Slide 1Types of plansSlide 3Slide 4Defined contribution plansDefined benefit plansChart from UK but trend is probably same in USDefined Benefit Pension PlanPension ApproachesSlide 10Capitalization approach to pensions:Measures of Pension LiabilityInterest/return ratesWhat happens whenSlide 15Slide 16A working paper for pensionsSlide 18Accounts on Employer’s BooksWorking Paper – Pension ExpenseA working paper for pensionsAccounts on Employer’s BooksA working paper for pensionsAccounts on Employer’s BooksA working paper for pensionsSelf-checking featuresNet Periodic Pension CostPension DefinitionsActuarial Gains and LossesSlide 30Slide 31Slide 3210% Corridor AmortizationSettlements & CurtailmentsPension Disclosures [FAS 132(R)]Pension Disclosures [FAS 132(R)]Pension Disclosures: ReconciliationsPension DisclosuresCurrent portion of liabilitySlide 41Other Post-retirement BenefitsSlide 43APBO vs EPBOSlide 45Postretirement Benefit WorksheetWorking paper for FAS106Net periodic postretirement benefit cost.Comparing FASB 87 & 106Slide 50Slide 511Pensions & Other Post Employment Benefits – after SFAS No. 158Includes certain slides provided by authors of Skousen, Stice & Stice and Kieso, Weygandt & Warfield Intermediate Accounting textbooks, as modified and adapted by Teresa Gordon2Contributory PlanNon-Contributory PlanDefined Contribution PlanDefined Benefit PlanTypes of plansA Pension Plan is an arrangement whereby an employer provides benefits (payments) to employees after they retire for services they provided while they were working.Pension PlanAdministratorPension PlanAdministratorContributionsEmployerEmployerRetired EmployeesBenefit PaymentsAssets & LiabilitiesLO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.Nature of Pension PlansNature of Pension Plans 444444444444444444444444444444444444Some pension plans are:LO 1 Distinguish between accounting for the employer’s pension plan and accounting for the pension fund.Contributory: employees voluntarily make payments to increase their benefits.Noncontributory: employer bears the entire cost.Qualified pension plans: offer tax benefits.Pension fund should be a separate legal and accounting entity.Nature of Pension PlansNature of Pension Plans5Defined contribution plansA plan that provides benefits based solely on what has been contributed and the earnings thereon < 401(k) > Amounts to be funded are determined by the plan No promise for specific future benefits. Independent third party holds assets Risk borne by employee  Accounting relatively straightforward6Defined benefit plansA pension plan that determines the amount of benefit to be provided Contributions based on estimated amounts needed to meet expected payments Form versus substance of trust Risk borne by employer Accounting by employer is complicatedActuaries estimate the employer contribution by considering mortality rates, employee turnover, interest and earning rates, early retirement frequency, future salaries, etc.7Chart from UK but trend is probably same in US8Defined Benefit Pension PlanEmployerCurrent EmployeesServicesWages and SalariesPension FundContributionsRetired EmployeesDefined Benefits9Pension ApproachesBefore FASB 87 & 88:“pay as you go” or “noncapitalization”FASB 87 & 88 Capitalization approachFull obligation reported only in notesFASB 158Pension & post-retirement benefit cost is same as FASB 87Full obligation is now reported on balance sheetAdditional items now on statement of comprehensive incomeRecognition of the Net Funded StatusCompanies must recognize on their balance sheet the full overfunded or underfunded status of their defined-benefit pension plan. The overfunded or underfunded status is measured as the difference between the fair value of the plan assets and the projected benefit obligation.Accounting for PensionsAccounting for PensionsLO 3 Explain alternative measures for valuing the pension obligation.11Capitalization approach to pensions:Employer has full liability for benefits related to service already rendered by employeeExpense is recognized as employees work (service cost) and this increases the liabilityLiability balance increases every year since present value of future benefits is larger (less time remains to cash outflow) Liability is reduced through payments to retireesAssets of the plan are considered pledged, collateral against a liabilityLiability less designated assets reported on balance sheet (net presentation)12Measures of Pension LiabilityVestedBenefitObligationAccumulatedBenefitObligationProjectedBenefitObligationBenefits forvestedemployeesat currentsalariesBenefits for vested and non-vested employees at current salariesBenefits for vested and nonvested employees at future salaries(GAAP)PV of ExpectedCash Flows13Interest/return ratesDiscount rateRates on high-quality fixed-income investments with maturities consistent with expected payments to retireesGenerally equivalent to a portfolio of zero-coupon bonds with appropriate maturitiesExpected rate of returnBased on long-term rate of return anticipated given investment of plan assets14What happens whenInterest rates increase?Interest rates decrease?Service CostsInterest on the LiabilityActual Return on Plan AssetsAmortization of Prior Service CostsGain or Loss+++-++-Accounting for PensionsAccounting for PensionsLO 4 List the components of pension expense.Components of Pension Expense1.2.3.4.5.Effect on ExpenseCompanies do not recognize two main items in the accounts and in the financial statements:Pension Items Not RecognizedPension Items Not RecognizedLO 5 Use a worksheet for employer’s pension plan entries.Some items are recognized in other comprehensive income; changes in these items are amortized into expense through smoothing techniques. Prior service costs. Actuarial gains and losses.A company must disclose in notes to the financial statements, but not in the body of the financials.Projected benefit obligation.Pension plan assets.17A working paper for pensionsThis is very similar to the one in textbookThis is very similar to the one in textbookLO 5 Use a worksheet for employer’s pension plan entries.The “General Journal Entries” columns determine the journal entries to be recorded in the formal general ledger. The “Memo Record” columns maintain balances for the unrecognized pension