Chapter 3 solutions part 3

Chapter 3 solutions part 3 - Chapter 3 Part 3 of 3 19 In a...

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

View Full Document Right Arrow Icon
Chapter 3 Part 3 of 3 19. In a defined contribution plan, the employer promises to currently contribute a fixed sum of money to the employee’s retirement fund, so it is the contribution that is defined. In a defined benefit plan, the employer promises to pay a periodic pension benefit to the employee after retirement (typically until death), so it is the benefit that is defined. The risk (or reward) of the investment performance in the former case is borne by the employee and in the latter by the employer. Accounting for defined contribution plans is simple: whenever a contribution is made it is recorded as an expense. Defined benefit plans’ accounting is complex and involves currently recording a liability based on future expected benefit payments and an asset to the extent the plan is funded. Pension expense in this case depends on the changes in pension obligation and the return on plan assets. 20 (a) Pension obligation: This is the present value of expected benefit payments to the employee based on current service. (b) Pension asset: this is the fair market value of the plan assets on the date of the balance sheet. (c) Net economic position of the plan: This is the difference between the fair market value of the pension assets and the pension obligation. When this difference is positive the plan is referred to as overfunded and when negative the plan is termed underfunded. (d) Economic pension cost: Economically, pension cost is equal to the change (increase) in pension obligation minus return on plan assets. This is called the funded status. Typically, pension obligation changes because of additional employee service (service cost) and present value effects (interest cost). 21. The common non-recurring components are: (a) Actuarial Gain/Loss: This arises because of changes in actuarial assumptions such as discount rates and compensation growth rates. (b) Prior Service Cost: This arises because of changes in
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.

Page1 / 4

Chapter 3 solutions part 3 - Chapter 3 Part 3 of 3 19 In a...

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