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Chapter 20: Accounting for Pensions and Post-retirement Benefit (Using a…
Chapter 20: Accounting for Pensions and Post-retirement Benefit
Nature of Pension Plans
Defined Contribution Plan
the employer agrees to contribute to a pension
trust a certain sum each period, based on a formula.
The plan
defines only the employer’s contribution
. It makes
no promise regarding the ultimate benefits paid out
to the employees.
Defined Benefit Plan
A defined benefit plan outlines the benefits that employees will receive when they retire.
Role of Actuaries
companies engage actuaries to ensure that a pension plan is appropriate for the employee group covered
Actuaries are individuals trained through a long and rigorous certification program to assign probabilities to future events and their financial effects.
Accounting for Pensions
Measures of the Pension Liability
The profession adopted the defined benefit obligation—the present value (without deducting any plan assets) of the expected future payments required to settle the obligation resulting from employee service in current and prior periods.
Accounting rules require that, at each measurement date, a company must determine the appropriate discount rate used to measure the pension liability, based on current interest rates.
Net Defined Benefit Obligation (Asset)
Changes in the Defined Benefit Obligation (Asset)
Plan Assets and Actual Return
Using a Pension Worksheet
2015 entries and worksheet
Past service cost
2016 entries and worksheet
Remeasurements
2017 entries and worksheet
Reporting Pension Plans in Financial Statement
Within the financial statements
Within the notes to the financial statements
Other Post-retirement Benefits