Pensions and Other Postretirement Benefits Essay

Custom Student Mr. Teacher ENG 1001-04 26 December 2016

Pensions and Other Postretirement Benefits

As you may know there are two types of pension plans that are most commonly used: a defined contribution plan and a defined benefit plan. “A defined contribution plan sets forth a certain amount that the employer is to contribute to the plan each period (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). “A defined benefit plan specifies the amount of pension benefits to be paid out to plan recipients in the future.

Companies that use this plan must make sufficient contributions to the funding agency in order to meet benefit requirements when they come due” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). The defined contribution plan makes no promises on what the ultimate benefits are to be paid. “The benefits received by the recipients are determined by the return earned on the invested pension funds during the investment period” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011).

When you account for this plan the risk for future benefit is the employee and the employer’s only cash outflow is the annual contribution to the pension plan fund. “The pension expense is equal to the amount of promised annual contribution”(Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). The financial statements should disclose the plan, what groups are covered, the basis for determining contributions, and any significant matters affecting comparability from period to period (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011).

Accounting for the defined benefit plan is more complex. “The pension benefits to be received in the future are affected by uncertain variables such as turnover, mortality, length of employee service, compensation levels, and earnings on the pension fund assets” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). The risks lie with the employers because they must make large enough contributions to meet what was promised and the amount of pension expense may not be equal to the cash contributed to the plan (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011).

Employers are also required to disclose the following information if they chose to use the defined benefit plan: “1. A description of the plan, including employee groups covered, type of benefit formula, funding policy, types of assets held, significant matters affecting comparability or information for all periods presented, 2. The amount of net periodic pension cost for the period showing separately the service cost component, the interest cost component, the actual return on assets for the period, and the net total of other components,

3. A schedule reconciling the funded status of the plan with amounts reported in the employer’s statement of financial position” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). APB Opinion No. 8 states that there are some basic problems with the accounting for the defined benefit pension plan. The problems identified are: “1. Measuring the total amount of cost associated with a pension plan, 2. Allocating the total pension costs to the proper accounting periods, 3. Providing the cash to fund the pension plan, and

4. Disclosing the significant aspects of the pension plan on the financial statements” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). SFAS No. 87 “Employers’ Accounting for Pensions” maintains that pension information should be prepared on the accrual basis and retained three fundamental aspects of past pension accounting:

1. delaying recognition of certain events, 2. Reporting net cost, and 3. offsetting assets and liabilities” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). The components of pension costs reflect different aspects of the benefits earned by employees and the method of financing those benefits by the employer. The following are required to be included in the net pension cost recognized by the employer sponsoring a defined benefits pension plan:

1. Service cost, 2. Interest cost, 3. Return on plan assets, 4. Amortization of unrecognized prior service cost, 5. Amortization of gains and losses, 6. Amortization of the unrecognized net obligation or unrecognized net asset at the date of the initial application of SFAS No. 7” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011). There are other postretirement benefits that are addressed in SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other than Pensions. ” SFAS No. 106 deals with other postretirement benefits other than pensions which includes a variety: tuition assistance, day care, legal services, and housing subsidies, the most significant are retiree health care services, and life insurance.

Although on the surface OPRBs are similar to defined benefit pension plans that have characteristics that necessitate different accounting considerations and that have been the source of considerable controversy: future cash outlays for OPRBs depend on the amount of serves that the employees will eventually receive, additional OPRBs cannot be accumulated by employees OPRB with each year of service, OPRBs do not vest” (Schroeder, Clark, & Cathey, “Pensions and Other Postretirement Benefits,” 2011).

As noted the two most frequent pension plans are the defined contribution plan and the defined benefit plan. However, APB Opinion No. 8 has identified that there are some basic problems with the accounting for the defined benefit pension plan. There are also other postretirement benefits that include retiree healthcare benefits and life insurance.

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