CH 20 Class Notes - CHAPTER 20 ACCOUNTING FOR PENSIONS I...

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CHAPTER 20 – ACCOUNTING FOR PENSIONS I. Types of Pension Plans A. Nature of Pension Plans 1. Provide income to employees during their retirement years. 2. The employer sponsors the plan, incurs the cost, and makes contributions. 3. The plan (a separate legal and accounting entity) receives contributions, administers plan assets, and makes benefit payments. B. Defined Contribution Plan 1. 2. 3. Employer’s only obligation is to remit an annual contribution. 4. Types of defined contribution plans: a. b. 5. Employer records pension expense equal to the cash contribution: 1
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C. Defined Benefit Plan 1. 2. 3. A typical pension formula calculates annual retirement benefits based on years of service, age, and annual pay at retirement (Example: 1 ½ % x Years of Service x Final Year’s Salary) Example: The annual benefits to an employee who retires after 30 years of service, with a final salary of $100,000, would be: 4. Components of a defined benefit pension plan a. Pension Benefit Obligation 1. Accumulated Benefit Obligation (ABO) 2. Vested Benefit Obligation (VBO) - 3. Projected Benefit Obligation (PBO) b. Plan Assets c. Pension Expense (cost of having a pension plan) 2
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II. Pension Plan Assets A. B. A trustee manages the assets of the plan by performing the following: 1. Accepts employer contributions. 2. Invests the contributions. 3. Accumulates the earnings on the investments. 4. Pays benefits from the plan assets to retired employees or their beneficiaries. C. The plan assets can change due to: 1. 2. 3. 3
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PENSION PLAN ASSETS Global Communications contributed $48 million to the pension fund in 2008. Plan assets at the beginning of 2008 were valued at $300 million. The expected rate of return on plan assets was 9%, but the actual return on those assets in 2008 was 10%. Retirement benefits of $38 million were paid at the end of 2008 to retired employees. What is the value of pension plan assets at the end of 2008? ($ in millions) Plan assets at the beginning of 2008 $300 Return on plan assets (10% x $300) 30 Cash contributions 48 Less: Retiree benefits paid (38 ) Plan assets at the end of 2008 $340 4
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III. Pension Expense A. Components of Pension Expense 1. Service Cost –
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This note was uploaded on 07/26/2009 for the course ACCT AIM 4332 taught by Professor Tiffanybortz during the Summer '09 term at University of Texas at Dallas, Richardson.

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CH 20 Class Notes - CHAPTER 20 ACCOUNTING FOR PENSIONS I...

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