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Pension Plan Accounting

One of your friends just heard a lecture on accounting for defined-benefit pension plans. "I can't believe how complicated that is," she says. "And half of the information used is just a guess. I think we should go back to the cash basis of reporting for these plans. At least it was reliable."

Using your knowledge of how the five components of pension accounting are measured,
- Explain how pension expense used to be calculated and why the cash basis is no longer accepted by U.S. GAAP.
- Identify and describe the six pieces of information needed to calculate pension expense.
- Describe the calculation used to arrive at pension expense.
- Explain the areas of accounting for pensions that continue to be controversial and under debate. How do you think these areas may change in the future?

Justify your answers with examples and reasoning.

Solution Preview

Earlier pension expense was did not consider the underfunded or overfunded status in a complete and understandable way. The historical values of the pension funds were recorded and the accountant did not recognize fully the changes in earnings the financial effects of events affecting the plan's funded status. Earlier the accountant could delay recognition of economic events that affected the costs, recognize assets for a plan that was underfunded, The underfunding or overfunding was mentioned in the notes to the financial statements. Earlier reconciliation was provided in the notes, Now the need for reconciliations is eliminated and the financial reporting is more understandable. Currently, according to the GAAP, pension expense calculation is done on accrual basis this eliminates the cash basis of accounting for pension ...

Solution Summary

The answer to this problem explains changes in pension plan accounting. The references related to the answer are also included.