Course Notes Chapter 20

Course Notes - Chapter 20-1 Accounting for Pensions and Accounting for Pensions and Postretirement Benefits Postretirement Benefits Chapter Chapter

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Unformatted text preview: Chapter 20-1 Accounting for Pensions and Accounting for Pensions and Postretirement Benefits Postretirement Benefits Chapter Chapter 20 20 Chapter 20-2 A Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working. It is a form of compensation. Nature of Pension Plans Nature of Pension Plans Employer Pension Plan (separate entity) Employee (Retired) Contributions (inflows) Benefits* (outflows) * Technically, the benefit are to the firm, who then uses it to satisfy their obligation to the employees Chapter 20-3 Some pension plans are: Contributory: employees voluntarily make payments to increase their benefits. Noncontributory: employer bears the entire cost. Qualified pension plans: offer tax benefits. Pension fund should be a separate legal and accounting entity (why?) Nature of Pension Plans Nature of Pension Plans Chapter 20-4 Defined-Contribution Plan Defined-Contribution Plan Defined-Benefit Plan Defined-Benefit Plan Employer contribution determined by plan (fixed) Risk borne by employees Benefits based on plan value Commonly referred to as 401(k) Benefit determined by plan Employer contribution varies (determined by Actuaries) Risk borne by employer See §715 Types of Pension Plans Types of Pension Plans Chapter 20-5 Accounting for Defined Contribution plans is easy, basically the period expense is the amount the employer has promised to the employee for service. The journal entry is: Dr: Compensation expense xxx Cr: Compensation liability xxx Defined Contribution Plans Defined Contribution Plans Chapter 20-6 Contrary to a defined contribution plan where the inputs are set (the risk is on the employee), in a defined benefit plan the outputs (benefits) are set (the risk is on the employer). These are much more complicated to account for, and are less common today (cheaper). These plans are common for manufacturing industries, such as the automakers. The largest expense today these firms are facing are actually the other benefits, namely health care. Defined Benefit Plans Defined Benefit Plans Chapter 20-7 Unlike a contribution plan, a benefit plan requires more disclosure since there is a future obligation to the company. It is complicated, but in the end only two items must be answered: • What is the pension obligation that a company should report in the financial statements? • What is the pension expense for the period (since expenses represent the creation of future obligations or the use of assets)? Defined Benefit Plans Defined Benefit Plans Chapter 20-8 Service Costs Service Costs Interest on Liability Interest on Liability Expected Return on Plan Assets Expected Return on Plan Assets Amortization of Unamortized Prior Service Costs Amortization of Unamortized Prior Service Costs Amortization of Gains or Losses Amortization of Gains or Losses + + + + +- +- + + +- +- Defined Benefit Plans: components Defined Benefit Plans: components There are 5 Components of Pension Expense: 1....
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This note was uploaded on 08/22/2011 for the course ACIS 3116 taught by Professor Staff during the Spring '11 term at Virginia Tech.

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Course Notes - Chapter 20-1 Accounting for Pensions and Accounting for Pensions and Postretirement Benefits Postretirement Benefits Chapter Chapter

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