Chapter 20 - Chapter 20: Accounting for Pensions and...

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Unformatted text preview: Chapter 20: Accounting for Pensions and Postretirement Benefits Pension plan an arrangement whereby an employer provides benefits (payments) to retired employees for services they provided in their working years Company or employer organization sponsoring the pension plan and incurs the cost and makes contributions to the pension fund Fund or plan the entity that receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the retired employees (pension recipients) o Pension plan is funded when the employer makes payments to a funding agency Contributory pension plan the employees bear part of the cost of the stated benefits or voluntarily make payments to increase their benefits Noncontributory pension plans the employer bears the entire cost Qualified pension plan plans that offer tax benefits by permitting deductibility of the employers contributions to the pension fund and tax-free status of earnings from pension fund assets The pension fund should be a separate legal and accounting entity Defined-Contribution Plan The employer agrees to contribute to a pension trust a certain sum each period, based on a formula [401(k) plan] The formula may consider such factors as age, length of employee service, employers profits, and compensation level The plan only defines the employers contribution; it makes no promise regarding the ultimate benefits paid out to the employees The size of the pension benefits that the employee finally collects under the plan depends on several factors: o The amounts originally contributed to the pension trust o The income accumulated in the trust o The treatment of forfeitures of funds cased by early terminations of other employees A company usually turns over to an independent third- party trustee the amounts originally contributed o The trustee, acting on behalf of the beneficiaries (the participating employees), assumes ownership of the pension assets and is accountable for their investment and distribution Accounting for a defined-contribution plan: o The employee gets the benefit of gain (or risk of loss) from the assets contributed to the pension plan o The employer simply contributes each year based on the formula established in the plan The employers annual cost is the amount that is obligated to contribute to the pension trust The employer reports a liability on its balance sheet only if it does not make the contribution in full The employer reports an asset only if it contributes more than the required amount The employer must also disclose the following: a plan description, including employee groups covered; the basis for determining contributions; the nature and effect of significant matters affecting comparability from period to period Summary: A retirement plan in which a certain amount or percentage of money is set aside each year by a company for the benefit of the employee. There are restrictions as to aside each year by a company for the benefit of the employee....
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Chapter 20 - Chapter 20: Accounting for Pensions and...

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