Reporting Paper Papa Rydoo ACC541 October 25, 2010 School of Business/Leslie Crews Reporting Paper INTERNAL MEMORANDOM To: CEO From: Papa Rydoo Date: October 25, 2010 Reference: Postretirement Plans Introduction Acquisition of a company leads to many changes in the company and especially in the area of the retirement benefit plans for our company. It is complicated adjusting to benefits plans but with the required reporting, the transition will be smooth. The different types of pension plans we will focus on are; defined contribution, defined benefit, and other postretirement plans.
Defined Contribution Plan (DCP) Defined contribution plan is a retirement plan that an employer promises to contribute toward an employee’s retirement funds periodically. Most companies will match whatever an employee contributes towards the fund. However, there would be no promise as to the ultimate benefits that would be paid into the funds because the retirement benefits are determined by the returned earned on the contributions to the funds during the investment period (Schroeder, Clark, & Cathey, 2005, p. 445).
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DCP is recorded on the financial statements as a pension expense, it is a straightforward transaction and it carries no risk for the employer because all the risks go to the employee. Defined Benefit Plan (DBP) Defined benefit plan is the amount of retirement benefits an employee would receive in the future but the terms are defined by the company. Most companies would have terms that would require employees to have at least 30 years of service, and reach the retirement age between 65-67 years of age to receive full benefits as listed by the company.
Full benefits an employee would receive could be 60% of the average of the highest five yearly salaries. A company must decide the annual contribution to meet benefits requirements in the future (Schroeder, Clark, & Cathey, 2005, p. 445). Pension plans to be received in the future are affected by the following: turnover, morality, length of employee service compensation levels, and earnings from pension fund assets (Schroeder, Clark, & Cathey, 2005, p. 446). Other Postretirement Benefits (OPEB) Other Postretirement Benefits (OPEB) was issued by the FASB pronouncement SFAS No. 06 to deal with additional benefits offered by companies other than the retirement benefits. The lists of benefits are: tuition assistance, day care, legal services, housing subsidies, retiree care benefits, and life insurance (Schroeder, Clark, & Cathey, 2005, p. 445). Although most companies require that retirees to exchange services in other to receive the benefits, SFAS No. 106 requires companies to cost the OPEB over the working lives of the employees that qualifies to receive the benefits. Issues with Pension Benefits
In the early 2000s most companies suffered the deterioration in their funded pension assets because of poor equity market and low interest rates but the pension obligations remained the same. About 20% of the companies have done away with the defined benefit plan (DBP) it was costing too much to find (Schroeder, Clark, & Cathey, 2005, p. 446). Employers have hired actuaries to determine how calculate the right amount of contribution to employee benefits plans. The two funding methods used by the actuaries were the cost approach and benefit approach.
The cost approach uses the estimate approach to determine benefits to be paid in future and how much to fund the benefits. Benefit approach takes the amount of earned benefits to date and estimates the present value. APB Opinion No. 8 In the past there have been many problems with the inconsistency of the measurement of cost with pension plans; allocating the pension costs to the right amount, acquiring cash in the pension plan fund and reporting the transactions on the financial statements.
There were two views involving the recording of pension cost to the company’s financial statements argued by the board members, eventually the board it was agreed upon that annual pension expense would include normal cost as deferred wages payable. Liability issue of pension plan In 1981, the FASB gave several reasons the method of reporting pension cost on the financial statements because of some issues titled “preliminary views”: •What period should the pension cost be recognized? •How should pension costs divided to the individual periods? Should the information on status of pension be included in the statements of changes in financial position? (Schroeder, Clark, & Cathey, 2005, p. 449). These views by the FASB would require companies using the defined benefit plans net pension to recognize liability or net asset on their balance sheet because it uses the matching principle according to GAAP. American Institute of Certified Public Accountants (AICPA) disagreed with recognizing the pension costs as an asset or liability, because the amounts involved according to SFAC No. 6 is not in compliance with the definition of an asset or liability. SFAS No. 7 and Pension cost In 1985, SFAS No. 87 provisions requires a standardized method of measuring net pension cost, immediate recognition of pension liability when accumulate benefits exceed the fair value, and more detailed disclosures on the pension costs (Schroeder, Clark, & Cathey, 2005, p. 451). Choosing a defined benefit pension plan the following components are required to be included net pension cost; service cost, interest cost, return on plan assets, amortization of unrecognized prior service cost, amortization of gains and losses, and amortization of the unrecognized net asset of the transaction amount.
Conclusion The two types of pension benefits plan are defined contribution plan (DCP) and defined benefit plan (DBP), employee carries the risk of the DCP while the employee carries the risk of the DBP. Companies offer post retirement benefits to employees in the form of health and life insurances. Many problems were associated with the recording of pension costs, but due to provision SFAS No. 87 by the FASB there was a standardized method for recording pension costs. References Schroeder, R. G. , Clark, M. W. , & Cathey, J. M. (2005). Financial Accounting Theory and Analysis (8th ed. ). : John Wiley & Sons, Inc.