NOTES ON CRITICAL POINTS OF PENSION ACCOUNTING

NOTES ON CRITICAL POINTS OF PENSION ACCOUNTING - Note on...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Note on the critical aspects of Pension Accounting We are dealing with defined benefit pension plan where the benefits are pre- defined and are based on future salaries. Actuaries compute the respective numbers by applying a present value technique. Here, PBO and fair value of plan assets are the elements of interest. The components of pension expense can be briefly summarized as follows: 1. Service cost: An additional future benefit that arises out of service rendered by employees in the current fiscal period. The PV of such benefit is taken as the service cost with a corresponding increase in projected benefit obligation (PBO) - Dr. Pension Expense (for service cost) and Cr. PBO. 2. Interest cost: Interest would accumulate on PBO like any other outstanding long-term debt. The interest calculated by applying the settlement rate on the beginning PBO, which would form a part of periodic pension expense with a simultaneous increase of PBO - Dr. Pension Expense (for interest cost) and Cr. PBO. 3. Expected return on plan asset: Expected return in dollar terms is computed by applying an expected rate of return on the beginning balance of plan assets. Expected return is a negative component of pension expense and thus, deducted from pension expense as a credit. The corresponding entries are two-fold: one is the difference between actual and expected return, which would be recorded as an asset gain or loss in OCI (G/L) and the other is a debit of actual return to the plan asset. You have to be careful about
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 01/18/2011 for the course ACC 5115 taught by Professor Mitra during the Winter '10 term at Wayne State University.

Page1 / 3

NOTES ON CRITICAL POINTS OF PENSION ACCOUNTING - Note on...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online