Question

Many companies implement pension plans. Normally the obligation that the company has to future retirees is off the balance sheet, same with the pension fund of assets maintained to cover the future obligation. Discuss the appropriateness of the accounting treatment for pensions in terms of required inclusion on the balance sheet and additional disclosures.

Answer 1

Generally there are two types of pension plan:

1. Defined Contribution Plan
2. Defined Benefits Plan

1. Defined contribution plan:

Under defined contribution plan, employer needs to contribute specified amount as contribution to the pension plan. The Investment risk under this plan lies on employees. The Journal entry under this plan is as below:

Pension Exp Dr       XXXX

Cash/ Bank Cr.   XXXX

2. Defined Benefits Plan

Under defined benefit plan employee get a specified amount at the time of retirement on the basis of his average salary. The investment risk lies on employer as under this plan contribution amount is undefined and the contribution is based on the expected future benefits to be paid. The benefits to be paid to the employees are specified under this plan.

The employer records the pension expenses annually by discounting the expected future liability at end of every year and liability is created on year on year basis.

The entry for Pension expenses is as below:

Pension Exp DR                                         XXXX

Defined benefit pension liability               CR              XXXX

Generally pension expenses consist of following:

1.   Current and past Service cost
2. Interest cost
3. Expected return on pension fund
4. Amortization of unrecognized prior service cost
5. Amortization of unrecognized gains and losses

If there are planned assets for the liability than Contribution to the planned assets is shown as Balance sheet asset item by passing the below entry:

Defined Planned assets DR     XXXX

Cash/ bank a/c            CR         XXXX

Further actuarial gain and losses are also recognized on Defined plan assets and Defined benefit pension liability at year end.

Disclosure to footnotes:

1. Discount rate and growth rate used
2. All the assumptions for actuarial valuation
3. Excess of planned assets over defined benefit liability and vice versa
4. actuarial gain and losses on planned assets and defined pension liability