Ch20 - CHAPTER 20 ACCOU NTI NG FOR PE NSIONS AN D...

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1048 C H A P T E R 20 ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS LEARNING OBJECTIVES After studying this chapter, you should be able to: Distinguish between accounting for the employer’s pension plan and accounting for the pension fund. Identify types of pension plans and their characteristics. Explain alternative measures for valuing the pension obligation. List the components of pension expense. Use a worksheet for employer’s pension plan entries. Describe the amortization of prior service costs. Explain the accounting for unexpected gains and losses. Explain the corridor approach to amortizing gains and losses. Describe the requirements for reporting pension plans in financial statements. 9 8 7 6 5 4 3 2 1 Many companies have benefit plans that promise income and other benefits to re- tired employees in exchange for services during their working years. However, a shift is on from traditional defined-benefit plans, in which employers bear the risk of meeting the benefit promises, to plans in which employ- ees bear more of the risk. In some cases, employers are dropping retirement plans alto- gether. Here are some of the reasons for the shift. Competition. Newer and foreign competitors do not have the same retiree costs that older U.S. companies do. Southwest Airlines does not offer a traditional pension plan, but Northwest and United both have pension deficits exceeding $100,000 per employee. Cost. Retirees are living longer, and the costs of retirement are higher. Combined with annual retiree healthcare costs, retirement benefits are costing the S&P 500 companies over $25 billion a year and are rising at double-digit rates. Insurance. Pensions are backed by premiums paid to the Pension Benefit Guarantee Corporation (PBGC). When a company fails, the PBGC takes over the plan. But due to a number of significant company failures, the PBGC is running a deficit, and healthy companies are subsidizing the weak. For example, steel companies pay just 3 percent of PBGC premiums but account for 56 percent of the claims. Accounting. To bring U.S. standards in line with international rules, accounting rule mak- ers are considering rules that will require companies to “mark their pensions to market” (value them at market rates). Such a move would increase the reported volatility of the retirement plan and of company financial statements. When Britain made this shift, 25 per- cent of British companies closed their plans to new entrants. Where Have All the Pensions Gone? PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
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As a result of such factors, it is not hard to believe that experts can think of no major company that has instituted a traditional pension plan in the past decade.
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