Intermediate Accounting II
Chapter 20
Accounting for Pensions
Overview of Employer's Accounting for Pension Plans

Defined contribution plan - employer agrees to make a defined contribution to a pension plan

plan participants receive whatever benefits have accumulated

each year, employer records an expense an a related liability for the contribution

Defined benefit plan - employer agrees to provide a benefit at retirement that is defines or fixed by formula

employer accepts risk of meeting the obligation upon employee's retirement

requires use of complex actuarial estimates

Involves 2 accounting entities

employer sponsor - reports pension expense on the income statement, and apension liability which is the sum of two accounts - accrued/prepaid pension cost and additional liability, and an intangible asset -deferred pension cost (if required)

employee sponsor must also maintain these accounts on a memo basis -unrecognized prior service costs and unrecognized gains and losses

pension plan - maintains these accounts: projected benefit obligation,accumulated benefit obligation (for reporting purposes only), vested benefits (for reporting purposes only) and plan assets

Terminology

Accumulated Benefit Obligation (ABO) - actuarial present value of benefits (vested or unvested) attributed by the pension benefit formula to employee services rendered before a specified date, and based on employee service and compensation prior to that date. The ABO differs from the PBO in that it includes no assumptions about future compensation levels.

Actual return on plan assets - difference between fair value of plan assets at the end of the period and the fair value at the beginning of the period, adjusted for contributions and payments of benefits.

Expected return on plan assets - amount