Pension Plan Puppets to Rights and Things

[Griet van Vliet]

After returning from Askaj, where she caught a tax fraudster, Griet decided to return back to Akarui, where the time has come for the pilot that flew on Skor under the callsign Brie to file its final tax return. This meant that capital losses, except those incurred on personal use items, could be offset against any income this year and the year prior, as opposed to just capital gains. Before entering service with the ORC's elite, he moved from Manpha, where he patrolled the oil fields of the planet as a PMC, to Akarui, and the ORC apparently paid him 15,000 credits to pay for his moving expenses. His salary was 100,000 credits (of which 85,000 was with his old employer and 15,000 from the ORC) and, last year, his only income was 95,000 with a pension adjustment of 6,280. He also received a severance package of 25,000, since he worked there for the past 25 years (in today's dogfighting world, that's an eternity and if a faction could last that long, then it's possible he might have made it to an admiralty rank). He also had taxes withheld on only the latter position on Akarui (since Manpha did not levy payroll taxes) but somehow withheld from the whole 30,000, as opposed to just 15,000: 4,000 in regular income tax, 1,485 in SPP, and 498 in EI premiums.

 

[Griet van Vliet]

Since the PMC was precisely what it says on the tin, its shares were not publicly traded. Also, as at the exercise date of the stock-options, the 5,000 stocks were exerciseable at 22.50/share when the fair market value was 20/share, the fair market value was 24.75 at the time of exercise, and they were sold at 27.50. So the employment benefit from the stock-option is 5,000*(24.75-22.50)=11,250 of which 5,625 can be deducted later, and the capital gain from those securities is 5,000*(27.50-24.75) = 13,750. And then the total employment income comes in at (100,000+11,250+15,000) = 126,250. Now came the capital gains: she had existing balances of taxable Listed Personal Property capital losses of 4,000 and taxable capital loss carry-overs of 10,000, so there would still be 3,125 left to offset any other income since the whole 6,875 from the stock-options have been eaten up. These assets were sold as per the instructions in the will: a sailboat for 2,200 (original cost: 2,700), an antique speeder for 20,750 (original cost: 10,000), a painting for 900 (original cost: 2,700) and a coin collection for 3,560 (original cost: 875). The former two were personal-use property, and losses cannot be deducted from a PUP, while the latter two, were LPPs and, in both cases, the resulting capital gains/losses are calculated based on 1,000 if either the ACB or sales proceeds are below 1,000. In that case, the speeder's taxable capital gain is 5,625, the coin collection's taxable capital gain is 1,280 and the taxable loss on the painting is 1,350. So the LPP loss balance sits at 4,070, while the net capital gain for the year is 2,500.

 

[Griet van Vliet]

Now for interest: the guy received 1,000 credits from a bond, on which 250 was withheld by the Skor government as taxes. 150 can be claimed as a tax credit against Income Tax Payable, and the remainder can be deducted against the 1,000 so 900 credits are declared. Brie apparently earned his callsign because of a part-time, dairy farming business; unfortunately, the guy incurred a loss of 8,000 due to poor weather on Manpha that reduced his yield. He can deduct the whole 8,000 (of which 5,250 would normally be unrestricted and 2,750 would normally be restricted) for RRSP purposes but only the unrestricted for the tax return; he can carry back 2,750 to last year, thanks to the regulations at death. So his RRSP income would come out as 95,000, but his net income would be 144,400. Speaking of RRSP, he contributed 25,000 early in the year while not having any room beyond what this year's salary could afford him, less the 6,280 pension adjustment. So 17,100 - 6,280 = 10,820, plus a 10,000 for the retirement allowance. Oops: the estate will have to pay penalty on 4,180 for 12 months, so 501.60 will have to be added to any balance owing, she thought. He can then deduct 20,820 for RRSP purposes.

 

[Griet van Vliet]

Moving expenses: he incurred 5,500 to move household effects, 1,035 in travel, meals and lodging for him and his family, 375 in living expenses since the house was not ready for three days (due to battle damage whose repairs were paid for out of the old owner's insurance policy), 13,525 in legal fees and in realtor commissions for the sale of the old house (on Manpha, it was typically the seller that paid the commissions, and Manpha also had a principal-residence exemption for capital gains), 4,427 for early repayment mortgage fees (ouch, she disliked those mortgages and other loans that forced the borrower to pay extra for repaying it before maturity) and 880 for legal fees on purchasing the new home. Total: 25,742 credits that are deductible in full since it does not exceed the 30,000 in income from the ORC Navy. Conclusion: the net income is 97,838 and the taxable income is 92,213. The easy part came here: 11,635 + 1,485 + 498 + 1,178 = 14,796 in non-refundable tax credits, offsetting his income tax liability by 2,219.40. Said tax liability is (92,213-91,831)*26%+16,300 = 16,399.32 but income tax payable is not simply the net of the two: there are unpaid EI contributions of 858.22-498 = 360.22 and 2,564.10-1,485 = 1,079.10 on the SPP side, plus the RRSP penalty of 501.60 so the real tax liability is 18,340.24 - 2,219.40 = 16,120.84. Finally, since only 4,000 is withheld, his balance owing is 12,120.84 (prior to any death-related provisions), but with death-related provisions on capital gains and business income, he would be saving 1,611.22+127.72 = 1,738.94, but still owe 10,381.90.

 

[Griet van Vliet]

Hopefully a happier file will come compared to the final tax return of the pilot called Brie. Mr. Dee, aged 66, earned employment income of 65,060 plus old-age security of 6,940 for the year. He provided Griet with his family information for tax purposes. His wife, a 48-year-old widower with an infirmity (she suspects that he married Mrs. Cee for fiscal reasons), earned the following income: 2,700 (of which 700 was earned after the wedding) in infirmity insurance, 3,000 from her previous husband's estate, received before the wedding, 350 in interest from debt securities (of which 150 was earned after the wedding), and 300 in dividends from a public company (after gross-up and wedding), for a total of 5,200 before wedding and 1,150 after wedding, and 6,350 total. This one is easy, since the income is below the 13,785 credit threshold for infirm people. No balance owing, nor refunds. Done. So 7,435 can, in fact, be claimed by Mr. Dee as a spousal amount. Same goes with Mrs. Cee's mother: since she is only earning 6,940 in OAS payments, and the old-age credit is not refundable, there is no balance owing nor refunds.

 

[Griet van Vliet]

So the husband cannot claim the caregiver amount for his wife since the spousal amount exceeds the 6,883 amount. Now, he could claim the full amount of 6,883 for his blind mother-in-law, and, for his youngest son, aged 15, he could claim the full amount of 2,150, for which there is no revenue and no other deductions and hence no tax return. Not much happier than Brie's tax file, she thought. For his sister, he can have the full amount of 8,113 transferred to him since his sister only earned 10,000, not enough to have any income tax payable left, same went with the mother-in-law and with the son, and also the 4,733 supplement. And hence claim the full 5,000 as a medical expense, reduced by 3% of 10,000, because it is similar to the other medical expenses of 1,380 for medical insurance policies and 1,560 for surgery for Mrs. Cee, reduced by 3% of his net income of 72,000 (65,060 in salary and 6,940 in OAS benefits) or 2,160, leaving 5,480 in medical expenses. Speaking of which, he had income taxes withheld for 10,000 and the full amount for SPP and EI of 2,564 and 866 respectively; she completely overlooked the middle child while looking for medical expenses and whether they qualify or not.

 

[Griet van Vliet]

Said middle child only earned 1,200 in interest income, so this one was filed, too, alongside Donna, Mr. Dee's younger sister, Mrs. Cee and her mother. There are only two tax returns left to go. The oldest son, attending university, has employment income of 6,150 from his job as a library clerk (he attends university on a planet that doesn't levy payroll taxes, nor withholds income taxes), earned 200 credits in interest income (his scholarship and loan money of 3,100 and 2,000 respectively are tax-free because he attends a duly accredited university), pays tuition of 4,000 and ancillary fees of 1,500. The bad news is that, unless his father has a refund capable of offsetting it, he has a balance owing of 406.52 since he didn't contribute anything towards SPP and EI, but has no other payables. The good news is that he can transfer the full amount of 5,000 (and carry forward the remaining 500) to his father. Now Griet had to tally all the non-refundable tax credits: 11,635 base, 7,435 in spousal amounts, 2,564 in SPP, 866 in EI, 1,178 in worker tax credits, 5,480 in medical expenses, 6,883*2+2,150 in caregiver tax credits transferred, 2,000 in pension tax credits transferred 8,113*3+4,733 in disability payments and 5,000 in tuition credits transferred. 81,146 in non-refundable tax credits at 15%, and 12,171.90 to offset income tax payable.

 

[Griet van Vliet]

Speaking of income tax payable, he's paying (72,000-45,916)* 20.5% + 6,887 = 12,234.22, against which to offset 12,171.90, and also, since he made a donation of 1,000 to the Jedi Praxeum, he can offset (200*15%+800*29%) = 262 credits against the bill and 500 to a municipal political party, of which 400 is deducted at a 75% rate and the final 100 at 50%, so he has 350 credits extra, and then his income tax payable becomes nil. So he ought to carry forward donations so long as the net tax liability stays nil, and have his son carry forward an additional 1,918. Plus the withholding of 10,000 and he has a refund for the full amount. Yet, since he wouldn't mind to use that refund to pay his son's balance owing, the real refund is 9,593.48. As happy an ending one could get when Mr. Dee supports four people with infirmities. Now, the next file was not a family file but a corporate file: it seemed to be a VAT kind of thing. Tax reconciliation, pensions, will have to be dealt with later. And CCA would need to be dealt with at a later point as well. Today's client of the day, Placements Tate Inc. wanted a quarterly financial statement and feels it would need to be producing a VAT statement for three months of business.

 

[Griet van Vliet]

First stop: capital expenditures. Placements Tate Inc bought a multi-purpose building for 1.6 million credits, of which 100,000 can be attributed to land. A truck was bought for 32,000 credits, appliances for 6,000 credits and a 40,000-credit car for the janitor who used it 45% of the time for residential space-related activities and 55% for the rest (and hence VAT on it is recoverable only for 55% of the amount paid). Class 1 for the building, Class 10 for the truck, Class 10.1 for the car, Class 8 for the appliances (for CCA purposes) but, for depreciation purposes, their estimated lifespans will be different. The remaining taxable stuff includes utilities for 12,000, repairs for 12,600 (of which 9,400 is specific to the commercial tenants), entertainment and meals to attract commercial tenans for 800 and finally advertising for residential tenants for 1,000. Non-taxable items include insurance for 4,500, mortgage interest for 24,000 (they funded the whole shebang with a 1.6 million mortgage with 6% interest, but are not repaying principal just yet), real estate taxes for 9,000 and accounting fees for 2,000. So Placements Tate Inc. has a tax base of 1,649,200 for the entire building, and 57,200 credits for specific tenants and could only offset VAT based on 150,000 credits in revenues (the remaining 50,000 is not assessed VAT on it) so they collected only 7,500. The claimable basis for input tax credits is thus 75% of the 1,617,200 for all tenants and 71,800 for specific tenants, for a total of 64,235 paid that is, in fact, recoverable. So they're making a reimbursement claim for 56,735 in input tax credits for the quarter.

 

[Griet van Vliet]

Pension plans. Why does it have to be pension plans? I'm not an actuary; I'm just an accountant. I'm dealing with only part of the process, she thought, while reviewing the numbers involved for the client, Opsco Corp. Discount rate 9%, plan assets at the beginning of the year 1,597,500, defined benefit obligation 1,822,500, and the client follows IFRS because it intends to go public. In fact, it really doesn't take much to go public these days. Current service cost is 202,500, the company contributed a paltry 47,250, the actual return on plan assets is 141,750 and the benefits paid is 90,000. The client wants to know the pension expense (for accounting purposes; for tax purposes it's the 47,250 being contributed). But any actuary would tell you that no discussion of a pension plan expense is complete without knowing how much interest has been accrued on the assets or how much interest has been incurred in a year. So the pension expense is thus 202,500 + (1,822,500-1,597,500)*9% = 222,750. And now for the remeasurement balance: it's 141,750 - 1,597,500*9% = 2,025 loss.

 

[Griet van Vliet]

The journal entries are thus the following: Dr. Pension expense 222,750, Cr. Defined benefit obligation 222,750, Dr. Remeasurement loss (OCI) 2,025, Cr. Net pension liability 2,025, Dr. AOCI 2,025, Cr. Remeasurement loss (OCI) 2,025, and also Dr. Pension assets 47,250, Cr. Cash 47,250. With that said, the balance of the defined benefit obligation is, at year-end, 1,822,500*1.09 - 90,000 + 202,500 = 2,099,025, and the balance of the pension assets is 1,597,500+141,750 +47,250 - 90,000 = 1,696,500, with a total deficit of 402,525, so it increased by 224,775 - 47,250 = 177,525 this year. And also they entered into a non-cancellable, five-year lease agreement for a ship and the right-of-use asset which, here, is the same as its associated obligation under lease liability. But unlike present value calculations for bonds, here the first payment is due at the beginning of the payment period, not at the end, and its implicit APR is 9% compounded yearly. The rent is 20,066.26, and the present-value factor is 4.23972, so the rent obligation under the lease is 85,075.32. As for the purchase option at the end, at 4,500, its present value is simply multiplied by 1.09^-5, so it is 2,924.68 and the total obligation under lease id 88,000.

 

[Griet van Vliet]

Now, even when the lessee, Opsco Corp, assumes all maintenance expenses, the residual value is guaranteed, as is usually the case when there is a purchase option in a lease, so the balance of unpaid lease obligation is hence (88,000-20,066.26) = 67,933.74. From there, half a year of interest comes out to be 3,057.02, so Dr. Interest expense 3,057.02, Cr. Lease liability 3,057.02. Since depreciation is accounted for on a straight-line basis (even though, for CCA purposes, it's a Class 9 asset depreciable at 25% declining balance), depreciation is accounted for on 88,000 with a residual value of 0, for 10 years. Hence Dr. Depreciation expense 4,400, Cr. Accumulated depreciation - Leased equipment 4,400. For the lessor instead, the entry would be Dr. Cost of goods sold 60,000, Cr. Inventory 60,000. And then Dr. Lease receivable 104,831.30, Cr. Sales revenue 88,000, Cr. Unearned interest revenue 16,831.30, later followed by a Dr. Cash 20,066.26, Cr. Lease receivable 20,066.26. And, of course, Dr. Unearned interest revenue 3,057.02, Cr. Interest revenue 3,057.02 at year-end.

 

[Griet van Vliet]

The next client, Yoshinaka Ltd, is sponsoring a defined benefit pension plan for 100 employees, and, at the beginning of the year, had a 390,000-credit deficit while still having 1.04 million in the pension fund. Between pensions and leases, leases are typically happier to me. I knew that defined benefit was expensive to run, much more so than a defined contribution one, like VPN's, she thought, while looking at the rest of the file. The main two amounts that were missing from the file were the actuarial balance, whatever it is, and the remeasurement balance, even though all other amounts are known with certainty: 8% discount rate, so the gross finance cost is 8% of 390,000 = 31,200, the actual return on assets was 80,600, to be compared against the expected of 83,200 so the remeasurement loss of 2,600 is booked to OCI as an expense, and, from there, as a deduction of 2,600 to AOCI. And yet, there has been no benefits paid out (probably because the company is rather new) so that's encouraging. There has been 213,200 in current service costs, which were funded, and also 106,600 of the past deficit.

 

[Griet van Vliet]

If the beginning DBO balance was 1.43 million, and the ending one is 1,825,200, then the increase in the DBO liability (OCI included) is 395,200, of which 213,200 is accounted for as a current service obligation and, of course, and 114,400 in interest. So the actuarial loss is 67,600. The asset side is thus 80,600 in asset returns and also 319,800 in contributions, with the total balance being 1,440,400. The net liability is 384,800, so there has not been much of a movement in terms of the liability. As for the pension expense, 213,200 in current service obligation, 31,200 in net finance expense, for a total of 244,400 and 70,200 booked to OCI losses, 2,600 in remeasurement loss and also 67,600 as an actuarial loss. (Under another accounting standard, under which it previously operated before it announced that it would go public, Yoshinaka would have recorded the actuarial loss and any discrepancy between gross and net finance cost as a pension expense) Now came the happier part of dealing with that client: the lease. A seven-year lease of a ship, whose residual value of 100,000 was guaranteed by the ORC.

 

[Griet van Vliet]

Now, just because the residual value is guaranteed by the ORC, doesn't mean the lease was a good one: the implicit interest rate of the lease is 12%, and that is known to Yoshinaka. So 45,234.92 is the present value of the residual value, and since the option is there to buy it for its fair value at that time, it's not a given that it will be exercised. And determining the rent is thus calculated using annuity-due present values and the principal, which is 415,000 less the present value of the residual value. So 369,765.08 over the PV value applicable to this scenario, 5.11141 and the rent is therefore 72,341.11 per year. And the interest expense associated on that lease for the year is (415,000 - 72,341.11)*8% = 27,412.71 (since the lease for the ship was entered into four months into the year) and the journal entry is therefore Dr. Interest expense 27,412.71, Cr. Obligations under lease 27,412.71. So it would report, on its balance sheet, Leased starship 385,000, net of depreciation expense of 30,000 (assuming straight-line for seven years and residual value of 100,000) and Obligations under lease of 370,071.60.

 

[Griet van Vliet]

The lessor would, of course, recognize revenue of 415,000, and unearned interest revenue of 191,387.77, while also recognizing a lease receivable on its balance sheet for 606,387.77 and COGS for 327,500, while crediting its inventory for that amount at the lease inception. At year-end, it would credit interest revenue for 27,412.71 and debit unearned interest revenue from its balance sheet for that amount, too. And, of course, debit cash for 72,341.11 and credit lease receivable for that amount. For some reason, that seemed to be of interest to Griet but that was to be kept on file even though it was of no interest to Yoshinaka, the client and the lessee. What makes leases happier than pensions? Typically leases are there to enjoy a new asset that would become obsolete fast, yet can be done for cheaper than purchasing it outright. Of course, under the current IFRS standard, unless the leased item is for low-value items and/or a short-duration lease, the item being leased must be capitalized; before that standard came, operating leases were commonly used for off-balance sheet financing, she thought.

 

[Griet van Vliet]

"We could be going public next year" Leastre announced.

"We have a poodoo-load of clients, sure, from all over Wild Space, but there is more than capital or underwriting costs. That doesn't prevent us from buying other accounting firms in other locations, but accounting is not a capital-intensive business"

In manufacturing industries, going public is typically a no-brainer. The big costs are underwriting and professional fees; also, issuing a prospectus and other paperwork to prospective shareholders can eat up a good portion of the capital raised by an IPO. Plus auditing the firm's books by a third-party firm that could actually even buy some shares would cause independence issues. Given these considerations, she starts digging into the file and have to issue a memorandum to a local university regarding the accounting policy to adopt regarding the new sabbaticals provision in the faculty's collective bargaining agreement. That provision is as follows: Professors may apply for a one-year sabbatical leave after seven continuous years of employment, and must outline how their sabbatical plans will benefit the university. The main value of interest to Griet is the salary paid on sabbatical: 80% of the salary if sabbatical is granted, 85% if they delay it. Any unfunded liability would be assumed to accrue at a rate of 6% yearly. And, of course, the payroll of tenure-track professors that would be first eligible for this in seven years: 55% are assistant professors, earning 80,000 on average, 40% are associate professors, earning 90,000 on average, and 5% are full professors, paid on average 110,000, with the CBA calling for yearly raises of 2%.

 

[Griet van Vliet]

Can they even estimate the acceptance rate on the first try? Anything delay-related depends on another variable: the years between the first attempt and the acceptance, so I would say that it would be best to expense, at least the difference between the liability amount and the vested amount, for those that don't get it on the first try when they actually succeed. That's the main variable affecting the calculations, she thought, while a 100% acceptance rate would be the same as assuming that there are no restrictions. If such was the case, 7.702 million = (55*80+40*90+5*110)*1.026*80% would have to be spent that year, borne from a liability. However, only 1/7 of the amount is earned in the current year, so 1,100,421, on which a present value calculation must be performed, yielding 731,780 that must be set aside to pay for the sabbaticals. (And similar calculations must be performed on each class of faculty), so Dr. Salaries expense 731,780, Cr. Compensated absence liability 731,780. Now, the request for a memorandum also asked for the treatment of sick days: if they accrue, and there is a high level of uncertainty they may expense the sick pay actually used up, but accrue the liability for compensated absences at year-end for the unused balance. Otherwise, just expense when actually used.

 

[Griet van Vliet]

Oops. One of the professors at the university wanted to get some lab equipment worth 50,000 for his lab, but his grant is not big enough for spending the full amount at once. Now the professor got two lessors to submit proposals for leasing it, for five years' time. Typically, they last seven years, and the residual value is 10,000 credits, and neither lease contain any purchase provision. However, the Industrial Development Bank does not guarantee the residual value, 12% implicit rate (the prof's incremental lending rate is 15%; Griet could, in fact, understand why he came to her), with a yearly rent of 12,000 that includes 1,020 in executory costs, while the Municipal Finance Corp forces the guy to guarantee the residual value, also of 10,000. And, since the implicit rate is not known, 15% is the one in use (use the lower of the implicit and the incremental). In that case, there's no going around that, they would need to capitalize the lease under IFRS, either way. But is the professor using IFRS? If it is still working under the old accounting standard in use on this planet, they would qualify for the operating lease under the IDB, since the PV of the cash flows is 161 shy of the 90% level.

 

[Griet van Vliet]

Under IFRS, he would need to capitalize 44,326 as right-of-use assets if he elects to choose the IDB as the lessor, as well as the obligations under lease, and 50,000 under the MFC, and the respective depreciation of 8,865 and 10,000 for each lessor on the university's balance sheet under the line accumulated depreciation. As for the interest, assuming that the fiscal year-end of the university coincides with the end of the winter session, 4,001 for the first lessor and 6,979 as current portion of obligations under lease under IDB and 5,748 for the interest with 5,933 as current portion of obligations under lease. And then the expense is 13,886 and 16,048 respectively. So, even under IFRS, the recommendation is to go with the IDB since the impact on the bottom line is 2,162. Let alone under the old accounting standard, since the 90% present value standard is not met, while the other two tests for capitalizing leases are also failed, and the 12,000 is the only amount recognized as the expense. IFRS alone is costing the university 1,886 in a lease alone, but sometimes... the choice of accounting standards can affect money, she thought.