Intermediate accounting 19th by stice stice chapter 17

Chapter 17 19th Edition Employee Compensation—Payroll, Pensions, and Other Compensation Issues Intermediate Accounting James D Stice Earl K Stice PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2014 Cengage Learning 17-1 Payroll and Payroll Taxes Social security and income tax legislation impose five taxes based on payrolls: Federal old-age, survivors’, and disability (tax to both the employee and employer) Federal hospital insurance (tax to both employer and employee) Federal unemployment insurance (tax to employer only) State unemployment insurance tax (tax to employer only) (continued) 17-2 Payroll and Payroll Taxes Individual income tax (tax to employee only but withheld and paid by employer) 17-3 Federal Old-Age, Survivors’, and Disability Tax • • • The Federal Insurance Contributions Act (FICA) provides for FICA taxes from both employers and employees to provide funds for federal old-age, survivors’, and disability benefits for certain individuals and members of their families The employer is required to withhold FICA taxes from each employee’s wages In 2010, annual wages up to $106,800 were subject to 6.20% for FICA tax 17-4 Federal Hospital Insurance • • • The Federal Insurance Contribution Act (FICA) also includes a provision for Medicare tax This tax differs from the tax previously discussed in that the tax is applied to all wages earned; there is no upper limit The tax rate for 2010 was 1.45% for both employer and employee 17-5 Federal Unemployment Insurance • • The Federal Social Security Act and the Federal Unemployment Tax Act (FUTA) provide for the establishment of unemployment insurance plans Employers with insured workers employed in each of 20 weeks during a calendar year or who pay $1,500 or more in wages during a calendar quarter are affected (continued) 17-6 Federal Unemployment Insurance • • • • Tax rate on the first $7,000 of wages earned has been 6.2% since 1985 Employer can apply for a credit limited to 5.4% for taxes paid on state unemployment tax, effectively reducing the federal tax to 0.8% (6.2% – 5.4%) No tax is levied on the employee Payment to the federal government is required quarterly 17-7 State Unemployment Insurance • • State unemployment compensation laws (SUTA) are not the same in all states In most states, laws call for tax only on employers, but a few states tax both employer and employee Although the normal rate on employers may be 5.4%, states have merit rating or experience plans providing for lower rates based on employer’s individual employment experiences 17-8 Income Tax • Federal income taxes on the wages of individuals are collected in the period in which the wages are paid • The “pay-as-you-go” plan requires employers to withhold income tax from wages paid to their employees • Most states and many local governments also impose income taxes on the earnings of employees that the employer must withhold and remit (continues) 17-9 Income Tax • Withholding is required not only of employers engaged in a trade or business but also of religious and charitable organizations, educational institutions, social organizations, and governments of the United States, the states, the territories, and their agencies, instrumentalities, and political subdivisions 17-10 Differences in Actuarial Estimates of PBO • • The actuarial computation of the projected benefit obligation involves many estimates:  Future interest rates  Life expectancy rates  Future salary rates The deferred loss arising from the adjustment to the PBO becomes part of the deferred net pension gain or loss for possible future amortization 17-57 Amortization of Deferred Net Pension Gain or Loss from Prior Years • • The deferred pension gain or loss from prior years is amortized over future years if it accumulates to more than an amount defined by the FASB as a corridor amount Amortization is required only on that portion of the unrecognized net gain or loss that exceeds 10% of the greater of:  PBO or  the market-related value of plan assets at the beginning of the year (continued) 17-58 Amortization of Deferred Net Pension Gain or Loss from Prior Years The FASB indicated that any systematic method of amortizing the deferred net gain or loss that equaled or exceeded the straight – line amortization over the remaining expected service years of the employees would be acceptable as long as the procedure is applied consistently to both gains and losses 17-59 Revolutionary IASB Exposure Draft Key elements of the exposure draft are as follows: • Balance sheet reporting of the net pension liability/asset with adjustments • Use of actual return on the pension fund rather than expected return • • No accumulated other comprehensive income Decomposition of the pension expense components 17-60 Disclosure of Pension Plans The major disclosure requirements in FASB ASC Topic 715 for most publicly traded companies are as follows: A reconciliation between the beginning and ending balances for the projected benefit obligation A reconciliation between the beginning and ending balances in the fair value of the pension fund (continued) 17-61 Disclosure of Pension Plans A disclosure of the accumulated benefit obligation The funded status of the plans and the amounts recognized in the balance sheet The components of pension expense for the period Any effects on the other comprehensive income for the period and the details of the existing balances in accumulated other comprehensive income (continued) 17-62 Disclosure of Pension Plans The assumptions used relating to (a) discount rate, (b) rate of compensation increase, and (c) expected long-term rate of return on the pension fund Disclosure of the percentage of the different types of investments held in the pension fund along with a narrative description of the investment strategy (continued) 17-63 Disclosure of Pension Plans For each of the next years, disclose an estimate of the amount of cash to be paid in benefits and the amount of cash to be contributed by the company to the pension fund 10 For postretirement benefits: assumed heath care cost trend rates and their effect on service and interest costs and the ABO if the assumed health care cost trend rates were one percentage point higher 17-64 Pension Settlements and Curtailments • Settlement of a pension plan occurs when an employer takes an irrevocable action that relieves the employer of primary responsibility for all or part of the obligation • A curtailment of a pension plan arises from an event that significantly reduces the benefits that will be provided for present employees’ future services Curtailments include:  Termination of an employee earlier than expected  Termination or suspension of a pension plan 17-65 Settlements FASB ASC paragraph 715-30-35-39 requires that a settlement be recognized in the current period if it: was an irrevocable action, relieved the employer of primary responsibility for the pension benefit obligation, and eliminated significant risks related to the obligation and the assets used to effect the settlement 17-66 Informal Rather than Formal Plans • • Many company postretirement benefit plans are not written into formal contracts Companies often begin paying for postretirement health care benefits as a continuation of health care coverage for active employees 17-67 Pay-as-You-Go Accounting Rather than Accrual Accounting • Because postretirement benefit plans are usually not funded, almost all companies previously charges these costs against revenue in the period the benefit costs were incurred rather than when the employee service was rendered • This policy results in uneven charges against revenue and does not recognize a liability for unfunded postretirement benefits 17-68 Nonpay-Related Rather than Pay-Related Benefits • The date when employees become eligible for postretirement benefits is known as the full eligibility date • After that date is reached, the employee is eligible to receive 100% of the postretirement benefits regardless of any future service or pay level reached 17-69 Chapter 17 ₵ The The End End $ 17-70 17-71 ... insurance tax (tax to employer only) (continued) 17- 2 Payroll and Payroll Taxes Individual income tax (tax to employee only but withheld and paid by employer) 17- 3 Federal Old-Age, Survivors’, and Disability... 1,224 Employees Income Taxes Payable 1,600 Cash 13 ,176 16,000 To record payment of payroll and related employee withholdings (continued) 17- 11 Accounting for Payroll Taxes The employer’s payroll... benefits such as:  Health care benefits  Life insurance coverage 17- 21 Accounting for Pensions Financing retirement years is accomplished by establishing some type of pension plan that sets aside funds