Question

How can a company record pension liabilities when it doesn’t know how much an employee will receive or how long an employee will draw the pension

Answer 1

Accounting of pension liabilities is regulated by 'IAS 19 Employee Benefits'

Accounting of pension liabilities is followed by two method

1) Defined Benefit plan - This specify how much money an employer need to contribute

2) Defined Contribution plan - This specify how many employees will receive money in retirement.

There are four main aspects of pension amount valuation which are current cost, Past service cost, Interest cost, Expected income from plan assets.

Acturial reports are used who determine the fair value of plan assets and obligations of Pension liability using discount rates and other statistical science.

Hence even though we dont know the exact amount but a fair value concept is used as per IAS 19 using statistical data and assumptions.