Intermediate Accounting II
Accounting for Pensions
Overview of Employer's Accounting for Pension Plans
Defined contribution plan - employer agrees to make a defined contribution to a pension plan
plan participants receive whatever benefits have accumulated
each year, employer records an expense an a related liability for the contribution
Defined benefit plan - employer agrees to provide a benefit at retirement that is defines or fixed by formula
employer accepts risk of meeting the obligation upon employee's retirement
requires use of complex actuarial estimates
Involves 2 accounting entities
employer sponsor - reports ...view middle of the document...
Gain or loss - change in the value of either the PBO or the plan assets resulting from experience different from that assumed or from a change in actuarial assumption. See also "unrecognized net gain or loss".
Plan amendment - change in the terms of an existing plan or the initiation of a new plan.
Prior service cost (PSC) - cost of retroactive benefits granted in a plan amendment. See also "unrecognized prior service cost".
Projected benefit obligation (PBO) - actuarial present value as of a date of all benefits attributed by the pension benefit formula to employee service rendered prior to that date. The PBO is measured using assumptions as to future compensation levels if the pension benefit formula is based on those future compensation levels (pay-related, final-pay, etc. plans)
Retroactive benefits - benefits granted in a plan amendment that are attributed by the pension benefit formula to employee services rendered in periods prior to the amendment. The cost of retroactive benefits is referred to as prior service cost.
Service - employment taken into consideration under a pension plan. Years of employment before the inception of a plan constitute an employee's past service; years thereafter are classified in relation to the particular actuarial valuation being made. Years of employment prior to the date of a particular valuation constitute prior service.
Unrecognized net gain or loss - cumulative net gain(loss) that has not been recognized as a part of net periodic pension expense.
Unrecognized prior service cost - portion of prior service cost that has not been recognized as a part of the net pension expense
Calculating Pension Expense
Pension Expense is a net amount calculated by combining the following 5 items
interest on the projected benefit obligation
actual return on plan assets
amortization of unrecognized prior service cost
effects of gains and losses
Pension expense is included in the income statement, the components are disclosed
increases pension expense
df - actuarial present value of benefits attributed to employee service during the current year
takes future salary levels into consideration (uses the benefits/years of service approach)
in the worksheet, the amount of service cost is accounted for by debiting Pension expense (income statement account) and crediting PBO (off-balance sheet account -memo)
Interest on Projected Benefit Obligation (PBO)
increases pension expense
df - increase in the amount of the PBO due to the passage of time.
interest rate is called the settlement rate (reflects the rates at which pension benefits are expected to be settled)
Interest for the year is calculated on the PBO at the beginning of the year (ie use simple interest)
in the worksheet, interest is accounted for by debiting Pension expense...