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Example Accounting Essay

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Accounting for Pension Funds

Financial reporting and case study of a defined benefit plan

Powerpoint slides for a presentation:

CONTENTS

INTRODUCTION

Pension Funds make up Huge Long Term Liabilities

Funding is not shown in the Balance Sheet – ‘off balance sheet’

Reporting is essential

Even though accounting for pension funds is extremely complex, a basic understanding of the principles will help the individual appropriately analyse companies and the manner in which they manage the funds.

MAIN TYPES OF PENSION FUNDS

Defined Contribution Plan - Company may make contributions to the plan but no promises on the value of the future benefit to the employee

Defined Benefit Plan - Employee is aware of the terms of the benefits that he/she will receive at retirement. Company is responsible for investing in a fund that will meet promised benefit upon retirement of employee

Factors taken into consideration for Defined Benefit Plans

Length of Service

Salary history at time of retirement

ACCOUNTING FOR DEFINED BENEFIT PLAN

Three main areas of complexity in accounting for a Defined Benefit Plan

First – Series of payments that have been promised far into the future

Second – Accrual Accounting is necessary

Third – Necessary to smooth the year to year fluctuations

ACCOUNTING FOR DEFINED BENEFIT PLAN

FAIR VALUE AT THE START OF THE YEAR

(+) Return on the Plan Assets
(+) Employer Contributions
(-) Benefits Paid

PROJECTED BENEFIT OBLIGATION AT THE START OF THE YEAR

(+) Service Cost
(+) Interest Cost
(+/-) Actuarial Gain/Loss
(+/-) Plan amendment Gain/Loss
(-) Benefits Paid

Figures follow

REFERENCES

Camfferman, K., & Zeff, S. A. (2007). Financial Reporting and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000. New York: Oxford University Press.

Coronado, J. L., & Sharpe, S. A. (2003). Did Pension Plan Accounting Contribute to a Stock Market Bubble?. Brookings Papers on Economic Activity, (1), pp. 323 - 327.

Cullinan, C. P. (1997). Audit Pricing in the Pension Plan Audit Market. Accounting and Business Research, 27(2), pp. 91 - 101.

Fung, A., Hebb, T., & Rogers, J. (Eds.). (2001). Working Capital: The Power of Labor's Pensions. Ithaca, NY: Cornell University Press.

Gold, J. (2005). Accounting/actuarial Bias Enables Equity Investment by Defined Benefit Pension Plans. North American Actuarial Journal, 9(3), pp. 1 - 8.

James, M. L. (2008). The Effect of Changes in Accounting for Defined Benefit Pensions and Other Postretirement Benefit Plans on Companies' Financial Statements and Stakeholders. Journal of the International Academy for Case Studies, 14(2), pp. 51 - 57.

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