Pensions (FAS 87); Post
Retirement Benefits (FAS
106); Post Employment
Benefits (FAS 112);
Disclosure about Pensions,
etc. (FAS 132 [R]) –
amendment of FAS
87,88,106
Dr. Heidemarie Lundblad
1
•Pension:
Regular payments made to employees
after retirement. Covered under ERISA
(Employee retirement income security act,
1974) Protected by PBGC (Pension benefit
guarantee corporation)
2
Type of Pension Plans:
Defined Benefit Plan
Defined Contribution Plan
Cash Balance Plan
3
Defined Contribution Plan
 Amount of contribution is predetermined
(may be adjusted periodically). Amount
of future benefit varies, depends on
variety of factors. Employees bear risk..
4
Defined Benefit Plan
 Amount of future benefit predetermined
on the basis of some type of actuarial
model. Contribution depends (may vary)
on a variety of factors. Company bears
risk.
5
Cash Balance Plan
A controversial hybrid between defined
contribution and defined benefit plan.
“Portable” but lower benefits for older
employees
Employer bears risk. For accounting
purposes is treated like defined benefit
plan
6
Type of Benefit Obligation
Projected Benefit Obligation
PV of pensions earned by employees in
previous periods, vested or non vested
(based on expected future salary levels)
7
Type of Benefit Obligation
Vested Benefit Obligation
Only vested obligations, based on current
salary levels
(amount payable to employees if plan is
terminated now)
8
Type of Benefit Obligation
Accumulated Benefit Obligation
Vested or non-vested obligations, based on
current salary levels
(amount payable to employee if s/he quits
now)
To vest requires five years of service under
ERISA
9
Type of Benefit Obligation
Unfunded Accumulated Benefit Obligation
Minimum Liability to be disclosed
10
Type of Service Cost
Current Service cost
Accumulated prior service costs
11
Type of Service Cost
Current Service cost
PV of pensions earned by employees in the
current period
12
Type of Service Cost
Accumulated Prior Service cost
PV of pensions awarded to employees for
work in periods prior to adoption of pension
plan or
as a result of retroactive changes in the plan.
(Amount not yet taken into income)
 NOTE: Companies are not required to
immediately recognize the expense. Since
employees are still working, this cost may be
amortized over the remaining service life.
13
Elements of Plan Assets,
Pension Expense and
Liability
Service Cost (current and prior)
Plan Assets
Interest cost
Pension Expense
Firm’s Total Obligation
Unfunded (Accrued) Pension Liability or
Prepaid Pension Cost
Amortization of Prior Service Costs
Minimum Pension Liability
14
Elements of Plan Assets,
Pension Expense and
Liability
Plan Assets
Σ of prior contributions
+/- Σ of income (loss) in prior periods
+/- income (loss) in current period
- Σ payments made to retirees
+ current contribution
15
Elements of Plan Assets,
Pension Expense and
Liability
Interest cost
Beginning projected benefit obligation X
discount rate
16
Elements of Plan Assets,
Pension Expense and
Liability
 Pension Expense
Current service cost
+ interest cost
- expected return on plan assets
+ amortization of unfunded prior service cost
+/- loss (gain) due to difference between expected
and actual return on plan assets
+/- loss (gain) due to difference between expected
and actual value of plan assets
Recognized to the extent that gain (loss) exceeds
10% of the greater of obligations or fair value of
17
plan assets
Elements of Plan Assets,
Pension Expense and
Liability
Firms total Obligation
Projected Benefit obligation
+ Accumulated prior service costs
+ accrued interest
=/- changes in plan adopted retroactively
+ Current service cost
- payments made to retirees
18
Elements of Plan Assets,
Pension Expense and
Liability
Unfunded (Accrued) Pension Liability or
Prepaid Pension Cost
Difference between Pension Expense and
Funding
19
Elements of Plan Assets,
Pension Expense and
Liability
Amortization of Prior Service Costs
1. Straight line method: Cost / Average
remaining service life of employees
2. Years of future service method: Cost X #
of employees working / Σ of expected years
of future service
20
Elements of Plan Assets,
Pension Expense and
Liability
Pension Liability
Fair Value of Plan Assets minus Projected Benefit
Obligation
1. If unfunded pension liability < pension liability
--> recognize difference in current period and
2. debit Accumulated other comprehensive
income (AOCI)
21