Pensiones

Accounting for Pensions

A. Defined Contribution Plan--a defined contribution plan is a pension plan
where the contribution that the employer agrees to make to a pension trust
is defined by a formula
1. Accounting
a. Income Statement
1) Pension Expense--pension expense is recorded each period for
the amount that the employer is obligatedto contribution to
the pension trust
b. Balance Sheet
1) Prepaid / Accrued Pension Cost--a prepaid asset or an accrued
liability is recorded for the difference between the amount
contributed to the pension trust and the pension expense
c. Illustration--a corporation provides a defined contributionpension plan for its employees; during year 1 the corporation had
a required contribution of $50,000 under the plan and made a
contribution $50,000 to the pension trust; during year 2 the
corporation had a required contribution of $50,000 under the plan
and made a contribution of $55,000 to the pension trust; during
year 3 thecorporation had a required contribution of $50,000
under the plan and made a contribution of $40,000 to the pension
trust
Year 1:
Pension Expense 50,000
Cash 50,000

Year 2:
Pension Expense50,000
Prepaid / Accrued Pension Cost 5,000
Cash 55,000

Year 3:
Pension Expense 50,000
Cash 40,000
Prepaid / Accrued Pension Cost10,000

2. Disclosure
a. Description of the plan, including employee groups covered
b. The basis for determining contributions
c. The nature and effect of significant matters affecting
comparability from period to period

B. Defined Benefit Plan--a defined benefit plan is a pension plan where the
benefits that the employee will receiveat the time of retirement are
defined by a formula

1. Basic Formula
a. Accounting
1) Income Statement
a) Pension Expense--pension expense is recorded each period
for an amount equal to service cost increased by interest
on the projected benefit obligation decreased by the
expectedreturn on plan assets
I) Service Cost--service cost is the actuarial present
value of benefits attributed by the pension formula to
employee service during the current period
II) Interest on the Projected Benefit Obligation--interest
on the projected benefit obligation is theinterest for
the period, computed using the settlement rate, on the
projected obligation outstanding during the current
period
A) Projected Benefit Obligation--the projected benefit
obligation is the actuarial present value of both
vested andnonvested benefits accrued to date based
on all years of service performed by employees and
the employees' future salary levels
B) Settlement Rate--the settlement rate is the
discount rate at which pension benefits could be
effectively settled using annuity...