TO: Company CEO
SUBJECT: Reporting of Pension Plan in acquisition of Company ABC
DATE: June 11, 2013
In the acquisition of Company ABC, many factors must be considered, including the acquisition of the company’s pension plans and the addition of two segments. After careful analysis, the two operating segments have caused a loss to the company and must be eliminated. This memo will outline the reporting procedures for the pension plans and the necessary steps that must be taken to eliminate the segments.
Defined Contribution Plan
One of the most frequently encountered and widely used pension plans is the defined benefit plan. Under this ...view middle of the document...
” While the defined contribution plan is known for its simplicity in nature, the defined benefits plan has been found to be more complex.
Defined Benefits Plan
Under the defined benefit plan, employers promise fixed retirement benefits defined by a designated formula. This formula is typically based on the employees’ number of years of service, the final pay or the average of the last few years, and sometimes the age of the employee. “Employers are responsible for ensuring that sufficient funds are available to provide promised benefits” (Chapter 17, n.d.). The three main components of this plan include: the employers contribution of retirement benefits, the plan assets by which the employer pays the benefits, and the periodic expense which is a composition the contribution and the plan assets. The company may need to hire an actuary to account for the uncertainties that may arise and to determine the company’s obligation. According to Schroeder, Clark, and Cathey (2011), the uncertain variables such as employee turnover rate, length of employee service, compensation levels, and earnings on the pension fund assets can affect the pension benefits to be received upon retirement. Accounting for the defined benefits plan can be more complex, as it involves accurately reporting for the three key elements. The pension contribution is measured in three ways which include: the vested benefit obligation (VBO), the accumulated benefit obligation (ABO), and the projected benefit obligation (PBO). Calculating the balance, which is to be reported in the disclosure notes, of the projected benefit obligation can be affected by five events: service cost, interest cost, prior service cost, gains and losses, and payments to retired employees.
Reporting for the PBO is much like reporting for the pension plan assets in that the balance is not formally recognized on the balance sheet but the return is included in the calculation of the periodic pension expense and the balance is stated in the disclosure notes. If the PBO exceeds the assets, the pension plan is said to be underfunded and if the assets exceed the PBO then the pension plan is said to overfunded. On the balance sheet, a company must report a liability for the underfunded amount or an asset for the overfunded amount (Chapter 17, n.d.).
The pension expense is reported for on the basis of five components:
1. Service cost is the first component of the pension expense.
2. Interest cost is combined with the...