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11 – Liabilities Revisited. CORPORATE FINANCIAL REPORTING. L IABILITIES D ISCUSSED I N C HAPTER 11. Off balance sheet financing Pensions Income taxes Retirement Obligations.
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11 – Liabilities Revisited CORPORATE FINANCIAL REPORTING Corporate Financial Reporting - Liabilities 2
LIABILITIES DISCUSSEDIN CHAPTER 11 Off balance sheet financing Pensions Income taxes Retirement Obligations Corporate Financial Reporting - Liabilities 2
There are thousands of different kinds of pension plans, but in general they can be classified into two types: defined contribution plans and defined benefit plans LIABILITIES IN CHAPTER 11Pensions Corporate Financial Reporting - Liabilities 2
Pretty simple and risk free for the company, but would you prefer one? REPORTING OF PENSIONSDEFINED CONTRIBUTION PLANS Corporate Financial Reporting - Liabilities 2
How they work and their terminology are what are of interest to us. REPORTING OF PENSIONSDEFINED BENEFIT PLANS Corporate Financial Reporting - Liabilities 2
Service cost (SC) Projected benefit obligation (PBO) Plan assets (PA) Settlement rate or discount rate Rate of return on plan assets Prior service cost Unamortized gains or losses Accumulated benefit obligation (ABO) REPORTING OF PENSIONSDEFINED BENEFIT PLANS TERMINOLOGY Corporate Financial Reporting - Liabilities 2
1/1/01: we hire an employee & promise her, after retirement she will receive, for the rest of her life, pension payments equal to: her highest salary times the number of years she worked for us times 2%. And to make Congress happy, we will deposit her pension money in an independent company. REPORTING OF PENSIONSEXAMPLE FOR DEFINED BENEFIT PLAN Corporate Financial Reporting - Liabilities 2
LIABILITIES IN CHAPTER 11 REPORTING OF INCOME TAXES Two relevant aspects of income taxes: Tax loss carryback/carryforward (Net Operating Loss or NOL) and Deferred income taxes. Corporate Financial Reporting - Liabilities 2
Our company reports the following: TAX TAXYEARIBTRATEPAID 2007 $10,000 25% $2,500 2008 21,000 20 4,200 2009 12,000 30 3,600 2010 (40,000) 30 ? 2011 13,000 30 ? REPORTING OF INCOME TAXESNET OPERATING LOSS Corporate Financial Reporting - Liabilities 2
PUBLIC INCOME TAXSTATEMENTRETURN estimate bad debt expense ? estimate warranty expense ? straight line depreciation ? first-in first-out inventory flow ? rent revenue when earned ? rent expense when incurred ? etc, etc. REPORTING OF INCOME TAXESDEFERRED INCOME TAXES Corporate Financial Reporting - Liabilities 2
DEFERRED INCOME TAXES: future year(s) Year: 2011 (35%) [say 2012] (30%)* PublicTaxPublicTax Inc. before 10,000 10,000 ? ? Land sale 7,000 - 0 - - 0 - 7,000 Warr. exp. (4,000) - 0 - - 0 - (4,000) Prem. L.I. (2,000) - 0 - - 0 - - 0 - I.B.T. 11,000 Taxable Inc. 10,000 Tax Due ? Inc. tax exp. ( ) Net income . * Assuming that the congress has legislated the tax rate for 2011. LIABILITIES Corporate Financial Reporting - Liabilities 2
FAS 143 covers legal obligations associated with the retirement of a tangible long-lived asset that result from the acquisition, construction, or development and (or) normal operation of that asset. Obligations are created by law, statute, ordinance, and written or oral contracts. ASSET RETIREMENT OBLIGATION Corporate Financial Reporting - Liabilities 2
On 1/1/11, our company (not BP) spends $2,000,000 acquiring an oil platform in the Gulf of Mexico. We will depreciate the platform using SL depreciation over 10 years. Our “risk adjusted risk-free” interest is 10%. We must remove the platform at the end of its useful life; we estimate those costs to be: OptionAmountProbability A $300,000 25% B 500,000 40 C 600,000 35 ASSET RETIREMENT OBLIGATION Corporate Financial Reporting - Liabilities 2
QUESTIONS? LIABILITIES Corporate Financial Reporting - Liabilities 2
