Pension Costs

Topics: Pension, Asset, Balance sheet Pages: 5 (1672 words) Published: December 3, 2010
In examining the costs of pension plans, Leah Hutcherson, CPA, encounters certain terms. The components of pension costs that the terms represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans. DIRECTION AND REQUIREMENTS

In this simulation, you will be asked various questions regarding basic pension plan terminology.

1. Discuss the theoretical justification for accrual recognition of pension costs.

Cash-basis accounting recognizes pension cost as being equal to the amount of cash paid by the employer to the pension fund in any period; pension funding serves as the basis for expense recognition under the cash basis.   Accrual-basis accounting recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees.   Not infrequently, the amount which an employer must fund for pension purposes during a particular period is unrelated to the economic benefits derived from the pension plan in that period. Cash-basis accounting recognizes the amount funded as periodic pension cost and the amount funded may be discretionary and vary widely from year to year. Funding is a matter of financial management, based on working capital availability, tax considerations, and other matters unrelated to accounting considerations

2. Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs. b. Explain the following terms as they apply to accounting for pension plans. 1. Market-related asset value.

2. Projected benefit obligation.
3. Corridor benefit obligation.
c. Using the FARS research database, list the information that should be disclosed about a company's pension plans in its financial statements and its notes. Provide citations for your answer.

Definition of Pensions Plan/Cost

• The annual cost incurred by a firm in providing its employees with a pension plan (

• Pension costs are a major item of expenditure and they can be difficult to manage. It is hard to know how they will change and develop over time, but being in control of pension costs has enormous advantages for your company

• PENSION PLAN COST: THE BASICS The cash contribution and pension expense calculations are both often referred to as the cost of a pension plan – one as a cash outlay and the other as a reduction (or increase) in company earnings. Both are calculated using similar principles, although the rules for calculation are very different

Pensions are a
form of deferred compensation. Participants trade compensation today for future pensions tomorrow. Both the pension funding rules and pension accounting rules require that the cost of that deferred compensation be recognized as it is earned.

•,5,Slide 5


Corridor amortization occurs when the accumulated unrecognized net gain or loss balance gets too large. The gain or loss is too large when it exceeds the arbitrarily selected FASB criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess unrecognized gain or loss balance may be amortized using any systematic method but the amortization cannot be less than the amount computed using the straight-line method over the average remaining service-life of active employees expected to receive benefits
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