Topics: Pension, Cash balance plan, Balance sheet Pages: 21 (2148 words) Published: July 7, 2014
Chapter scope notes
Exclude alternative measures of pension obligation (p.1202)
Exclude Other Defined Benefit Plans (pp. 1216)
Exclude appendices

Characteristics of organizational relationship: operating company & pension plan

Emphasis will be on Defined Benefit Pension Plan accounting and reporting

Pension plans are provided by organizations to provide for eligible employees upon retirement

In Canada they are provincially regulated

The concept is straightforward: An organization places in a separate, but still owned entity or trust, sufficient assets, whose return should provide for future retirees. The Pension Plan entity is not consolidated with the related operating company.

The application is complex because of 1) the types of plans, 2) the means of determining the funding of plans and 3) the variables to consider in determining what constitutes pension expense today, for what will be expected pension benefit payments years from now.

The key players: Fund Manager and Actuary

Simplifying revisions (Immediate Recognition Approach) with IFRS, January 2013 but will result in expense reporting/earnings reporting volatility. Principal operating features, application and disclosure; Private Enterprise and IFRS

Types of Pension Plans
Payments to Pensioners
Principal Operational Features
The Funding Schemes
The make-up of and reasons for the Pension Plan Components The reporting of pension expense under IFRS Standards and options under ASPE Separate entity or trust owned by the company

Company AccountsPension Plan

Record pensionPension Plan Performance


Pension asset/Equal to net of plan
or liability on B/Scomponents

Types of Pension Plans

Defined contribution plans: benefits risk to retirees
Defined benefit plans: no benefits risk to retirees

Type of Plan
Defined contribution
Fixed amounts-easy for company to determine annual pension expense Variable depending on the plan performance
Defined Benefit
Required contributions by the company may vary depending on the plan’s performance –determination of pension expense is complex Benefit pay-outs are pre-determined eg: % of last five years earnings or 2% earnings per year x # of year’s service

Clearly, the employer must monitor the performance of a defined benefit plan very closely as any plan under-performance (to satisfy future pension obligations) must be funded directly by the employer. Alternatively…

Principal Operating Features

Pension Plans may be Contributory or Non-contributory. Contributory means that a % of the employee’s salary is withheld and, combined with an employer’s contribution, sent to the pension plan.

If a defined benefit plan performs very well – that is the plan assets are evaluated as being more than sufficient to satisfy future pension obligations; not the case recently as market conditions have severely stressed the financial health of pension plans.

However, in a defined benefit pension plan, should the plan under-perform, employees are not required to increase contributions. Such deficiencies are borne by the employer.

Pension entitlements may be Vested or Unvested.

Pension Plans are usually administered by a separate Trustee.

Being provincially governed, most pension plans are Registered ensuring tax deductibility of company contributions to the plan.

Defined benefit plans pose a challenge in that companies have to make a reasonable estimation of what assets to set aside today for ongoing and future obligations. Reliance is placed on Actuaries to approximate the future obligations expressed in today’s dollars but the company is heavily involved in determining employee group demographics – in the years to come. Plan asset earnings assumptions

Future salary increases
Employee turnover
Gender composition
Mortality rates (separate death...
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