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Chapter 20
(a)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Postretirement Pension Benefits
Date: February 10, 2013
Defined benefit pension plans are so-named because the benefit provided to the
employee is defined so that most of the risk of funding the plan is placed on the
employer. The following information on defined benefit plans is addressed in
FASB ASC 715-30
Defined Benefit Pension Plans:
> Defined Benefit Pension Plans
05-4 The General Subsections address the fundamentals of defined benefit
05-5 In most cases, services are rendered over a number of years before an
employee retires and collects or begins collecting the pension. Even though the
In defined contribution plans, no set benefit level is stated. The risk associated
with investment and the determination of the level of funds available to fund a
retirement benefit rests on the employee, rather than the employer. The following
information on defined contribution plans is outlined in FASB ASC 715-70-20
Defined Contribution Pension Plans:
A plan that provides postretirement benefits in return for services rendered,
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specifies the amount of benefits the individual is to receive. Under a defined
contribution postretirement plan, the benefits a plan participant will receive
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(b)
Memorandum
To: Eric Conner and Phil Martin, CM2
From: L. Harbach
Re: Underfunding of Pension Expense
Date: February 10, 2013
Accounting for pension plans requires measuring the cost and identifying it with
the appropriate time periods. There are five components of pension cost:
1. Service cost the expense caused by the increase in pension benefits
payable (the projected benefit obligation) to employees because of their
services rendered during the current year.
4. Amortization of unrecognized prior service cost the allocation of pension
plan amendments (retroactive benefits) to pension expense in the future,
specifically to the remaining service years of the affected employees.
5. Gain or loss Two items comprise this gain or loss: (a) the difference between
Note that the gain or loss resulting from actuarial assumption modifications to the
projected benefit obligations and the difference between actual and expected
return on plan assets are recorded to an Unrecognized Gain/Loss account and
do not affect net income in the period incurred. The FASB decided to reduce the
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performance drops significantly, as it did in the recent recession, pension plan
asset funds can decline significantly.