Wiley GAAP 2008

Concepts, Rules, and Examples

The principal objective of FAS 87 is to measure the compensation cost associated with employees' benefits and to recognize that cost over the employees' service period. This statement is concerned only with the accounting aspects of pension costs. The funding (assets set aside to meet future payment obligations) of the benefits is not covered and is considered to be a financial management matter.

When an entity provides benefits that can be estimated in advance to its retired employees and their beneficiaries, the arrangement is a pension plan. The accounting for most types of retirement plans is covered by FAS 87 and 88. These plans include unfunded, insured, trust fund, defined contribution and defined benefit plans, and deferred compensation contracts, if equivalent. Independent deferred profit sharing plans and pension payments to selected employees on a case‐by‐case basis are not considered pension plans. The typical plan is written and the amount of benefits can be determined by reference to the associated documents. The plan and its provisions can also be implied, however, from unwritten but established past practices.

The establishment of a pension plan represents a commitment to employees that is of a long‐term nature. Although some companies manage their own plans, this commitment usually takes the form of contributions to an independent trustee. These contributions are used by the trustee to invest in plan assets of various types (treasury ...