Reading 9: Emploee Compensation Post-Employment & Share-Based

1Page No. 579+ sep 2022 FridayDate / /Reading 9Limp oyeeCompensation . Post Employment &difinedShare - BasedM 10.1Types of PlanDefined BenifitDefined Contirbution- Pay defined amt of pension afterAgreed upon contirbution isRetirementmade to employee's pension plan- Bo only employer ContributesBoth ContributeEmployer Carries RiskEmployee Carties the riskEmployer owns assetsEmployee owns assets,Employer act as agentEmployer will appoint anEmployee directly investInvest managerpolicyContribution to pension f trustPre fundingNot applicableAsset : Plan assetContirbution are expLiabilities: PBOfaithers Page No. 58pobilityDate/*OtherpostEmploymentBenifitsOPB,akaUnfundedplan- Benifits suchaslifeinsuranceprem,healthcareplanE- Accounting treatmentsamesas DB- Regulationsdo.notIreqsuch plansto be funded in advance-Benifitsdependson plans specificationgoid*DC Accounting01Employer doesnotpromisespecificlevelofretirementBengit1/5Employer ContributionbrailsB/s-Asset=Excess or shortfall in pay relativeLiabiliteis69978AtospecifiedcontributionbenifalNo significantissueEfor analystRRemainingpaydue:-CLCashflaceNein*DBAAccounting-lakafundal planimpNon - Pay related plansPay related planRen Benefits unrelated to salaryBenefits related to SalaryEmployer needtoestfuturebenefitpayntodeterminereq contributiDifficult accounting landysis issue Page No. 59Date//GxAnnual penension = (% of final salary at retirement X No. ofpay"41 of ServiceregrodsgoingM 10.2:6DBBISfiguredPBO - Projected Benefit obligation} samePVDBO-Presentvalueofthedefinedben fitobligationIFRSCurrent servicePresent valueTofallfuturepensionpaynearned todate basedexpectedsalaryincreasesover timeonAssumesemployeeworksuntilretirementEst ofliabilityonagoingConcernbasisfuture salaryAPBO Current servicecost5Int cost,past servile Cost,Changesinactuarialassumptionsandbenefitspaidto employerenigondaCurrent B/SServicingDate ofdateperiodretirementPyn ofPensionPAXPBGPVof PensionDiscountingpayn IGov BondDisc Rate High with Rate duration Cop & Bond curreny samePage No. tozpension pynDate/as*PBO ComponentsAnnual credit discounted at disc with N Yr to RetCurrent Service CostThechangesinPBOattributedto employee's effort'sduringtheyrTheactuarialPVofpensionbenefitearnedinayearEx.workedIertiayrInt Costohy empolyer share of lostTheIncrease inthePBOresultingfromthepassageoftime - PBOatstartofperiodXdiscountrat*Subjecttodiscountrateremaining constantActurialIFRS - Exp immdediatelyGains &lossesGains andCRAP - Amort over the avy service life of EMOlossesresultingfromchangesinacturialassumptionsaffectingthePBO0994Past ServiceCosts (PSC)Retroactiveimpact ofonpastbenefit awarded toemployees resultingfromplanamendments For exchanging the payoutfrom60%to65% of final salaryBenefits PaidPaymadefromthefundtoexistingretiresPBODisclosure=DisRateReturn on plan assetRate of Compensation Page No. 61Date//Opening PBOLast yr Closing+Service CosttInt lost+ Actuarial loss } only acturial assumption affecticting PBO- Actuarial Gain+/- Past Services CostConservate (-) generos (+)- Benifits paid= Closing PBOThis yr PBORecorcilationdisclosedinfootnot.ExampleRetirement age ; 65Pension : 2% of Salary X yr workedpaid annuallyin arrears benefit based on final salaryRate of compensation growth 4% p.aLife expectancy post retirement = 15 yrDiscount rate = 87One employee :John'sJohn McElwain was hired on 1st Jan I 2016John's starting salary is 50,000 , / John has 25 yr toretirement.PBo After I yr of employnSol"Salary on 24 retirement :50,000 X (1.0g) = 128,165.22Annual pay" after working for 1yr :128,165.21 X 2% x / yr = 2,563 30 Operating expCullent scluice costPage No. 62Date//PBO at retirement date:PMT = -2,563.30 , N=15 1/4=8 CPT PV of 21,940.500PBOattheEend of 2016FV = 21,940,55N = 29, 1/4 =8CPT PV = 3,460.01PBOPVDBOPBO After 2 yr of Employ"Annual pay" after working for 2 year128,165.21x2%X2yr= 5,126.61PBO at retirement date:PMT= 51,26 . 61N = 15V/S =8CPT PV=43,881 09PBOattheend of 2017:FV = 43,881.09N = 23, 1/4 =8CPT PV = 7,473.62Recoraliation of PBOPBO yr 2AdditionalbenifitearnedduringtheTperiod(for workinglextra yr)128,162 . 21X2%=*)2563.30RetirementPMT = -2,563 30N = is1/4:18CPT.PV = 21,940.55FV = 21,940.55 / N=23,1/4=8CPT PV = 3,736 8)Current Service Cost Page No. 63Date//2016 PBO3,460.01Int lostCurrent Service Cost3736 -81= Opening PBO X discountRateInt lost276.80= 3460.01 X 872017 PBO7,473.62= 276.80FV of plan assetFunding policy is a function ofIncome taxEmployerERISA rulesContributionsCash Flow considerationFunded Status FISActualcapitalgainsIdiv/intwill}Return offluctuatewith marketAssets (ROA)Benefits pat Pay" made from the } BenefitsfundtoexistingretireespaidFV ofplanassets atstart of yr+/- ActualReturnon planassets+ EmployerContributionsReconciliation-Benefitspaidtoretireesdisclosedin= FVofPlanassetsat end of yrfactoriesNote:Don'tbeConfused ;thisisexactlywhat thenameimplies 1 themarketvalueofplan asset Benefit paid = no impact on net pension A/C64Page No.Date//Funded StatusFv of Planassets-PBO=FundedstatusFv > PBO = Overfunded(+)AssetFV PBO = Under funded(-)LiabilityFunded stutus = Economic Position of plan asset=Bls Asset / Liabilities*If reporting assets , subjected to ceiling of PV of futureeconomic benefitsAsset.. CeilingNote : IFRS useprojectedunitCreditmethodfor DB obligatinPresentation VIMPlls :IFRS - Component may bepresentedSepratlyGRAP - Component areagregatedandpresentedasasingle line item (NCB/S : (IFRS 4 GAAP)- Net amt is reportedFundedStatesonBIS- Max amt of assetisrestrictedtothePVfuture reducedcontributionsofUpper capor PV of future refunds APage No.65Date / /ExFintreeI Starting Salary = 70,0002No. of yr ofservice=30yrS Promised annualpay" = 3%4PromisedaA Pensionannualpay"==20=SDisc rate = 12%6Compensation growthrate = 5%Step I ] CalculatelastSalaryN= 291/4 =5PV= 70KFV = 288,129,Step 2Calculateannualpay"288,129 X3%= 8644Step 3] Multiply with Completedyr of service866481 = 86648664 X2 = 17,288, 8664 x3 = 25,932N= 20 114-12Step4] CalculatethePV of onthedayofretirementPMT = 8644PV= 64,556PV2 = 64,556*29AMPV3=64,566 X3129,132= 193,693Step5]Calculate PV for todayN= 291/4=12FV = 64,556PV = 2413J19N = 281/4 - 12FU 129,132PV= 5406N=271/1 =12FV = 193,698PV= 9083 TPPC- - More vdatilemeasule thanpensionapof persion expPage No. 66Date//Year IYear 3Year 22413/5406/9083Int CostService lostInt lostService lost2413 X 12%N =28 1/4=125406X12%N = 28FV =64,565= 290FV = 64565= 648CPTPV=3027CPT PV J 2703Module10.3:DBPlansPartI-PeriodiclostPeriodicpensionlost:TotallostrelatedtoaplanCompanyisDBpensionforagivenperiod.VariousComponentsofthistotallostsCanbeonPILor octunderIFRS4 GAAPPeriodic pension Exp:AkapensionCostComponentreportedinP/LofperiodicpensionlastthatarePIL (not 0(1)recognizedinCalculatingPeriodicPensionlostApproch 1 :AdjustingthechangeinNetPension(Asset)foremployerContributionsLiabilityTotalpensionPeriodicPensionlost=NetpensionliabilityTPPC rPPC = Reported PPC +PPC in OCIPageNo. 67Change in net pension liability Date//TPPC 11 End net pension liability - Bey net pension liabilit+ Employer ContributioninNet pension Liability or Vin net pension asset overthereportedCost for Co.inNPL orNPABenefit for Co.Eleminat smoothed amtfrom reported persion sexp andTPPC = Contributions - A Funded status includ the actual return on Assi=Contributions - CEND FS 1 Beg FS)Morevolatilemeasureof Pension expTPPC is sameunderIFRS&GAAPbutdifferon where the pension cost is reflected CPIL or 04)TPPC I Periodic economic lostApproch 2 : Aggregating Periodic Components of lostsum of all of in PBO except benefit paid - actual RUATPPC = Current Service lost + Int lost + Past service lost+ Acturial losses - Acturial gains - Actual return onplan assetsBenefit paidobligation & FV of plan asset ( , so theyhave no impact on overfalt fundstutsContribution (employer) has nothing to do with PPCTPPC =in pension obligation - Actual earging on plan asset 099TPPC = End PBO - Up PBO -Actual return + Benefit paidPage No. 68Date / /Ex:PBOPlan assetsBeg pension obligation - 2225Beg FV of plan assets-1850+ Carrent Service Cost - 845+ Actual return on assets - 250+ Int lost- 120+ Employer Contribution - 580+Past Service Cost- 635- Benefits paid - 170- Benefits paid-(120)End FV plan asset - 2510Endpensionobligation - 3655SolnnMethod 127BegEng NPC = 3655 - 2510NPL = 2225, - 1850(+ve NPL)1145= 375TPPC = (1445 - 375) + 580 = 71350Net change in NPLover period of timeMethod 2TPPC=Servicelostt Int lost + Pas service Cost - Actual retainan asset845 + 120 t 635 -2501350 Page No. 69I16th Sep 2022SaturdayDate / /* PPCunder IFRS & GAAPTPPC is same under bothReporting P/C and ocl differsIFRSyIt allow recognition of Certain events that affectsthepensencostinOCI (instead of Us)IServiceCostFCarrent Service CostRecognized inPast Service Cost1/5 as Exp2Net int exp - Overfunded faplan = Net Int incompeRecognized in(NIE)Under funded plan = Net Int expI/S asNet int exp = NPL (asset) X Disc Rate=(Pension obligation - -FV of plan asset) xr.NIE Reppresent Financial lost of deferring pay" related to planfinancial Income from prepaying amtll3 RemeasurementeventsActuarial G/C that affects PBORecognize inNot amortizedDiff bet actutal & expect ed returnOCIIn I/sRemeasurement GIL = Actuarial GLL t C actual - expected retuin on assetDDisc Rate = Expected Return Expeded RetuinPage No. 70Date/Dist Rate * notalwaysus GRAPTheeventsareamortizedinthe1/5 over timeE(untiltheninoc)IServiceCurrent Service lost-Recognizedin1/5CostPast ServiceCost- In OCIAmortoverremainingservicelife2IntExp / IncomeIntExpreportedSepratty(Pension lost )RecognizedEx pectedIncomereported separately(Pension Costin 1/53RemeasurmentActurialGILAssumed}RecognizeinAmortized in IlsDiff bet"expectedV.S actual returnIn OCI PILbyBy CorridoreMethodActurialGIL = Remeasuremet all(IFRSAmortizeoverremainingServicelifethebegnetGILthatexceeBegactuarialGIL>10%ofofPBO4Plan assetthenamortized Page No. 71Date / /Summery of RemeasurementNetPlan AssetsPBOActual Vs . Expected returnActurial GILresulting fromchany esinactuarial assumGRAP - Assumed4 Disc RateIFRS - Disc Rate7 - Rate of Salary- CompositionofparticipantssEffect onDisc RateRate of salltryExpected Rateof feturn-B/S LiabilitityTPPCPPC in PILtounder GAAP only(FRS Dis Rate = Yeild onhigh a quality Cor poratedebtwithSimilardurationtoplanassefiabilities-as GAAPDisc Rate =RateatwhichpensionbenefitsCanbesettled '7ePage No.Date / /IFRS Vs. GAAP1CurrentServicelost-P/LE2Int lost -IFRS :- Net Int Exp / Income is showsGARP:- (+) Int lost} Reported(-) Expected Returnsepratly3Expected Return on plan assets - No effect on PBo butComponent of reportedpensionexpRemeasurement4Acturial GIL - 2 ComponentsG/L due toIT in PBGDiff bet expected vs. actualIFRS - Not amortizedGRAP - Amort using Corridor approach-Amtin0C1> 10 % of PBo of plan ass.SPastServicelostDiffConlyexcessamtover107.isamort)IFRS-PIL(Expindediatly)periodicpensionlostGAAPoci& amortPeriodicPension-CurrentServicetIntlostExceptedReturnlost in PICCost Page No 73Date / /Same asGRAPPBO recommiliationIFRScurrent onlyNetPeriodicBenefitCostIntlostXExpected (x)Retrint Service Cost S ? Recurring+ Servicelostx -Net+ Int costcost (actual)+/- Net Int exp income- Expected return on planassetsmoothed+/- Past service CostH- Amort of acturial GILevent+/-AmortofpastserviceCost=Pensionexpon115PensionExponVsUnamortizedpastServicelostandRemeasurements are in oualtuarial gains&lossesinOCIand not amortizedNetInt ExpllicBeg fund StatusDisc Rate3Opening PBOXDis RateInt ExpUs GAAP alaiRatelt20OpeningPlanasset%Expectedreturn$ ExpectedReturn)opening fundstatusDisRate=NetInt explaincenical)1922.0ruleIFRSexpetedreturndiscount fatonlyworksifdisciscontantthroughoutRate Page No. 74Date / /FRSComponentGAAP1/5Current Service CostIsEIlsPast Service CostoaamortInt CostIlsilsRate CanIlsbe dff115Expected ReturnActuarial GILAmort portion on09not amortized+Unamortized oclM 10.4: DB PlanPart 2Periodiclost ExampleEx.DBplanofZenithIndustriesEmployer Contribution - 1200Actual Return (assets) -1795Current Service lost - 1850Benefits Paid-635Past Service lost - 120Unamortized actuarial - 3150Op PBO- 38750losses 09Acturiallosses- 628Expected return (asset) -6y.Closing PBO- 43,619Dis Rate - 7-5%Opplanasset- 28322-assing plan asset30,6821Beg & End Funding Status2 TPPC4 PPCinOCIGAAP3forPPC in PIL GAAP Cigaric amoitIFRS& IFRS Page No. 75Date//SolFundedStatusOpening fundedStutus = Op plan asset - Opening PBO=28,322 - 38,750=-10,428Cls funded Stutus = c/s Plan asset - C/S PBO= 30,682 - 43,619= -12,937Funded Status = -2509 [opClsA-10428)-(12937)]Reconciliations ofPBO&PlanassetsPBOPlan assetOls PBO- 38,750o/s Plan asset - 28,322Current Service Cost- - 1860Emplayer Contribu -1200Int Cost - 2906Actual Retuin -1795Past Service lost- - 120Benefit paid -(635)Acturial Loss - 628Benefit paid - (635)C/S Plan asset30,628qxoCls PBO43,619= Op PBOXDisc Rate=38750X 7.57= 2906 Plan amendments - Additional benefit provided the increasetheamt of the employer's obligation to plan participantsPage No. 76Date//in 141 ofserviceTPPCMethod 1Method 2Current Service Cost - 1850Int Cost - 2906Employer Contribution -. 1200APast Service lost -in funded stutus - 25091203709Acturial losses - 628Actual return on - (1795)assetsTPPC3709PeriodiclostinPILGAAPop planx expected return xb7.asset1223322IFRSII1699Current Service Cost - 1850Current Service Cost-1850Int Cost- 2906Past Service Cost -120Expectedreturn- (1699)Net Int lost - 782Int Cost - Expected retuinon plan assetAmortization-0Pension exp2750Pension exp3057up B/S valueunderfundedExp (T)Unamortize acturial Losses - 3156 (oci - 3630)=opening fund Statusxdisc.Op PBO- 38,750 (10% = 3875)= -10,928 x 75%8.1%I -782:No amortizationlegAmoit of past Service Cost is ignored120 - act this Yr :- star amoit nxt yr Page No. 71Date//Periodic Costin 00PeriodiclostinOCI=TPPC-PeriodiccostinP/LDOCIIFRS : = 3709 - 2752= 951 soclGAAP: = 3709 - 3057Not c/s valueit= 652 AOLIExample Fintree:2.01M*Beg PBO =10MActual returns = 2Beg Plan asset = 15Disc rate = 6%Service lost = 2Expected return (GAA) = 10%Plan amendments = 1.5Contribution to plan asset IActuarial losses = 4Benefits paid = 1GAAP & IFRSSolnPBOPlanassetsBegPBO-10Int Cost (10 X 67.) - 0.6Beg Plan asset - 15itaActual return - 2Service Cost - 2Contribution -IPast service Cost - 1.5Benefits paid - (1)Actuarial losses - 417Benefits paid - (1)17.1 Page No 78Date / /I/S (IFRS)I/S (GAAP) 6'Service Cost - 2Service Cost - 2Past service Cost -1.5Int lost - 0-6Net Int income - (0.3)Expected Inc - (1.5)3.21-1OCI (IFRS)OCI (GAAP):Actuarial losses(4)Actuarial losses(4)Diff b/w expectedDiff b/w expectedand actual return1-1and actual retarn0.5(2.9)Past Service Cost (1.5)(5)M.10.5 : PlanassumptionsfortastesAllplansmustmake /disclose3 assumptions :1Disc Rateas92 Rate ofCompensation Increase3] Expected return on plan assets C-GAAP only )These assumptions Can affects :=bingB/S (through effect on PBO)Ils (pension Cost )Pensionaccounting:Thegreatest earningsmanipulationtoolKnowntomanagement PageNo. 79High Rate bondDate//Disc1Rate :Chang eassumptionhaveinlower inputonPBOCompaidtoUsedtoCalculate:-TPPCorB/CA/LtochangeinassumPBOislessPVofDBpay"(PBO)CurrentserviceCostsCPVannualunitcreditof.Int exp(underIFRS)asrBegpensionobligationNet Intexp / IncCunder(FRS)toberecognizedontheI/s=0FV of planassetPensionobligationRemeasurement(under IFRS)toberecognizedinlocifundedstatusimprovein Dis RateOp PBOTPPCUs PBONo change inService costplan assetIntexptopPBOoutweightin Int expOp PBOsoIntfallsPensionexpNote:For matureplan(timetoretirementinshort )anDisc Ratein Int ExpMayIn some casseInt ExptMayoffsettheimpact ofService Cost&PBUmayT2CompensationGrowthRateA in thisisactuarialassumption=)pension formulaisbasedonfinalyrsalary,in1 ingrowthincompensationin PBOPeriodic Pension Cost Page No. 80Date//Compensation growth RateFFPC Total value of pay owned toemployeesafterretirementannual unit creditpension obligationService lostInt lost3 Expected Return on Plan assetsin Expect ReturnNo impactonfundedstutusPension expTPPC notaffected (GAAP)on P/Loffset byPensionCost in oclFor other post employment benefitsAssumption are similar for other post employement benefitexpected the Compensation growth is replaced byahealthcare Inflation rateInflotion will become Constant This Constant rate is KnownasaltimatehealthcaretrendrateRata at whichexp will glow Page No. 81FintreeDateDiscount Rate,Compensation growth fat,eExpected return onplan assets T7) Liability decreasesLiability :Expense :Liability No impaltNewplan :Exp :Mature plan :ExpImpact of Assumptions VIMP1 Disc RateWage Rate IncreasesTExpected Rate of RetB/SLowerHigherNo changeTPPCLowerHigherNo changePeriodic lost in P/LLowerHigherDecreaseus GRAPMature plansExamples: Carrent Saraly 75000 yrexpectedtoworkfor5 more yrbefore retiring.DiscRate7%Compensationgrowth rate =4.5%each yr during her retirement until her death, supiterwill payherthe employee a pension pay" of 17. offinal salary at retirement for each of yrofServicebeyondthe date of establishment ofplan WhenplanIsestablished + the employee is alsogiven credit of 20 yr of past Service with immediateretirementvesting Company exept Employee will live 15yr after Page No. 82Date//I13th Sep 2022the assurancedEst the impact of a % increase indisc rate(from7%to 8Y.) on:2] clossing pension obligation in yr I2] PensionCost in yr 1SolnFinal Salary=PV = 75,000114N= 4,CPT Fv = 89,43,90Annual pay" after = (89,4390 X1%) X (5+20)Retirement= 22359,72Thisvaluedoesnotchangewith1%in disc late.but therePVchangesN= IS1/48PMT = 22,359.72FV=0CPTPVPV = 191,387.58Annal unit=Value at retirementcreditYears of Serviceis 191387.58Horb20+6=7655.50,bosped Page No. 83Date//Benefit attributed toPrior yr153,110.007655.50x 20Current yr7655.50=lyr (7655.50)Total benefit earned160,765.50Op pension obligation60104,206.04153,100of1.085t Int Cost8336.33104,20409X0.08+ CurrentService5627.027665 S /(1.08)4cls Pension obligation118,167.94TheCosClsobligationhasfrom 130,505. 72(7%disc)to118,167.44Y2YrIpensionCost (Int t service cost )from14 345.70 (7%)to13463.35 + 5627.02)8%Whateffectofa100 bpIformG.S % to5.5%inassumedCompensationonyrI(Is PBOFor thisweneedtorecalculateestfinalsalary&annualpensionpay"PV ofestfuturepay"&annualunit CreditOEst final salary=75000X55)PV = 75000114 = 55% N=4=92,911.85FV = 92,911.85Estannualpension=(92,911.85X0.01)X25pay=23,227 96 84Page No.Date//PV of this pay"N= 15 , 1/4 = 07 PMT = 23,227FV=0CPT PV = 211,558Annual Creadit= 211,558.2825= 8462.33Prior Yr169,246.63=846220Current Yr8,462 33=1458462Total benefit earned177.708.96op Pension obligation120,670.51=169,2461.075+ Int lost8446.99=120,670 X 0.07+ Current service6455.87=8462(107)Cls pension obligation135,573.32The Company cls obligation hasfrom130,505.72to135,573.32Disclosure- Near terminhea thcar A Costs- Ultimotehealthcaretrendrates-Yrinwhich ultimate trendrate"reachedn Liability is present value of expected future payhoften not funded in advancePage No. 85Date//* Assumptions of Other post - employement benefitsAssumeptions are similar for the post employement benefitsexpects the Compensation growth rate is replacedthehealthcarebyinflationrateThisConstantrateKnownUltimateHealthcaretrendsrateisClassified as defined benefit planFirmsCanreducethepostemploymentbenefitsobligationsand periodic exp by :Decreasing the near term healthcare inflation rate.Decreasing the ultimatehealthcare trend rate.Reducingthetimmingneedtoreach the ultimatehealthcaretrendrateAdjustings Items of pension benefits for analytical purposes3Several aspects of the accounting for pensions and otherpost employment benefits Can affect Comparative financialanalysis using ratios based on financial statements.GrossVsNetPension assets / liabilitiesThe firm's total assets and total liabilitiesarebothlessthan if the firm reportedthe gross amounts.Under bothIFRS & GAAP standards the amountdisclosedinthebalancesheetisaNetamt Page No. 86Date / /Diff in assumptions used :10Diff in Key assumptions can affects comparisonsacross Companies Ex. dis rateEDiff bet IFRS & GAAP in recognizing total periodicpension CostPeriodicpension costs may not be comparable LFRS &GRAP differ in their provisions about lost recognizedin PIL Vs OCIReporting GAAP of periodic pension costs in P/L may costs not PIL be Comparelare reported in operating exp on the Inc on theHERS all of the components on pensionI/S even though some of the components are of afinancial nature Cltnt. exp and the expected retain an assets)IFRSGRAP. Components of periodic pension Costs in P/C (an beincluded in various line itemsAnalyts Can adjust GAAP - reported income by :Cignores any amortizations)Adding back the periodic Pension cost in lls andsubtracting only service Costs in determining operating nclot Cost Should be added to the fiem's Int expActual return on plan assets should be added tonon -operatingIncome Page No. 87Date / /* Income Statement AdjustmentFullpensionexpistakencostthroughserviceOnlyisoperating exp (SGFA)operatingRemovepensionexpfromCostoperatingexp and includeserviceAddIntlosttoIntexpAdd actual return on plan assetsAmortizationignorednon on-operating - Incomebly Total I/S Effects = Service t Int 1 Actual RetuinExamples :Usethefollowinginfotoreclassify theComponents of periodic pensioncostbet" operatingand non ope ratingd20)IsOther DataOperating Profit145,000Current Service cost7000 +Int exp(12,000)Int costhowo5000 +other income2000Expected return on assets8000 -Income beforeTax135,000Actual return on assets9500 Operating Proofit=DepertatingProfit+Repoited pension exp - Seivce If lostPage NoAdjDate //Sol Adjusting 1/5 Exp1/5ReportedAdjustmentAdjustedI/Sits ExpServicecostOperating Profit145,000+90007000192,000-PensionInt Exp(12,000)-5000(17,000)expother Income2,000+950011500Income before135,000Actual Return136,500tax+ 15007000 t 5000 - 8000Periodicpensionlost(inP/L)of4000isaddedbacktooperating profit.Service costof7000issubtractedfrom operating profitIntCostof5000isaddedtoIntexpActual returnassetsof9500isaddedtootherIncomeonfaiturCash FlowAdjustmentVIMPForanalyticalpulposeTadjustCFOand CFFfor theafter taxdiffineconomicpensionexp andcashContributionsOver Contribution(Replayment)Contribution > Total Periodic PensionCost= PrinciplePMT(Contribution -TPPC) (1-T)CFFCFOUnder Contribution C Borrowing)ContributionTPPC=BorrowingCFFCFO(Contribution - TPPC ) (1-T) Page No. 89Date //a) CashflowreferstopensionincludingtheamtContributionandtheamtofofbenefitspaid.Contribution >TPPCOverallpensionobligationCFO=CFO+(Contribution-TPPC)x(1-t)CFF = CFF - (Contribution- TPPC) X (1-t)Contribution TPPCSource of borrowingCFO = CFO - (Contribution -TPPC) X (1-t)CFF = CFF + Contribution - TPPC) X (ltt))Diffbet"CF&TPPCismaterialtheanalystsshouldtConsiderreclassifyingthediffactivitiestofromoperatingfinancingactivitiesintheCFsstatementExample :BhaskarThakurisanalyzingthefinancialstat"ofBoxCar(BC)Inc ,amanufacturerof equipmentof equipmentfortherailroadIndustryHefindsouttheCompanymadea340contributiontotheplanduring theyrHecollectsthefollowinginfofund Status- 25302350CFO948asfunded Stutus- 2180FlsCFF112NetIncome- 812Tax RateGot. PageNo 90Date / /TPPC = Contribution - in fundedStatus= 340 - (2280 - 2530)= 690 m-350ContributionShortfall = EmployerContribution - TPPC= 340-690 -= -350After tax CF adjustment = -350 (1-0.4)= -210 -CFO = 948 -210= 738CFF = 112 210= 322PensionPlan NotedisclosuresandCFrelatedinformationItemIFRSGAAPgaisAmount on B/SfitzubalNet AmtNet amttwopPension expDiv in variousOperating expline itemsCincluding Int)Cash FlowDivided inCFOCFO/CFF0825bay20 Page No 91Date / /M 10.7 :*Share - Based CompensationBasic Principle -Compensation exp should be spread over theperiodforwhich they reward the employee referedto asservice PeriodPeriod for which reward un employees(ifESOPexeisisesecailythenitbecauseSP)IFRS & GAAP- DisclosemanagementCompensationinAnnualReport+GAAP-ProvideSECdisclouresregardingmanagementCompensationon proxystatementAdvantage of Share -based1No Cash outlays2AlignsmanagementandShareholderInt(Agency Cost)Disadvantages1Employeeshavelimitedinfluenceoverstockprice2 IncreasestockownershipRisk aversion$OptionawardsmayIncreaserisk taking4] ExistingshareholderdilutedFormsStock option} Equitystock GiantsettledStockappreciationright2 cashof9xPhantom shareS settled ain PKunchardIRIE but offset with i.Page No. 92equity remuinDate / /Exp - I/s -Disclosures Rey1]Natureandextentofshare-basedcompensationarrangementduring the period2] How fair Valuewas determind3 Impactofonincome for the periodAllocateAccountingFVoverserviceperiodRRJStock GrantsI/SExp = MVNI} EquityBlsMVCommon Stock + APICunchangeCompansation exp equals market value at grant dateAllocated over period benefited by employees service period(presumed to be current periodRestricted Stock :Ownership returned to company if conditionnot met (length of Service or performace rightPerformance share : Granted on meeting performance goals CERS, ROGRisk of manupulationStock OptionIntrensic value t Time valueFV at grant date = Est option premBased or # of option expectedto vest.Exp = Option glanted x Option prize on Servicegrant dat,to pervid Additional paidAPLL -in capitalPage No 93Date//vesting date is the first date the employeeCanactualyexercice the options .Compensation expisallocatedinthe I/S overthe servie period(granddatetovestingdate)HestingExpense=FVNo change inTime to vestingtotal equityNAPICOnce option is inthGrant datevesting dateRecognize the Compensation:exp over the serviceperiod based on:option pricing modelforFV2Stock Appreciation RightJCompensationbasedonchangesinvalue of shaleEmployee dont holdshareIt is diff fromstock optioninFirm canCashform of pay"appreciationinpayequityorcombinationAdvantages :-Disadvantage-Avoid dilution- Cash outflow- Less Risk aversion- Exp: FV and spread apr serviceCno downside)life Page No. 99Date //Phantom StockPhantom stock is similar to stack appreciation eg rightshypothetical Stock instead of the firms shareexcept payoff is based on the a performance actual ofPhar ton Stock can be used in privately held B company.and firm with highly illiquid stockOption Valuation MethodsFV measured "based on the observation observablemarket price (premium) of an option with thesameor similar terms and Centin Conditions 1 if one isavailableIn the absense of a market-based - instrument : FVisdetermined by an option valuation model1] Black-Scholes - - Merton Model - Contunious time period2] Binomial model - Disered Discride time3] Monte Carlo simulation Page No 95Date / /* Model AssumptionsAll model req Six assumptions:1. Excercise Price2.Stock Price at grant dateAssumptions affect FV and3.Volatility A FVhence compensation4.Risk -free Rateexpense5.Expected term (time to expiry)be Dividend yield