Employee Benefit Plan Financial Statements
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CPA Financial Accounting and Reporting (FAR) › Employee Benefit Plan Financial Statements
Which of the following financial statements are required for a defined benefit pension plan?
Statement of Financial Position and Statement of Activities.
Statement of Net Assets Available for Benefits and Statement of Changes in Net Assets Available for Benefits.
Balance Sheet and Statement of Operations and Changes in Funded Status.
Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net Position.
Explanation
U.S. GAAP requires defined benefit pension plans to present a Statement of Net Assets Available for Benefits and a Statement of Changes in Net Assets Available for Benefits. Disclosures regarding the actuarial present value of accumulated plan benefits are also required.
According to U.S. GAAP, what is the primary objective of the financial statements for a defined benefit pension plan?
To assist the sponsoring employer in determining the annual required contribution to the plan.
To provide information about the plan's present and future ability to pay benefits when due.
To report on the plan sponsor's stewardship of plan assets and its net periodic pension cost.
To provide information that is useful in assessing the performance of the plan's investment manager.
Explanation
The primary objective of a pension plan's financial statements is to provide financial information that is useful in assessing the plan's present and future ability to pay benefits when due. This involves reporting on the plan's resources and the claims against those resources.
Which of the following is a key difference in the financial reporting for this 401(k) plan compared to a defined benefit pension plan?
The 401(k) plan's financial statements are consolidated with the sponsoring employer's statements.
The 401(k) plan is not required to report investments at fair value.
The 401(k) plan presents a Statement of Activities instead of a Statement of Changes in Net Assets.
The 401(k) plan does not report an actuarial present value of accumulated plan benefits.
Explanation
Defined contribution plans, such as 401(k)s, do not guarantee a specific benefit amount at retirement. Therefore, there is no need to calculate or disclose an actuarial present value of accumulated plan benefits. The obligation of the plan is limited to the value of the individual participant accounts. Both plan types report investments at fair value and present a Statement of Changes in Net Assets.
In the statement of net assets available for benefits of a defined benefit pension plan, how should most investments be reported?
At amortized cost.
At the lower of cost or market.
At fair value.
At historical cost.
Explanation
U.S. GAAP (specifically ASC 960) requires that investments of a defined benefit pension plan, including stocks, bonds, and real estate, be reported at their fair value. This provides the most relevant information for assessing the plan's ability to meet its obligations.
Which of these amounts would be reported as a liability on the plan's statement of net assets available for benefits?
$2 million.
$0.
$10 million.
$12 million.
Explanation
The statement of net assets available for benefits reports the plan's assets and liabilities (such as benefits currently due and payable). The actuarial present value of accumulated plan benefits is not a liability on this statement; it is required to be disclosed in the notes to the financial statements. The difference between net assets and this actuarial amount ($2 million underfunded status) is also a disclosure, not a line item on the statement itself.
What is the total amount of net assets available for benefits that Arbor Trust should report at year-end?
$5,000,000
$5,180,000
$5,350,000
$5,130,000
Explanation
Net assets available for benefits are calculated as total assets minus total liabilities.
Total Assets = Investments ($5,000,000) + Cash ($150,000) + Employer contributions receivable ($200,000) = $5,350,000.
Total Liabilities = Accrued administrative expenses ($50,000) + Benefits payable ($120,000) = $170,000.
Net Assets = $5,350,000 - $170,000 = $5,180,000.
In a defined contribution plan's statement of changes in net assets available for benefits, the net appreciation in the fair value of investments should be reported as:
Two separate amounts for realized gains/losses and unrealized gains/losses.
A component of other comprehensive income for the plan.
An adjustment to the beginning balance of net assets.
A single amount that includes both realized and unrealized gains and losses.
Explanation
U.S. GAAP requires that the statement of changes in net assets available for benefits presents the net appreciation (or depreciation) in the fair value of investments as a single amount. This amount combines both realized gains and losses from sales during the period and the unrealized appreciation or depreciation of investments held at year-end.
How should this benefit-responsive investment contract be measured and reported in the plan's financial statements?
At historical cost, with no adjustment for interest earned until maturity.
At fair value, with changes reported in the statement of changes in net assets.
At amortized cost, similar to a held-to-maturity debt security.
At contract value, which represents contributions plus interest, less participant withdrawals.
Explanation
Benefit-responsive investment contracts, such as certain GICs, are a special class of investment for employee benefit plans. They are reported at contract value, not fair value. Contract value is the principal balance plus accrued interest, representing the amount participants would receive if they were to initiate a transaction. The fair value of the contract must still be disclosed.
The statement of changes in net assets available for benefits for a pension plan should include which of the following?
The funded status of the plan.
The net appreciation or depreciation in fair value of investments.
The change in the actuarial present value of accumulated plan benefits.
The projected benefit obligation.
Explanation
The statement of changes in net assets available for benefits reflects the changes in the plan's assets and liabilities during the period. It includes contributions, investment income (including the net appreciation/depreciation in fair value), benefit payments, and administrative expenses. The change in the actuarial present value of accumulated plan benefits, the projected benefit obligation, and the funded status are related to the sponsor's accounting or are disclosure items for the plan, not components of this statement.
How should this information be reported in the plan's financial statements?
As a disclosure in the notes to the financial statements.
As a reduction of equity on the statement of net assets available for benefits.
As a non-operating expense in the statement of changes in net assets available for benefits.
As a long-term liability on the statement of net assets available for benefits.
Explanation
For a defined benefit plan, the actuarial present value of accumulated plan benefits is a required disclosure. It is not recorded as a liability on the face of the statement of net assets available for benefits. The financial statements themselves focus only on the net assets, while the disclosure provides the other side of the equation to assess the plan's funded status.