Chapter 17 NEW - Pensions and Other Postretirement Benefits...

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Accounting 124 / Pensions 1 Pensions and Other  Postretirement Benefits Prepared by: Prof. Elizabeth Venuti
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Accounting 124 / Pensions 2 Overview Pension plan Pension fund Terminology Funded Contributory Qualified
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Accounting 124 / Pensions 3 Defined Contribution Plan Employer makes periodic contributions. Contributions are defined by preset formula. e.g. percentage of employee’s current salary Employer deposits the contributions into an employee-directed investment fund. Benefit payments are not defined. Employer has no commitment regarding benefit payments at retirement. Risk borne by employee. Accounting is simple: Pension expense is equal to employer’s contribution.
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Accounting 124 / Pensions 4 Defined Benefit Plan Employee’s retirement benefits are defined. Employer is committed to specified retirement benefits. Retirement benefits are based on a formula that considers years of service, compensation level, and age. Employer’s required contributions to pension fund are not pre-defined. Contributions are based on actuarially-determined estimates of liability and value of the pension fund assets. Risk borne by employer. Accounting difficult Pension expense is function of changing estimates of pension obligation and returns on pension fund assets
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Accounting 124 / Pensions 5 Measures of the  Pension Obligation Vested Benefit Obligation (VBO) Accumulated Benefit Obligation (ABO) Projected Benefit Obligation (PBO)
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Accounting 124 / Pensions 6 Measuring changes in the PBO Service cost Interest cost Benefits paid Plan amendments (prior service cost) Changes in actuarial assumptions
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Accounting 124 / Pensions 7
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