Pensions

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Pensions

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... assets are tax free. Types of Pension Plans ... Credit to Cash. Debit or Credit Prepaid/Accrued Pension Cost ... Credit Additional Pension Liability ... – PowerPoint PPT presentation

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Title: Pensions


1
Chapter 21
  • Pensions

2
Pensions
  • An arrangement whereby an employer provides
    benefits to employees after they retire for
    services they provided when employed

3
Employer vs. Plan Accounting
  • Employer sponsors the plan incurs the cost, and
    makes the contributions
  • Plan receives the contributions, administers the
    plan assets, and makes benefit payments to
    recipients

4
Pension Funding
  • Employer payments to funding agency
  • Contributory employees bear part of the cost of
    the stated benefits
  • Noncontributory employer bears entire cost

5
Qualified Pension Plans
  • Plans that meet federal income tax requirements
    that permit deductibility of employers
    contributions
  • Earnings from fund assets are tax free

6
Types of Pension Plans
  • Defined contribution plans employers
    contribution is defined there is no promise
    regarding amount of benefits to be paid out
  • Defined benefit plans employer is responsible
    for payment of defined benefits regardless of
    what happens in the trust fund

7
Pension Obligation
  • Vested benefits benefits employee is entitled
    to even if no further services rendered
  • Vested benefit obligation benefits for vested
    employees only at current salaries

8
Pension Obligation
  • Accumulated benefit obligation benefits for
    vested and nonvested employees at current
    salaries
  • Projected benefit obligation present value of
    benefits for vested and nonvested employees at
    future salaries

9
Capitalization vs. Noncapitalization
  • Noncapitalization existed prior to SFAS 87.
    Report an asset or liability only if amount
    funded during year differred from pension expense
  • Capitalization SFAS 87 is a compromise. Some
    elements of a pension are recognized in accounts
    and statements and some are not

10
Components of Pension Expense
  • Service Cost actuarial present value of
    benefits attributed by the pension benefit
    formula to employee service during the period.
    Increases pension expense

11
Components of Pension Expense
  • Interest on the Liability interest for the
    period on the projected benefit obligation.
    Discount rate is settlement rate. Increases
    pension expense.
  • Actual return on plan assets increase in
    pension funds from interest, dividends, and
    realized and unrealized changes in the fair
    market value of the plan assets. Generally
    decreases pension expense.

12
Components of Pension Expense
  • Amortization of unrecognized prior service cost.
    The cost of providing retroactive benefits.
    Allocated to pension expense according to the
    remaining service years of the affected
    employees. Generally increases pension expense.

13
Components of Pension Expense
  • Amortization of unrecognized net gain or loss.
    Comprised of the difference between the actual
    and expected returns on plan assets and
    amortization of unrecognized net gain or loss
    from previous periods. May decrease or increase
    pension expense.

14
Gains or Losses
  • Liability gains or losses are from unexpected
    changes in the market value of plan assets or
    changes in actuarial assumptions that affect the
    projected benefit obligation
  • Corridor approach used to control volatility of
    pension expense which may occur because of
    unexpected gains or losses on plan assets

15
Corridor Approach
  • If the balance of the Unrecognized Gain or Loss
    account exceeds 10 of the larger of the
    beginning balances of the PBO or the market
    related value of the plan assets (the corridor),
    amortization is required

16
Minimum Amortization
  • Minimum amortization is the difference between
    the Unrecognized Gain or Loss account balance and
    the upper or lower limits of the corridor,
    divided by the average remaining service period
    of active employees expected to receive benefits

17
Pension Work Sheet and Entries
  • Worksheet is used to record both formal entries
    and memo entries of all pension plan items and
    components
  • Entry to record pension expense
  • Debit to Pension Expense
  • Credit to Cash
  • Debit or Credit Prepaid/Accrued Pension Cost

18
Minimum Liability
  • Recognized when the accumulated benefit
    obligation exceeds the fair value of plan assets
  • Liability is equal to
  • Excess less accrued pension cost or
  • Excess plus prepaid pension cost

19
Minimum Liability
  • Journal entry is
  • Debit Intangible AssetDeferred Pension Cost
  • Credit Additional Pension Liability

20
Minimum Liability
  • When additional liability exceeds the
    unrecognized prior service cost, the excess
    should be reported as a contra account in
    stockholders equity called Excess of Additional
    Pension Liability Over Unrecognized Prior Service
    Cost
  • Reported as reduction to other comprehensive
    income
  • Referred to as a contra-equity account

21
Pension Disclosures
  • Description of plan
  • Components of pension expense for the period
  • Schedule reporting changes in benefit obligation
    and plan assets during year and reconciling
    funded status of plan with amounts reported on
    balance sheet
  • Discount rate, rate of compensation increase, and
    rate of return

22
Other Aspects of Pensions
  • Pension Reform Act of 1974 mandated many pension
    plan requirements including minimum funding,
    participation, and vesting.
  • Multiemployer plans are plans sponsored by two or
    more employers
  • Pension terminations
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