of 2 methods can be chosen (SL or service method)

D- PSC-OCI

C- pension liability

D-pension expense

c- PSC-OCI

• formal- pension information maintained in the accounts
• informal- pension information not formally recorded in the accounts 

1. amortization of net G/L at beginning of year
2. may cause pension expense to decrease (net gain) or increase (net loss)
3. =(sum of all previous g/l - previous amortization)

• gain- decrease in PBO from increase in expected or actual turnover, decrease in life expectancy, etc.
• loss- increase in PBO from decrease in discount rate, decrease in turnover, etc.

• gain- actual return > expected return
• loss- actual return < expected return

1. amount of amortization of net gain or loss at beginning of current year to include in current year pension expense. 2 methods allowed for amortization include (minimum "corridor" amortization and SL)
2. determine net g/l at end of current-year for amortization the following year (ending net G/L=beginning net g/l - amortization of beginning net g/l +/- PBO g/l for current year +/- asset G/L for current year

• amount outside of corridor is subject to amortization
• corridor = Net gain or loss +/- 10% of larger of PBO and assets, at start of year

• net pension g/l not yet recognized in pension expense
• if a portion of PBO is settled, a pro rata portion of net G/L is recognized

1. either decrease length of future employee service or eliminates accrual of benefits for some or all future services
2. portion of unrecognized PSC related to estimated reduced future benefits is treated as a loss. PBO often changes as a result which also gives rise to g/l
3. if net sum of psc and pbo change is a loss, then it is recognized as one in period in which it is probable that curtailment will occur
4. if net some is a gain, it is recognized when affected employees are terminated or when plans suspension or amendment is adopted

• special benefits offered only for a short period when a special event like a plant closing occurs
• loss and liability recognized if probable and estimable for the amount of benefits provided (liability is discounted if noncurrent)

1. PBO = DBO (defined benefit obligation), PSC= Past service cost
2. 2 alternatives for actuarial and asset gains and losses (recognize immediately in defined L/A account and OCI account or recognize immediately in defined L/A account and a valuation account)
3. PSC accounting: recognize as expense immediately if already vested and amortize "unrecognized PSC" remainder using SL
4. DBO-plan asset FV= funded status +unrecognized net pension gain or - unrecognized net pension loss - unrecognized PSC=defined benefit liability

• accrual accounting required
• employers may provide benefits to former and inactive employees after employment, but before retirement

1. when benefits meet 4 criteria: (a)employer's obligation to pay employees for compensated absences in future is attributable to employees services already rendered (b) rights invalued vest of accumulate (c) payment considered probably (d) amount of compensation can reasonably be estimated
2. when benefits don't meet 4 criteria, the standard for contingency applies. if probable postemployment L has been incurred as of date of FS and amt of future payment can reasonably be estimated, then expense and and L are recorded in that period

• provided by firms of employees based on service they have provided while employees (health care, medical care benefits, life insurance benefits, benefits related to tax or legal services, etc.)
• use accrual accounting

1. expected post-retirement benefit obligation (EPBO)- PV of benefits expected to be paid based on level of coverage employees are expected to obtain. (=PV of benefits to be paid by firm - employee contributions - medicare or other gov. sponsored plan payment)
2. APBO is computed as the fraction of EPBO earned by employees as of BS date (=EPBO X (yrs worked/yrs must work to obtain coverage level))

• result of rule change, this is 6th component of expense
• only needed for firms who didnt recognize the transition obligation immediately

• no additional benefits are earned beyond this date
• doesn't mean employee automatically receives full benefits
• employee has reached service level necessary to receive benefits that will most likely be granted

1. all employees can participate
2. employees must decide w/ in 1 month of firm setting price for stock whether to enroll in plan
3. discount does not exceed employer cost savings inherent in issuing directly to employees
4. purchase price must be based solely on MV of stock 
5. employees can cancel enrollment before purchase date and get a full refund

1. value of employee services to be received OR
2. value of options provided (determined by option-pricing model)

• gradual vesting may be allowed
• can be accounted for in 1 of 2 ways ( 1- one option plan, 2- treat each group as a separate option plan)

FV computed separately for each group...

• SL is an option. sum of total compensation amounts across all groups under plan is divided by largest vesting period yielding the compensation expense per each period
• minimum expense to be recognized is the amount of options vested through that date

1. larger effect on FS for US firms bc share-based compensation is less common internationally
2. each group must be accounted for separately and SL not allowed

• for continuing employment but the employee can't sell stock until award is vested and cant receive shares until vested
• total compensation expense = # of shares awarded X MV of stock at grant date
• changes in stock price after grant date have no accounting effect

1. employee receives difference between stock price at grant and exercise dates
2. employee pays nothing
3. SAR specifies pmt of benefit in either cash or stock

1. allows employer to issue shares--> account for as stock option plan
2. specifies payment to be made in cash or allows employee to chose cash

1. firm records L rather than PIC when compensation expense is recognized
2. each year service is provided, FV of each right is reestimated using option pricing model
3. compensation expense is recorded each year based on FV @ end of period
4. expected forfeitures are built into calculation
5. at exercise date, FV of SAR = price at grant date - price paid for stock

1. emphasis is on correct measurement of income tax A/L
2. deferred tax A&L are now measured directly along w/ income tax L
3. income tax is now a plug

• investment interest from state or municpal bond
• included in pretax accounting income

• insurance permiums on a life insurance policy for a key employee where a firm is beneficiary
• not deductible from taxable income but are an expense for financial reporting

• GAAP: based on cost of a natural resource
• TAX: based on revenues of resources sold

1. taxable temporary differences
2. deductible temporary differences

• initially involve a postponement in payment of taxes
• when reverses, causes future taxable income to be > pretax accounting income
• result in deferred tax liabilities
• examples: depreciation and installment sales

• initially cause prepayment of taxes
• increase in taxable income in originating year
• future taxable income is < pretax accounting income in reversing year
• deferred tax asset
• examples: warranty expense, revenue received in advance

= INCOME TAX EXPENSE

PRETAX ACCOUNTING INCOME

1. tax rate changed during year, new rate is applied as of beginning of that year to reccompute deferred tax balances. results in immediate change to interest expense
2. average tax rate is used for computing the changes in DTA accounts for corporations

• expensed immediately for financial reporting purposes
• deducted over short period for tax purposes which creates a DTA
• next years deducted amount is current, the rest in noncurrent

• current deferred tax aaounts are netted for BS
• noncurrent deferred tax accounts are netted for BS

• same as accounts giving rise to deferred accounts
• if not associated with an account, then the deferred account's classification is based on expected period of reversal

• >50% chance of realizing the DTA = reported free of any valuation account
• <50% chance of realizing the DTA = reduced by valuation allowance to amount that has >50% change

1. history of unused NOLs
2. history of OLs
3. losses expected in future years OR
4. very unfavorable contingencies

1. contracts or sales backlogs will produce enough taxable income to realized DTA
2. excess of appreciated asset value over tax basis of entity's NAs will produce more than enough taxable income to realize DTA OR
3. strong earning history indicates DTA will be realized

*positive and negative evidence must be used in making decision to use or not

1. expectation of future taxable income
2. taxable income in prior years w/ in 2-year carryback period for NOL
3. future taxable differences
4. tax planning strategies

• full amounts of both can be reported in BS, or net amount of dta w/ disclosure of allowance in notes
• classification of allowance follows classification of DTA

• income tax expense decreases and benfit is recognized
• amount of benefit recognized is largest amount for which the cumulative property of realization is > 50%

1. carryback 2, forward 20
2. just carryforward 20

• refund based on tax rate in years carried back to and limitted to amount actually paid for taxes
• earlier of 2 years used first
• if not efficient, carried forward 20 years, earlier used first
• no taxes paid on taxable income obsorbed by NOL
• D- Refund receivable C- income tax benefit

• no refund for taxes paid in previous years
• chose when future tax rates significantly increase
• D-deferred tax asset C- income tax benefit

• from taxable to nontaxable: causes DT accounts to be closed against income tax expense
• from nontaxable to taxable: causes initial DT accounts to be recognized from application of interperiod tax allocation

1. Change in DT account measurement- apply tax rates that have been enacted or "substantially enacted" by end of period
2. revaluation of plant assets- upward revaluation allowed. BV-revalue=temporary difference causing a change in relevant DT account. changes reported in equity rather than income tax expense.
3. classification of DT accounts: always noncurrent
4. DTA- recognized when >50% probability. no valuation accounts.
5. uncertain tax positions- not addressed, currently treated as contingencied