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Pension Accounting Impact of changes on usefulness

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SFAS 158 made revisions on how pension plans and postretirement benefit information should be reported in the financial statements.

Refer to Fatality Analysis Reporting System (FARS) to identify the changes that were made, both within the financial statements themselves and in the required disclosures.

Click http://www.fasb.org/pdf/fas158.pdf to learn how to access FARS.

Based on your analysis of the information provided, answer the following:
•What are the current requirements for reporting pension plan and postretirement benefit information in the financial statements?
•What are the changes that were made from previous reporting requirements?
•Have these changes improved reporting for the users of financial statements?

In your evaluation, you should consider how the changes either improved or did not improve the characteristics of usefulness and understandability identified in the conceptual framework for financial reporting, such as the following:
•Representational faithfulness
•Verifiability
•Conservatism
•Full disclosure
•Predictive or feedback value
•The definitions of financial statement elements

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Solution Preview

FARS = Financial Accounting and Reporting System

•What are the current requirements for reporting pension plan and postretirement benefit information in the financial statements?

Employers offering pension plans must disclosure the plans and their general features in a footnote. For defined contribution plans, the employer must disclosure the contribution, if any, in the current year and pension expense equals the contribution. For defined benefit plans, extensive disclosures of assumptions, components of pension expense, activity in the pension asset and pension obligation accounts and net funding status must be disclosed. In addition, the net pension asset/liability must be booked as an asset/liability and the change in pension assets and pension liabilities that are not booked into income must be booked into other comprehensive income.

•What are the changes that were made from previous reporting requirements?

The new changes required that employers offering defined benefit plans and post-retirement benefit plans report the funding status (excess of pension assets over pension obligations "overfunded" or the excess of pension obligations over pension assets "underfunded"). Also, the net over or under funded amount must be booked as an asset (overfunded) or liability (underfunded) on the book of the employer offering the benefits. The new standard required that the employer recognize gains, losses and prior service costs that are not recognized in ...

Solution Summary

Your discussion is 993 words and two references. It discusses how each aspect improved or declined with the pension standard. The pension requirements are discussed in general as well as a summary of the changes.

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Do these gains or losses impact the benefits the employee will eventually receive?

Do these gains or losses impact the benefits the employee will eventually receive?

Pension expense components include interest costs, service costs, related fees, gains and losses on the plan, and amortization from the prior service costs on the plan. The interest rate for pension expense is determined by using the projected benefit obligation that is outstanding for the current period. The amount of the projected benefit expense is calculated using the interest rate for the period to determine the total amount of interest. Prior service costs are amortized because the firm cannot receive credit for a future benefit unless it is amortized based on the credit in the future. The components of pension expense differ among the various types of contribution and benefit plans in terms of gains and losses. Most companies use an actuary approach, which allows management to use the expected rate of return on the plan and the total asset value from the pension assets, which is then calculated to determine the expected return. Although this isn't the only method used, it is by far the most common method used. Each factor is basically weighted separately to determine the final pension expense for the accounting period.

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