302Chapter 17 notes

302Chapter 17 notes - 1 CHAPTER 17 Employee...

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1 C HAPTER 17 Employee Compensation—Payroll, Pensions, and Other Compensation Issues L EARNING O BJECTIVES 1. Account for payroll and payroll taxes, and understand the criteria for recognizing a liability associated with compensated absences. In addition to accounting for taxes withheld from employees, employers are responsible for FICA as well as state and federal unemployment taxes. Employees earn compensated absences, and these must be accounted for as expenses in the period in which the employee earns those rights. 2. Compute performance bonuses, and recognize the issues associated with post-employment benefits. Employees may receive additional compensation based on the achievement of performance goals, often in the form of bonuses or stock options. The accounting for stock options requires estimates as to future value and can become quite complex. Benefits promised to employees (who leave the firm, either voluntarily or involuntarily) following employment but prior to retirement must be accounted for in a way similar to the accounting for compensated absences. 3. Understand the nature and characteristics of employer pension plans, including a detailed discussion of defined benefit plans. Pension plans can be structured as either defined benefit plans or defined contribution plans. With defined plans, the employee receives, upon retirement, the funds that have accumulated over time. Accounting for defined contribution plans is straightforward. Defined benefit plans are more challenging as the value of the benefits are often difficult to measure. 1
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As defined benefit plans are often a function of years of service, future salary levels, and life expectancy, actuaries are employed to provide estimates as to projected future benefits. 4.Use the components of prepaid/accrued pension costs and changes in the components to compute the periodic expense associated with pensions. The prepaid/accrued pension account reflects the difference between the present value of the amount expected to be paid in the future (PBO) and the fair value of the plan assets set aside to meet that obligation. Additional factors can affect the pension account as well, including transition gains/losses, prior service costs, and deferred gains/losses related to differences between expected and actual returns on plan assets. Each year an assessment is made as to the additional benefits owed as a result of another year of service, the effects of being a year closer to paying out benefits, and the return received as a result of setting aside funds to meet these future obligations. These factors also affect the amount reported on the income statement in that they each may require adjustment over time.
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302Chapter 17 notes - 1 CHAPTER 17 Employee...

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