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Unformatted text preview: 20-120ACCOUNTING FOR POSTEMPLOYMENT BENEFITS CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Understand the characteristics of pension plans. 2. Explain the historical perspective of accounting for pension plans. 3. Explain the GAAP for defined benefit plans, including computing pension expense and recognizing pension liabilities and assets. 4. Account for pension plans. 5. Understand disclosures of pensions. 6. Explain the conceptual issues regarding pension plans. 7. Understand several additional issues related to pension plans. 8. Explain other postemployment benefit plans (OPEBs). 9. Account for OPEB plans. 10. Explain the conceptual issues regarding OPEB plans. 11. Understand present value calculations for pensions (Appendix). 20-2SYNOPSISCharacteristics of Pension Plans1. A pension planrequires that a company provide income to its retired employees for the services they provided during their employment. A defined benefit planeither specifically states the benefits to be received by employees after retirement or the methods of determining such benefits. In contrast, under a defined contribution plan, the employer's contribution is based on a formula, and future benefits are limited to an amount which the contributions and the returns earned on the investment of these contributions can provide. Defined benefit plans are the primary focus of this chapter. 2. Under a fundedpension plan, the company makes periodic payments to a funding agencywhich is responsible for safeguarding and investing pension assets, and for making payments to retired employees. The amounts needed to fund a pension plan are determined by actuariesusing compound interest techniques, projections of future events, and actuarial funding methods. Under an unfundedplan, no such periodic payments are made. Instead, the payments to retired employees are made from current resources. Although the Pension Reform Act of 1974 eliminated unfunded company plans, some company plans are still underfunded and many governmental plans are unfunded. A pension plan is contributoryif employees bear part of the cost, and noncontributoryif the total cost is borne by the employer. Corporate pension plans are usually noncontributory. 3. This chapter focuses on the provisions of GAAP as they relate to employers' accountingand disclosuresfor pension plans. The operations of private retirement plans are regulated by the Employee Retirement Income Security Act of 1974(ERISA), also called the Pension Reform Act of 1974, and the Pension Protection Act of 2006. In addition, most companies design their plans to meet Internal Revenue Service requirements. Accounting Principles for Defined Benefit Pension Plans4. The pension expense(net periodic pension cost) recognized by a company includes five components: (a) Service cost, the actuarial present value of the benefits attributed to current-period employee services (that is, the deferred compensation for current services, to be...
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.
- Spring '11