chapter20 - Pre-Lecture Homework Accounting for Pensions...

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Slide 20-1 UCSB ANDERSON Accounting for Pensions Chapter 20 Slide 20-2 UCSB ANDERSON For class, you should be prepared to discuss the answers to the following questions: 1. Identify the five components that comprise pension expense and be able to explain the nature of each component. 2. What is meant by “prior service cost” and when are PSCs recognized in pension expense? 3. What is meant by “unexpected gains and losses” and when are these gains and losses recognized in pension expense? Pre-Lecture Homework Slide 20-3 UCSB ANDERSON A Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working. Nature of Pension Plans Pension Plan Administrator Contributions Employer Retired Employees Benefit Payments Assets & Liabilities Slide 20-4 UCSB ANDERSON Types of Pension Plans Defined Contribution Plan Defined Benefit Plan z Employer contribution determined by plan (fixed) z Risk borne by employees z Benefits based on plan value z Benefit determined by plan z Employer contribution varies (determined by Actuaries) z Risk borne by employer Actuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc. Statement of Financial Accounting Standard No. 158, VERY RECENT, and many changes from old. NO Actuaries required: Employer obligation limited to annual “matching” (if any). Once that “match” is paid, the employer is off the hook!
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Slide 20-5 UCSB ANDERSON DEFINED BENEFIT PLANS- ACCOUNTING: The accounting for defined contribution plans are simple: Credit liability for matching requirement, Debit 401K expense each period. THE BALANCE OF THESE SLIDES RELATES TO THE COMPLEX WORLD OF: 1. Understanding the components of a defined benefit plan. 2. Accounting for activity related to a defined benefit plan. Slide 20-6 UCSB ANDERSON SEPARATION The Company is also referred to as the “Sponsor”, a key term as the plan is SEPARATE from the Company. The deal works like this: z Each period, employees earn a piece of compensation which they will not receive until they one day retire; z GAAP seeks to match that cost to NOW when the “benefit” is being derived (Matching); z Companies seek to be investing into the plans “assets” so that there is an accumulation of funds to pay those benefits in the future. Slide 20-7 UCSB ANDERSON HMMMMMMmmmmmmmm… z How do we figure out what the cost of compensation related to the plan is each period? Actuaries, and this primary ingredient is called “Service Cost”; z If the liability was $1 today, would it be $1 twenty years from now? NO! Hence there is an “interest” component to the annual pension expense as well.
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This note was uploaded on 08/06/2008 for the course ECON 136C taught by Professor Anderson during the Summer '08 term at UCSB.

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chapter20 - Pre-Lecture Homework Accounting for Pensions...

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