Anne M. Shields, Gerrard, R. Taylor, Greg, Bol, Jasmijn C. Edward M. Werner, Rajesh K. Samwick, Raghu, More about this item Statistics Access and download statistics Corrections All material on this site has been provided by the respective publishers and authors.
You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:accper:vyip Pension Accounting. Overview of Pension Accounting A pension is a contract for a fixed sum to be paid regularly to a person, typically following retirement from service. Learning Objectives Summarize how a company reports their pension plan on their financials statements.
Key Takeaways Key Points The two most common are the defined benefit and the defined contribution plan. Key Terms contribution : An amount of money given toward something.
Licenses and Attributions. The massive increase in federal deficits and Fed balance sheet growth has consequences. Tax increases especially for wealthy retirees are likely. You may be trading off saving taxes now but paying much more in a few years when that money must be withdrawn anyway. An IRA is another example of a defined contribution plan, but one where the individual has more authority over the options for investing.
These plans are not employer specific. Now might be a good time to consider a Roth IRA conversion, i. Again, this might be a good idea because of the likelihood of higher future tax rates. The Virus Crisis has forced us all to reexamine our lives. Even if we can stay healthy, we should take this opportunity to reexamine the pension situation as well. In the immortal words of Benjamin Franklin, we should aspire to be healthy, wealthy, and wise.
The University of Waterloo is situated on the Haldimand Tract, the land promised to the Six Nations that includes six miles on each side of the Grand River. Our active work toward reconciliation takes place across our campuses through research, learning, teaching, and community building, and is centralized within our Indigenous Initiatives Office. The new accounting rules for pensions affect three areas of accounting: recognition, estimation and disclosure. Recognition refers to what must be formally included in the financial statements themselves.
For cities, these financial statements include the government-wide Statement of Net Assets and the government-wide Statement of Activities. The Statement of Net Assets is the balance sheet, and shows assets, liabilities, and their difference, net assets. The Statement of Activities in the counterpart to the income statement, and shows flows of resources that affected the net assets over the period.
Estimation refers to the methods used to arrive at the numbers to be formally included in the financial statements. Disclosure refers primarily to the material in notes to the financial statements containing additional or explanatory information about items recognized in the financial statements or items that are omitted from the financial statements.
Overall, the new pension rules brought recognition, estimation and disclosure closer to what is done in the private sector. To go into more detail, we should first make more clear exactly what we're talking about here. There are basically two types of pension plans: defined benefit plans and defined contribution plans.
In a defined contribution plan, the employer is responsible for making specified contributions to the pension fund and that's the end of it for the employer. What the beneficiaries ultimately receive is not specified and the employer makes no promises in that regard. Defined contribution plans do not require any fancy accounting for the contributor because its obligation begins and ends with the contributions.
There is no need to estimate the eventual benefits received—it is up to the beneficiaries to keep track of their own situations. In a defined benefit plan, the employer makes promises about the benefits to be received by beneficiaries and is responsible for fulfilling these promises the employer takes all of the investment risk.
These promised benefits entail a financial liability for the employer. This is where funding comes in—if benefits are promised, what is being done to make sure these promises can be kept? In the private sector, both ERISA [Employee Retirement Income Security Act] requirements and the tax law, which determines the deductibility of contributions to pension funds, influence the funding decisions. Funding of government-promised pensions is a political matter, not a tax or regulatory one.
So the new rules are aimed at defined benefit plans, and make required accounting recognition and disclosures much closer to what is done in the for-profit sector. The net pension obligation, i. The amount of recognized pension expense in the statement of activities income statement will increase, because it will include interest on the net pension obligation, as well as the present value of the future pension benefits earned in the current year by employees.
Pension expense will also take into account any substantive changes in the liability due to changes in the terms of the plans. As in the private sector, these will be amortized into pension expense over a period of time that depends on the number of years the beneficiaries of the pension plan are expected to work.
As we discussed above, the new rules will require recognition of the net pension obligation in the statement of activities. This amount is not currently recognized.
They also affect the recognition of pension expenses. Some information about these amounts is disclosed in the notes to the financial statements, but it is hard to dig out. For example, consider the financial statements of the city of New Haven for the year ended June 30,
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