- Discuss the Components of Annual Pension Cost
In pension accounting, the benefit pension plans necessitate employers to make several assumptions. The assumptions include estimates about the return on assets, estimates of future salary increases and establishment of the discount rate, which the employer will use to calculate the current value of pension payments to make in the future. In making the estimates, the firm should consider employee turnover and life expectancy. Notably, these estimates can influence the annual pension expense and the funding situation of the pension plan. In this context, there are particular constituents in the establishment of annual pension (Newell, Kreuze and Hurtt, 2002).
- Service cost
The service cost refers to the actuarial present value of benefits, which an employee has earned for the current year they have offered service. Employers employ the benefit formula to determine the service cost. Subsequently, employers discount the service cost to establish the present by utilizing the assumed settlement rate (Newell, Kreuze and Hurtt, 2002).
- Interest cost
The interest cost refers to the assumed discount rate multiplied by the start of the year obligation plan, which employers measure as the anticipated benefit obligation. This further shows the increase in plan liabilities within the same year because of time passage. This has an effect on the interest expense for the same year on an existing liability.
- Actual Return on Plan Assets
The fair value of plan assets determines the real return on plan assets in the given year. On the other hand, this decreases the pension expense. Conversely, it presents the investment return for the given year on assets, which the employer might have previously excluded to meet plan obligations (Newell, Kreuze and Hurtt, 2002).
- Amortization of Unrecognized Prior Service Costs
When the employer initiates a plan, which aims to grant retroactive benefits to employees for their services offered previously, results to an instant increase in the aimed benefit obligation, and a deferred cost for possible amortization. Therefore, the previously offered by employees is amortized over the future service years of the same employees (Newell, Kreuze and Hurtt, 2002).
- Amortization of the Transition Amount
Amortization of the current year’s assets gains and losses, liability gains and losses, and the unrecognized net gain or loss can potentially decrease or increase the expenses of annual pension (Newell, Kreuze and Hurtt, 2002).
- Discuss the Composition and Treatment of the Minimum Liability Provision
A lot of time has passed since the adoption of Statement 87; therefore, the requirement to provide a minimum liability has not received much interest. The possible explanation behind this is that the provision of minimum liability will not have influence on all employers. Minimum liability is a condition, which arises when the accrued benefit obligation is greater than the fair value of the plan assets. Apparently, there is no consideration for an opposite case scenario (Bline and Shekel, 2006). In the event that there is an accrued pension liability, records for extra liability established from the difference amid the minimum liability and accumulated pension liability. Notably, the requirements are applicable in the case of single-employer defined pension plans.
This means that the requirements have negligent influence accounting for multi-employers. In addition, the requirement to recognize the minimum liability is relevant in cases where the accrued benefit obligation and the present value of earned benefits is more when compared to the fair value of the plan’s assets. It is appropriate to ensure that application of the minimum liability requirements follows a plan-by-plan approach. Notably, the employer can have extra plan assets in comparison to pension obligations (Bline and Shekel, 2006). However, this will have to recognize the minimum liability because the individual plans are underfunded.
Bline, M. D., & Shekel, D. T. (2006). Interpreting the FAS 87 Minimum liability adjustment.
The journal of corporate accounting and finance, 1(3), 205-213.
Newell, E. G., Kreuze, G. J., & Hurtt, D. (2002). Corporate Pension Plans: How Consistent are
the Assumptions in Determining Pension Funding Status? American journal of business, 17(2). Retrieved from http://www.bsu.edu/mcobwin/ajb/?p=202