Jason Moore, CFA, is a credit analyst for Everest Bank in New York in their investment banking division. An existing customer of the bank, Longhorn Partners, which is based in Texas, has approached the bank for a $45 million loan to be used to acquire a smaller competitor. Moore has been appointed head of the credit team that will review Longhorn’s current business with the bank as well as their current operations in order to assess Longhorn’s request.
Overall, Longhorn has achieved consistent profitability over the last decade. The company is appropriately leveraged and appears to be well-run by its senior management team. However, there are a couple of items in the company’s financial statements that Moore believes may warrant further analysis.
Moore notices in the footnotes to the financial statements that two years ago, several changes in the company’s overall compensation plan were enacted. First, top managers of the company received significantly more stock options than they had in the past. In aggregate, options for 25,000 common shares at an exercise price of $40 per share were granted last year, which are scheduled to vest 25% a year until fully vested in four years. In addition, an employee stock purchase plan was implemented that same year. According to the plan, full-time employees who have completed at least one full year of service with Longhorn have the opportunity to purchase up to 250 shares each at a 5% discount on the anniversary date of their employment.
For many years, Longhorn has also offered to its fulltime employees a traditional, pension plan. It is a pay-related defined benefit plan, in which upon retirement, eligible employees are promised an annual pension payment of 3% per year of service times their annual salary at retirement. Select information regarding the pension plan from Longhorn’s most recent financial statement is as follows:
| Pension Benefit Obligation (PBO) |
$85,475,000 |
| Accumulated Benefit Obligation (ABO) |
65,250,000 |
| Fair value of plan assets |
71,365,000 |
| Net pension liability |
5,450,000 |
| Discount rate |
6.25% |
Assume that the stock price at the grant date of the 25,000 stock options was $30 per share and that an option-pricing model values the total option value at $100,000. Which of the following statements concerning the stock options is most accurate? Longhorn should recognize:
|
A) |
$100,000 of compensation expense at the end of the year of the option grant. | |
|
B) |
the actual compensation expense at that time when the options are exercised. | |
|
C) |
$25,000 of compensation expense for the granted options at the end of each year for the four years of the vesting period. | |
Under the required “fair value” method, compensation expense is based on the fair value of the options on the grant date, which is then evenly allocated over the vesting period. (Study Session 6, LOS 23.i)
Assume that at the end of the following year, 5,000 of the original 25,000 options granted are exercised by the various recipients. The exercise of a portion of the outstanding options will have which of the following effects on Longhorn’s financial statements?
|
A) |
Longhorn’s cash balance will increase by $200,000 with an offsetting increase to the shareholder’s equity account. | |
|
B) |
Longhorn’s cash balance will increase by $50,000, with an offsetting increase to the shareholder’s equity account. | |
|
C) |
Longhorn’s compensation expense will increase by $200,000 with an offsetting increase to the shareholder’s equity account. | |
When the options are exercised, Longhorn’s cash balances will increase by $200,000 (= 5,000 options × $40 exercise price), with an offsetting increase in shareholders’ equity. The exercise of options previously granted will have no effect on the current period’s compensation expense, as the schedule over which the compensation expense will be recognized was established at the time of the grant. (Study Session 6, LOS 23.i)
In accordance with SFAS No. 123(R), issued by the Financial Accounting Standards Board (FASB), which of the following statements regarding the employee stock purchase plan is most accurate?
|
A) |
Longhorn does not have to recognize any compensation expense in association with this program. | |
|
B) |
Longhorn must calculate the total discount for the program based on the stock price on the grant date, and recognize that amount as compensation expense for that period. | |
|
C) |
Longhorn must recognize the total dollar amount of discount given to employees at the time they purchase the stock as compensation expense in that period. | |
Because the discount of the stock purchase plan is considered noncompensatory (generally 5% or less), Longhorn does not have to recognize any compensation expense associated with this program. If a plan is considered compensatory, then the compensation expense would be recognized over the remaining service life of the employees. (Study Session 6, LOS 23.i)
According to the information above, the funded status of Longhorn’s pension plan is closest to:
|
A) |
underfunded by $6,115,000. | |
|
B) |
overfunded by $6,115,000. | |
|
C) |
underfunded by $14,110,000. | |
A plan is underfunded when the PBO exceeds the fair market value of the plan assets. In this case, the PBO exceeds the plan assets by $14,110,000 (= $85,475,000 ? 71,365,000). (Study Session 6, LOS 23.d)
Moore reads in the footnotes to Longhorn’s financial statements that the pension plan’s PBO balance increased by $5,000,000 last year. Of this amount, approximately 50% was attributed to benefits earned by its employees that year. The remaining 50% was attributed to a change in the pension plan’s actuarial assumptions. Which one of the following changes to actuarial assumptions would cause an increase in PBO?
|
A) |
A decrease in the rate of compensation growth. | |
|
B) |
A decrease in the discount rate. | |
|
C) |
A decrease in the expected rate of return. | |
Decreasing the assumed discount rate used to calculate the present value of the pension obligations will increase the PBO. (Study Session 6, LOS 23.c)
Ignoring taxes, what adjustment is necessary to Longhorn’s net pension liability and other comprehensive income in order to comply with current U.S. accounting standards?
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|
Net pension liability |
Other comprehensive income |
|
A) |
|
Increase $8,660,000 |
Decrease $8,660,000 | | |
|
B) |
|
Decrease $8,660,000 |
Increase $8,660,000 | | |
|
C) |
|
Increase $14,110,000 |
Decrease $14,110,000 | | |
According to current U.S. accounting standards, the funded status must be reported on the balance sheet. The plan is underfunded by $14,110,000 ($71,365,000 Plan assets – $85,475,000 PBO). Since Longhorn is reporting a liability of $5,450,000, an additional liability of $8,660,000 ($14,110,000 required liability – $5,450,000 reported liability) must be reported. The increase in net pension liability is offset by a decrease in other comprehensive income. (Study Session 6, LOS 23.d) |
发表于 2010-4-14 14:36
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