Defined contribution plan and defined benefit plan
Public Pension Plan
a pension Plan sponsored by a government unit
Private pension plan
a pension Plan sponsored by a business. We concentrate on this one.
Private Pension plans are governed by what federal law?
ERISA employee retirement income security act
Contributory pension plan
A plan whereby both the employer and the employees make contributions to the pension fund; contributions do not have to be in equal amounts.
Noncontributory pension plan
A plan whereby only the employer contributes to the pension fund. We concentrate on this.
What type of pension plan do we concentrate on in this course?
PRIVATE, NONcontributory, DEFINED benefit, FUNDED pension plan
What are the 4 different types of pension plan groups?
1. PUBLIC or PRIVATE
2. Contributory or NONContributory
3. Defined CONTRIBUTION or defined BENEFITS
4. Funded or UNfunded
Defined CONTRIBUTION plan
a plan in which the employer specifies the contributions to the plan, but there is no specification of the amount of benefits to be paid to the retirees. The contributions are usually tied to some base and applied at a specified rate (e.g. 5% of an employee's salary)
Defined BENEFIT plan
a plan whereby the amount of the employer's periodic contribution to the fund is not specified, but the benefits to be paid to retirees are specifically stated. We will concentrate on this type.
In a defined benefit plan contributions are made to the fund by the employer, but
the amount of the periodic contributions are not specified so long as they at least meet the minimum requirements set by ERISA.
Funded pension plan
a plan whereby the employer makes funding contributions to an independent funding agent (e.g., a large bank or insurance company). We will be concentrating on this type.
UNfunded pension plan
a plan whereby the employer retains control of the pension fund. Contributions are still made to the fund except that they are not made to an independent agent.
In a funded pension plan who is responsible for investing and managing the fund assets and making retirement payments?
the FUNDING AGENT (not the employer)
In an UNfunded pension plan who is responsible for investing and managing the fund assets and making retirement payments?
If GM motors has a FUNDED, Defined CONTRIBUTION Plan do they have a contingent liability to employees?
If GM motors has a FUNDED, Defined BENEFITS Plan do they have a contingent liability to employees?
A company's pension cost is determined largely by whom?
How do they do it?
They use Present Value techniques to compute the PV of the future benefits expected to be paid the retirees and the funding requirements.
What accounting term represents a contingent liability to the sponsoring company for their Private, concontributory, defined benefit, funded pension plan?
PBO Projected Benefit Obligation
PBO Projected Benefits Obligation
the present value of the future retirement benefits to be paid to the employees based on future salary levels expected to be in place when they retire.
What do some of the assumptions deal with that actuaries use to determine pension cost?
future interest rates
expected salary levels
expected rate of inflation
current age of employee group
number of covered employees
composition of covered employees
expected retirement dates of employees
life expectancy of employees after retirement
What are the two most important concepts in accounting for pensions?
PBO Projected benefit obligation and Fair value of plan assets
Fair Value of the Plan Assets represents what?
It represents the current market value of all assets in the pension fund. In essence, it embodies the assets currently available to liquidate the PBO.
Under what code does it address how to account for the funded status of a pension plan?
How do you account for it?
Neither the PBO nor the plan assets are recorded in a company's books or financial statements. However, the funded status of a pension plan must be reported in the financial statements as a net asset or liability in the Balance Sheet.
An asset if dr balance
A Liability if cr balance
Find the Pension asset/liability amount.
FV of Plan assets 8,000,000dr.
Pension asset/ liability = 2,000,000 cr.
So this would be a Liability
Do most companies that have pension plans have a pension asset or a pension liability at the end of a year?
How is the funded status of a pension plan reported if it nets to have a
What are the 4 primary components of a company's periodic pension expense and how should they be calculated to find the periodic pension?
What is the 5th one that Dr. Jordan added?
1. SERVICE cost
2. + INTEREST cost on the PBO
3. - a RETURN on FUND ASSETS
4. + AMORTIZATION of Prior Service Costs (PSC)
5. +/- ACTUARIAL GAINS or LOSSES
costs (or PV) of the future retirement benefits earned by the employees during the current year
Interest cost on PBO
the PBO is the PV of all future retirement benefits earned as of a particular date (i.e., the PV of future benefits earned in the past)
IS the PBO formally recorded on the books? What is it similar to in concept?
The PBO is not formally recorded in the books;
It is similar in concept to a long-term liability in that it represents a present obligation.
How does FASB require that interest expense be recorded on PBO?
FASB requires that an interest element on this PBO be recognized as a part of the current period's pension expense.
How does the interest element effect PBO?
It increases the balance of PBO.
Return on fund assets
Although a company makes yearly funding contributions to the pension plan, the fund assets are not actually recdorded in the books.