Problem Solving Survival Guide for Intermediate Accounting, 15th Edition, Instructor's Manual: Volume II: Chapters 15-24

CHAPTER 20

ACCOUNTING FOR PENSIONS AND POSTRETIREMENT BENEFITS

OVERVIEW

A pension plan is an arrangement whereby an employer provides benefits to employees after they retire. A defined benefit plan defines the benefits the employees will receive at the time of retirement. The accounting for a defined benefit plan is complex. Pension cost is a function of service cost, interest on the pension liability, return on plan assets, amortization of prior service cost, and recognition of gains and losses. Numerous disclosures are required. Accounting on an employer's books for a defined-benefit pension plan is the focus of this chapter. The accounting for health care and other benefits provided to retirees is similar to the accounting for pension plans. The topic “other postretirement benefit plans” is also covered in this chapter.

SUMMARY OF LEARNING OBJECTIVES

  1. Distinguish between accounting for the employer's pension plan and accounting for the pension fund. The company or employer is the organization sponsoring the pension plan. It incurs the cost and makes contributions to the pension fund. The fund or plan is the entity that receives the contributions from the employer, administers the pension assets, and makes the benefit payments to the pension recipients (retired employees). The fund should be a separate legal and accounting entity; it maintains a set of books and prepares financial statements.

  2. Identify types of pension plans and their characteristics. The two most common ...