Kế toán tài chính 2 - Chapter 16: Accounting for compensation

CHAPTER 16ACCOUNTING FOR COMPENSATIONINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Explain the accounting for salary and bonuses.Describe the accounting for stock compensation plans under generally accepted accounting principles.Discuss the controversy surrounding stock compensation plans.Identify types of pension plans and their characteristics.List the components of pension expense.Utilize a worksheet for employer’s pension plan entries.Explain the accounting for prior service cost and gains and losses.Describe the reporting requirements for pension plans in financial statements.Learning ObjectivesSalary and BonusesStock Compensation PlansPostretirement BenefitsPayroll deductionsCompensated absencesBonusesMajor reporting issueAccounting for stock compensationStock purchase plansDisclosure of compensation plansDebate over stock option accountingDefined-contributionDefined-benefitComponents of pension expenseUsing a pension worksheetReporting pension amountsOther postretirement expensesAccounting for CompensationAmounts owed to employees for salaries or wages are reported as a current liability.Employee-Related LiabilitiesSalary and BonusesIn addition, current liabilities may include:Payroll deductions.Compensated absences.Bonuses.LO 1 Explain the accounting for salary and bonuses.Payroll DeductionsTaxes:Social Security TaxesUnemployment TaxesIncome Tax WithholdingSalary and BonusesLO 1 Explain the accounting for salary and bonuses.Exercise: Assume a weekly payroll of $10,000 entirely subject to F.I.C.A. and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with income tax withholding of $1,320 and union dues of $88 deducted. The company records the salaries and wages paid and the employee payroll deductions as follows:Journal entry to record salaries and wages paid: Salaries and wages expense 10,000 Withholding taxes payable 1,320 F.I.C.A taxes payable 765 Union dues payable 88 Cash 7,827Salary and BonusesLO 1 Explain the accounting for salary and bonuses.Exercise: Assume a weekly payroll of $10,000 entirely subject to F.I.C.A. and Medicare (7.65%), federal (0.8%) and state (4%) unemployment taxes, with income tax withholding of $1,320 and union dues of $88 deducted. The company records the salaries and wages paid and the employee payroll deductions as follows:Journal entry to record employer payroll taxes: Payroll tax expense 1,245 F.I.C.A taxes payable 765 Federal unemployment tax payable 80 State unemployment tax payable 400Salary and BonusesLO 1 Explain the accounting for salary and bonuses.Compensated AbsencesPaid absences for vacation, illness, and holidays.Accrue a liability if all the following conditions exist.The employer’s obligation is attributable to employees’ services already rendered.The obligation relates to rights that vest or accumulate.Payment of the compensation is probable.The amount can be reasonably estimated.Salary and BonusesLO 1 Explain the accounting for salary and bonuses.Bonus AgreementsResult in payments to certain or all employees in addition to their regular salaries or wages.Bonuses paid are an operating expense.Unpaid bonuses should be reported as a current liability. Salary and BonusesLO 1 Explain the accounting for salary and bonuses.Stock Compensation PlansLO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Option - gives key employees option to purchase stock at a given price over extended period of time.Stock compensation plans may be declining in popularity.Illustration 16-4The Major Reporting IssueNew FASB standard requires companies to recognize compensation cost using the fair-value method.*Under fair-value method, companies use acceptable option-pricing models to value the options at the date of grant.LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation Plans*“Accounting for Stock-Based Compensation,”Statement of Financial Accounting Standards No. 123 (Norwalk, Conn: FASB, 1995); and “Share-Based Payment,”Statement of Financial Accounting Standard No. 123(R) (Norwalk, Conn: FASB, 2004).Accounting for Stock CompensationTwo main accounting issues:How to determine compensation expense. Over what periods to allocate compensation expense.LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation PlansDetermining ExpenseCompensation expense based on the fair value of the options expected to vest on the date the options are granted to the employee(s) (i.e., the grant date).LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation PlansAllocating Compensation ExpenseOver the periods in which employees perform the service—the service period.Brief Exercise: On January 1, 2006, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2008, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation PlansNo entry on date of grant.Brief Exercise: Prepare the necessary journal entries related to the stock option plan for the years 2008 and 2009.LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation Plans1/1/08Compensation Expense 200,000 Paid-in Capital-stock Options 200,00012/31/08Compensation Expense 200,000 Paid-in Capital-stock Options 200,00012/31/09($400,000 x ½)Employee Stock Purchase PlansGenerally permit all employees to purchase stock at a discounted price for a short period of time.Compensatory unless it satisfies three conditions:Substantially all full-time employees participate on an equitable basis. The discount from market is small. The plan offers no substantive option feature.LO 2 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Compensation PlansDebate over Stock Option AccountingWhen first proposed, there was considerable opposition to the fair-value approach because it could result in substantial, previously unrecognized compensation expense.Offsetting such opposition is the need for greater transparency in financial reporting.LO 3 Discuss the controversy involving stock compensation plans.Stock Compensation PlansA Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working.Pension PlanAdministratorContributionsEmployerRetired EmployeesBenefit PaymentsAssets & LiabilitiesPostretirement Benefits                                     LO 4 Identify types of pension plans and their characteristics.Defined-Contribution PlanDefined-Benefit PlanEmployer contribution determined by plan (fixed)Risk borne by employeesBenefits based on plan valueBenefit determined by planEmployer contribution varies (determined by Actuaries)Risk borne by employerActuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc.Statement of Financial Accounting Standard No. 87, “Employers’ Accounting for Pension Plans,” 1985LO 4 Identify types of pension plans and their characteristics.Postretirement BenefitsService CostsInterest on LiabilityActual Return on Plan AssetsGain or Loss+++-+-LO 5 List the components of pension expense.Components of Pension Expense1.2.3.5.Effect on ExpenseAmortization of Prior Service Costs+4.Postretirement BenefitsService Costs+LO 5 List the components of pension expense.Components of Pension Expense1.Effect on ExpenseActuarial present value of benefits attributed by the pension benefit formula to employee service during the period. Postretirement BenefitsLO 5 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseInterest for the period on the projected benefit obligation outstanding during the period.The interest rate (settlement rate) should reflect the rate at which companies can effectively settle pension benefits.Interest on Liability+2.Postretirement BenefitsLO 5 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseThe actual return on plan assets is the increase in pension funds from interest, dividends, and realized and unrealized changes in the fair-market value of the plan assets.Return on Plan Assets3.+-Postretirement BenefitsLO 5 List the components of pension expense.Components of Pension ExpenseEffect on ExpensePlan amendments often increase benefits for service provided in prior years.The cost (prior service cost) of providing these retroactive benefits is allocated to pension expense over the remaining service-years of the affected employees.Amortization of Prior Service Costs+4.Postretirement BenefitsLO 5 List the components of pension expense.Components of Pension ExpenseEffect on ExpenseVolatility in pension expense can result from sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation.Gain or Loss+-5.Postretirement BenefitsWe will now illustrate the basic computation of pension expense using the first three components: Service cost, Interest on the liability, and Actual return on plan assets. Using a Pension WorksheetLO 6 Utilize a worksheet for employer’s pension plan entries.A worksheet is not a permanent accounting record: it is neither a journal nor part of the general ledger.The “General Journal Entries” columns determine the journal entries to be recorded in the formal general ledger. The “Memo Record” columns maintain balances in the projected benefit obligation and the plan assets.Using a Pension WorksheetLO 6 Utilize a worksheet for employer’s pension plan entries.Exercise: At January 1, 2011, Uddin Company had plan assets of $250,000 and a projected benefit obligation of the same amount. During 2011, service cost was $27,500, the settlement rate was 10%, actual and expected return on plan assets were $25,000, contributions were $20,000, and benefits paid were $17,500.Instructions:Prepare a pension worksheet for Uddin for 2011.Using a Pension WorksheetLO 6 Utilize a worksheet for employer’s pension plan entries.Exercise: Prepare a pension worksheet for Uddin for 2011.($250,000 x 10%)($7,500) net liabilityUsing a Pension WorksheetLO 6 Utilize a worksheet for employer’s pension plan entries.Note the following about the worksheet:The ending balance in the Pension Asset / Liability column should equal the net balance in the memo record.For each transaction or event, the debits must equal the credits.Using a Pension WorksheetLO 6 Utilize a worksheet for employer’s pension plan entries.Amortization of Prior Service CostCompany should not recognize the retroactive benefits as pension expense entirely in the year of amendment. Employer initially records the prior service cost (PSC) as an adjustment to other comprehensive income.Employer then recognizes the PSC as pension expense over the remaining service lives of the employees who are expected to benefit from the change in the plan.LO 7 Explain the accounting for prior service cost and gains and losses.Amortization Method:Board prefers a years-of-service method, however SFAS No. 87 allows use of the straight-line method.Using a Pension WorksheetExercise: The following defined pension data of Doreen Corp. apply to the year 2011.Projected benefit obligation, 1/1/11 (before amendment) $560,000Plan assets, 1/1/11 546,200Prepaid/accrued pension cost (credit) 13,800On January 1, 2011, Doreen Corp., through plan amendment, grants prior service benefits having a present value of 100,000Settlement rate 9%Service cost 58,000Contributions (funding) 55,000Actual (expected) return on plan assets 52,280Benefits paid to retirees 40,000Prior service cost amortization for 2011 17,000Instructions: For 2011, prepare a pension worksheet for Doreen Corp. that shows the journal entry for pension expense.Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Exercise: Pension Worksheet for 2011($123,920) net liabilityUsing a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Exercise: Pension Journal Entry for 2011.Other Comprehensive Income (PSC) 83,000Pension Expense 82,120Dec. 31, 2011Cash 55,000Pension Asset / Liability 110,120Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Gain or LossUnexpected swings in pension expense can result from:Changes in the market value of plan assets, and Changes in actuarial assumptions that affect the amount of the projected benefit obligation.Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Question: What is the potential negative impact on net income of these unexpected swings?VolatilityThe profession decided to reduce the volatility with smoothing techniques.Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.AnswerRecorded in Other Comprehensive Income (OCI) account, combining them with gains and losses accumulated in prior years. This treatment is similar to prior service cost.“Asset Gains and Losses”Question: What happens to the difference between the expected return and the actual return?Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Question: What happens with unexpected gains or losses from changes in the Projected Benefit Obligation (PBO)?AnswerRecorded in Other Comprehensive Income (OCI) account, combining them with gains and losses accumulated in prior years. This treatment is similar to asset gains and losses.“Liability Gains and Losses”Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Companies combine the liability gains and losses in the same Other Comprehensive Income account used for asset gains and losses. They accumulate the asset and liability gains and losses from year to year that are not amortized in Accumulated Other Comprehensive Income. This amount is reported on the balance sheet in the stockholders’ equity section.Using a Pension WorksheetLO 7 Explain the accounting for prior service cost and gains and losses.Using a Pension WorksheetProblem: Katie Day Company adopts acceptable accounting for its defined benefit pension plan on January 1, 2011, with the following beginning balances: plan assets $200,000; projected benefit obligation $200,000. Other data are as follows.LO 7 Explain the accounting for prior service cost and gains and losses.Using a Pension WorksheetProblem: Pension Worksheet for 2011($3,000)* Expected Return on Plan Assets = $200,000 x 10% = $20,000 *LO 7 Explain the accounting for prior service cost and gains and losses.Using a Pension WorksheetProblem: Pension Journal Entry for 2011Other Comprehensive Income 3,000Pension Expense 16,000Dec. 31, 2011Cash 16,000Pension Asset / Liability 3,000LO 7 Explain the accounting for prior service cost and gains and losses.Using a Pension WorksheetProblem: Pension Worksheet for 2012LO 7 Explain the accounting for prior service cost and gains and losses.($158,300)Using a Pension WorksheetProblem: Pension Journal Entry for 2012Other Comprehensive Income 105,600Pension Expense 89,700Dec. 31, 2012Cash 40,000Pension Asset / Liability 155,300LO 7 Explain the accounting for prior service cost and gains and losses.Using a Pension WorksheetProblem: Pension Worksheet for 2013* Expected Return on Plan Assets = $264,500 x 10% = $26,450 *PlugLO 7 Explain the accounting for prior service cost and gains and losses.($204,500)Using a Pension WorksheetProblem: Pension Journal Entry for 2013Other Comprehensive Income (G/L) 52,370Pension Expense 83,430Dec. 31, 2013Other Comprehensive Income (PSC) 41,600Cash 48,000Pension Asset / Liability 46,200LO 7 Explain the accounting for prior service cost and gains and losses.Within the Financial StatementsRecognition of Net Funded Status of the Pension PlanAs required by SFAS No. 158, companies recognize on their balance sheet the overfunded or underfunded status of their defined-benefit pension plan. The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation.LO 8 Describe the reporting requirements for pension plans in financial statements.Reporting Pension AmountsWithin the Financial StatementsClassification of Pension Asset or Pension LiabilityThe excess of the fair value of the plan assets over the benefit obligation is classified as a noncurrent asset. These assets are used to fund the projected benefit obligation, and therefore noncurrent classification is appropriate.The current portion of a net pension liability represents the amount of benefit payments to be paid in the next 12 months (or operating cycle, if longer). Reporting Pension AmountsWithin the Financial StatementsAggregation of Pension PlansAll overfunded plans should be combined and shown as a pension asset on the balance sheet. All underfunded plans should be combined and shown as a pension liability on the balance sheet.The FASB rejected the alternative of combining all plans and representing the net amount as a single net asset or net liability.Reporting Pension AmountsWithin the Notes to the Financial StatementsMajor components of pension expense.Reconciliation showing how the projected benefit obligation and the fair value of the plan assets changed. A disclosure of the rates used in measuring the benefit amounts (discount rate, expected return on plan assets, rate of compensation).Table indicating the allocation of pension plan assets by category.Reporting Pension AmountsWithin the Notes to the Financial StatementsThe expected benefit payments to be paid to current plan participants for each of the next five fiscal years and in the aggregate for the five fiscal years thereafter.The nature and amount of changes in plan assets and benefit obligations recognized in net income and in other comprehensive income of each period.Reporting Pension AmountsWithin the Notes to the Financial StatementsThe accumulated amount of changes in plan assets and benefit obligations that have been recognized in other comprehensive income and that will be recycled into net income in future periods.The amount of estimated net actuarial gains and losses and prior service costs and credits that will be amortized from accumulated other comprehensive income into net income over the next fiscal year.Reporting Pension AmountsOther Postretirement ExpensesDifferences between Pensions and Postretirement Health-Care BenefitsReporting Pension AmountsIllustration 16-14Copyright © 2008 John Wiley & Sons, Inc. 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