With the recent acquisition of another company, the company acquired two different pension plans and two segments that do not flow with the company. The company is unfairly with the requirements in reporting the two pension plans. Also the company needs to determine the correct method for the two segments to be eliminated. Thus, the memo describes the reporting requirements for the pension plans of defined contribution, defined benefit, and other postretirement plans. The memo also discusses the process to eliminate the unwanted segments.
A defined contribution plan is one of the two most frequently used pension plans. “A defined contribution plan set forth a certain amount that the employer is to contribute to the plan each period” (Schroeder, Clark, & Cathey, 2011, p. 456). In this plan, the employer may set a percentage that will be paid each year without making any promises on the actual outcome of the benefits to be paid at retirement. The reporting requirements for this plan are actually simple and straightforward. The employer will record the percentage it has decided to contribute to the employee’s pension plan as a pension expense. In this plan, the cash contributed equals the pension expense. The employer also has to disclose the plan in the financial statements. The firm should include the existence of the plan, the groups covered, how the contributions are determined, and any significant matters affecting the comparability (Schroeder, Clark, & Cathey, 2011).
A defined benefit plan is the other most frequently used pension plans. According to Schroeder, Clark, & Cathey (2011), “a defined benefit plan specify the amount of pension benefits to be paid out to plan recipients in the future” (p. 456). In this plan, the employer states they will pay a percentage of the average of the employee’s highest five years’ salary. The reporting requirements for a defined benefit plan are much more complicated than the defined contribution plan. The company will use a benefit plan formula to determine the cost. The company “must then recognize the difference between the plans’ projected benefit obligation and its fair value of plan assets as either an asset or a liability” (Shaw, 2009, Balance-Sheet Reporting Under SFAS 158). The projected benefit obligation is the actuarial present value formulated from the benefit formula. The company also has to disclose:
a. A description of the plan
b. The amount of net periodic pension cost showing the breakdown of cost
c. A schedule reconciling the funded status of the plan
d. The weighted-average assumed discount rate and rate of compensation increase
e. Amounts and types of securities included in the plan assets (Financial Accounting Standards Board, 1985, Disclosures).
Other Postretirement Plans
Other postretirement plans are non-cash benefits available for retirees. Examples of these benefits can be health insurance, life insurance, legal services, and tuition credits. The reporting for these plans are similar to the defined benefit plan. They also cost the company substantial amount of money like the defined benefit plan.
Elimination of Segments
In order to eliminate the two segments the company acquired, the firm must first identify the cost associated with the segments. The firm would put the cost into two categories, avoidable costs and unavoidable costs. The avoidable cost are the cost that will go away once the segment is gone. The unavoidable costs will remain even once the segment eliminated. The unavoidable costs will then be distributed to the remaining segments.
Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards
No. 87. Retrieved from http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting
Analysis: Text and Cases (10th ed.). Hoboken, NJ: John Wiley & Sons, Inc.. Shaw, K. W. (2009). New Accounting Rules for Defined Benefit Pension Plans. Retrieved from