Chp_20_Notes

Chp_20_Notes - Chapter 20 Pensions ERISA (Employee...

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Chapter 20 – Pensions ERISA (Employee Retirement Income Security Act of 1974) – requires companies to fund their pension plan in an orderly manner so that the employee is protected at retirement. Two pension standards issued in 1985: SFAS 87 – Employers’ Accounting for Pensions SFAS 88 – Employers’ Accounting for Settlement and Curtailments of Defined Benefit Pension Plans for Terminated Benefits An amendment issued in 2006: SFAS 158 – Amendment to SFAS 87 Pension funds are separate legal entities and have their own separate audit. This chapter focuses on the employer’s pension accounting, not the employee’s. Chapter 20 Notes 1
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Defined Contribution Plans Employer Employee Contribution ( (Defined) Amount to Retired Employee ???????? Employee takes risk Very simple construction. No complex accounting issues for the employer!! Employer’s annual cost (pension expense) is the amount that they are obligated to contribute. Chapter 20 Notes 2 Pension Plan Assets Invested (Trustee)
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Defined Benefit Plans Employer Employee Contribution (Defined) Employer takes risk Amount to Retired Employee $3,000 monthly How is this determined? *During the year, how much future benefits did an employee earn? Calculate the PV of these future benefits , and that is how much the employer should contribute (fund) in a given year. Actuaries help determine much of what goes into the accounting for a defined benefit plan. Actuaries use factors such as turnover, mortality rates, length of service, Chapter 20 Notes 3 Pension Plan Assets Invested (Trustee)
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compensation, interest earnings, etc. to determine how much a company should contribute. Chapter 20 Notes 4
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Issues in Accounting for Defined Benefit Plans 1. What is the pension liability to be reported on the BS? 2. What is the pension expense to be reported on the IS? How do you measure the liability? 1. Vested Benefit Obligation (VBO) – Use only vested benefits at current salary levels. 2. Accumulated Benefit Obligation (ABO) – Use all years of service at current salary levels. 3. Projected Benefit Obligation (PBO) – Use all years of service at future salary levels. New recognition requirement (SFAS 158): Balance sheet must report the full funding status of the plan. Simple determination as follows: FVPA > PBO = Overfunded < PBO = Underfunded Chapter 20 Notes 5
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Components of Pension Expense 1. Service Cost – Increase in PBO due to services rendered during the current year. 2. Interest on the Liability – Interest accrues each year on the PBO because the PBO is presented on a discounted basis. The actuary determines the settlement rate, which is the rate used to obtain the interest cost: PBO x Settlement Rate = Interest Cost 3. Actual Return on Plan Assets – the trustee holds the plan assets and invests the assets based on the employer’s preferences.
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This note was uploaded on 02/25/2011 for the course ACCT 3021 taught by Professor Delaune during the Fall '06 term at LSU.

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Chp_20_Notes - Chapter 20 Pensions ERISA (Employee...

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