Re: Reporting for Pension Plans
There are no actuarial assumptions required to measure the obligation or expense, and there are no actuarial gains or losses. The employer recognizes the contribution payable at the end of each period based on employee service during that period. This amount is reduced by any payments made to employees in the period. You are a controller in a midsized manufacturing company that has acquired 100% of another company. The acquired company includes two segments and two different pension plans. Both of these reporting issues are new to your CEO, and your CEO wants to eliminate the segments. Write a 700- to 1,050-word executive memo that explains the required reporting for defined contribution, defined benefit, and other postretirement plans. Also include an explanation of what must happen for the two segments to be eliminated. (You do not need to know details about the segments to answer this.) (Schroeder, Clark & Cathey, 2005)
Pensions are a special category of liabilities, in that the expense for periodic costs is not tied to changes in the balance sheet. Once a pension plan is established, the company must make periodic estimates of future obligations, and these must be reflected in the financials as long term liabilities. Uncertainty - and obstacles to accurate forecasting - arise due to (a) unknown future employee salary levels (on which future benefits are based), (b) vesting events, and (c) investment performance of fund assets. A proper discount rate must also be selected to discount estimated future obligations back to a present value.
This complexity in accounting for present and future obligations can easily lead to material misstatements in the balance sheet and income statement (accidental or otherwise). Users of these financial statements must have a clear understanding of the assumptions and accounting methods used to calculate these items, so they can make their own determination on the...