Chapter 20 (Accounting for Pensions)

Chapter 20 (Accounting for Pensions) - 1. Distinguish...

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Unformatted text preview: 1. Distinguish between accounting for the employers pension plan and accounting for the pension fund. 2. Identify types of pension plans and their characteristics. 3. Explain alternative measures for valuing the pension obligation. 4. List the components of pension expense. 5. Use a worksheet for employers pension plan entries. 6. Describe the amortization of prior service costs. 7. Explain the accounting procedure for unexpected gains and losses. 8. Explain the corridor approach to amortizing gains and losses. 9. Describe the requirements for reporting pension plans in financial statements. Learning Objectives A Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided in their working years with the employer. Nature of Pension Plans Some pension plans are: Contributory: employees voluntarily make payments to increase their benefits. Noncontributory: only employer bears the entire cost. Qualified pension plans: offer tax benefits permitting deductibility of the employers contribution to the pension fund and tax free status of earnings from pension fund assets. Defined-Contribution Plan Defined-Benefit Plan Employer contribution determined by plan (fixed) Risk borne by employees Benefits based on plan value Benefit determined by plan Employer contribution varies (determined by Actuaries) Risk borne by employer Actuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates on plan assets, early retirement frequency, future salaries, etc. Types of Pension Plans Two questions with respect to pension accounting: 1. What is the pension obligation that a company should report in the financial statements? 2. What is the pension expense for a fiscal period? Defined Contribution Plan The employer contributes each year to the plan based on formula established for the plan, and reports it as pension expense. The employees get the benefit of gain or bears the risk of loss from change in the asset value under the plan. The employee is the beneficiary of the plan The employer reports a liability in the balance sheet if it does not make the contribution in full. The employer reports an asset if it contributes more than the required amount. Defined Benefit Plans Employers are at risk because they must contribute enough to meet the cost of benefits that the plan defines beforehand. Employer is the beneficiary of the defined benefit trust. Trusts responsibility is to safeguard and invest in assets so that there will be enough fund to pay for the employers obligation to the employees....
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Chapter 20 (Accounting for Pensions) - 1. Distinguish...

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