This preview shows page 1. Sign up to view the full content.
Unformatted text preview: of
ret irement . T he employee’s benef it ent it lement is t ypic ally det ermined by t he number of years of
servic e and t he earnings over a f ixed period of t ime. T he employer ensures t hat t here are
suf f ic ient asset s in t he pension f und t o make t hese payment s when due.
T he c ost of t he benef it is inf luenc ed by many f ac t ors, inc luding ret urn on pension f und
invest ment s, mort alit y rat es, employee t urnover rat es, inf lat ion rat es, and ot her c onsiderat ions.
T he c alc ulat ion of t he plan’s annual expense is based on ac t uarial est imat es.
Pension plans are eit her contributory or non- contributory . In a c ont ribut ory plan, bot h t he
employer and t he employee make payment s t o t he plan. In a non- c ont ribut ory plan, only t he
employer donat es. Many employers of f er employees a c hoic e of enrolling in eit her t ype of plan.
T he benef it t o an employee of enrolling in a c ont ribut ory plan is t hat it provides superior
ret irement benef it s. Ac c ount ing f or c ont ribut ory and non- c ont ribut ory plans is virt ually ident ic al.
Ac c rued Benef it Obligat ion (ABO) and Plan Asset s
T he Ac c ount ing St andards Board (Ac SB) requires t hat accrued benefit obligations (ABO) be
used t o measure t he liabilit y f or t he pension obligat ion. ABO is t he present value of post ret irement benef it s t hat employees have earned t o dat e. Essent ially, t he ABO is how muc h t he
pension plan c urrent ly owes. While t he ac t uary det ermines t he ABO, t he ac c ount ant t rac ks it .
An example of t his c an be f ound in Illust rat ion 19- 4 on page 1238 of t he t ext book.
T he c ount erpart t o t he ABO is t he plan asset s (what t he pension plan owns). Plan asset s are
made up by t he c ont ribut ions t o t he pension plan plus t he ret urn on t he plan asset s, less
benef it s paid t o t he ret irees. T hese asset s are managed by t he t rust ee on behalf of t he
c ompany and t he employees. T he employer does not own t hese asset s, nor are t hey report ed
View Full Document
- Spring '13