Pension Plans Reporting for and Types

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A pension plan may be defined as that calculated retirement plan that has been set up by a corporation, a government, a labor union or any other organization for this case for its employees. Here the employer will make substantial contributions in a set aside pool of funds which is meant to cater for the employee's future that is after he has seized working due to age. These contributions that have been set aside are then invested by the employer on behalf of the employee. The employee shall then receive his benefits upon retirement.

This is simply a scheme or a method in which a current employee shall transfer part of his net current income towards certain retirement fund or scheme. They are of two broad kinds i.e. the contribution plans that are defined and the benefit plans that are defined. Looking at the benefit plans that are defined or explained we finds that this is where the employee is contributing part of his income towards the pension fund but he has assurance and guarantee from his employers that he shall receive a certain amount after retirement. This type of plan does not look at the way the investments from the pool are fairing in the market. The employee has prior knowledge as to the amounts he shall receive after he retires.

In the second approach which is the contribution plans that are defined the employer will make contributions that are predetermined for the employee. Here after the funds are pooled in a common pool for investment purposes then they are expected to bear certain results. What the employee receives shall be dependent on the general performance of the investments and not on his actual contribution. This will only be favorable if the investments make profits for the employee's case.

Defined Contribution Plan and Defined Benefit Plan

Defined Benefit Plan

Having a glance at the benefit plans that are defined or explained we find that this is where the employee is contributing part of his income towards the pension fund but he has assurance and guarantee from his employers that he shall receive a certain amount after retirement. This type of plan does not look at the way the investments from the pool are fairing in the market. The employee has prior knowledge as to the amounts he shall receive after he retires.

This particular plan is more certain as compared to other approaches as it gives the employee the power to already start planning for his retirement as he is certain of the amounts he is bound to receive from the contribution plan. It's thought to be safer due to its certainty degrees being so high and is preferred by those contributors who are risk averse and do not want unnecessary risks that can be avoided. This approach is more popular in developing economies as they have very high uncertainties as to the movements of investments.

Defined Contribution Plan

This shall be defined as that which has the contribution plans that are defined by the employer and he will make contributions that are predetermined for the employee. Here after the funds are pooled in a common pool for investment purposes then they are invested in certain projects and are then expected to bear certain incomes. What the employee receives shall be dependent on the general performance of the investments and not on his actual contribution. This will only be favorable if the investments make profits for the employee's case.

This method is preferred by the risk takers who have in mind the maximization of their contributions. This is most common in developed economies as the contributors there usually have other investments and thus can be able to absorb a loss and as well can do well with a profit. It is more risky to use this type of plan as opposed to the first one in the sense that the risks involved are not equivalent. The benefit plan offers certainty while the contribution does not offer certainty.

Accumulated Benefit Obligation

This shall be defined as an estimate of the current and present value of the pension of a certain employee. It majorly assumes that the employee shall stop working for the firm soon after this estimate has been made. For many companies the accumulated benefit obligation is always characterized as a pension liability estimate.

This is also an actuarial present valuation of these contributory benefits. If these contributory benefits are vested or not vested they shall all be related by the pension benefit formulae to employee services rendered before a certain date that has been set aside and shall also be based on the services of the employee and the compensation up to date using the existing levels of the wages or salaries or the means of compensation for the services rendered.

Projected Benefit Obligation

This is an estimate of the present value of the liability of an employee's pension. The projected benefit obligation assumes that the employee will continue to work and make contributions to the pension plan. It assumes that contributions will increase as the employee's salary increases. This is also an actuarial present valuation as to the date that all the benefits attributed by a person to the pension benefit formulae to services of the employees are performed before that particular specified and set aside date. This projected benefit obligation is mainly measured using assumptions as to the future levels of compensation if the formulae of the pension benefit are based on the future levels of the wages and salaries or the specified means of compensation as to the work done.

Relationship between the two above

The accumulated benefit obligation is an actuarial present valuation of these contributory benefits. If these contributory benefits are vested or not vested they shall all be related by the pension benefit formulae to employee services rendered before a certain date that has been set aside and shall also be based on the services of the employee and the compensation up to date using the existing levels of the wages or salaries or the means of compensation for the services rendered while the projected benefit obligation is also an actuarial present valuation as to the date that all the benefits attributed by a person to the pension benefit formulae to services of the employees are performed before that particular specified and set aside date.

This projected benefit obligation is mainly measured using assumptions as to the future levels of compensation if the formulae of the pension benefit are based on the future levels of the wages and salaries or the specified means of compensation as to the work done

The Funded Status

The funded status as in relation to the pension plans can be explained as that status of the particular pension fund or plan that has accumulated assets that have been set aside for the payment of or for the re compensation of post retirement or just retirement benefits to the contributories who are mainly the employees. If you have an unfunded plan for example, this is also referred to as a pay as you go organizational structure of finances will not have assets that have been set aside and in this case these retirement benefits shall be set aside and are usually paid from the employer contributions that had been deposited to a central account.

The funded status will be equal the plan assets less the projected benefit obligation. The accumulated benefit obligation is not inclusive here. The funded status of the pension will have two primary elements which are the liabilities of the future and the pension fund or plan assets that shall be used to pay for retiree benefits. In the past companies had to include this particular amount owed to employees based on their projected obligation in the footnotes to the particular financial statements.

However, during the time when they shall be writing the financial statements the international accounting bodies have now proposed that the companies shall now be moving their pension deficits or if they have surpluses onto the statement of financial position instead of just recording them in the footnotes section.This action of moving the pension plans to the statement of financial position rather than just have them as footnotes in the books of accounts as well as any other post retirement benefit obligations in here will make many companies have to recognize a big liability which could also in the process cut down the net worth of these companies and could also hinder the possibility to hinder dividend payments or jeopardize their lending agreements with other persons.

The funded status will be equal the plan assets less the projected benefit obligation. The accumulated benefit obligation is not inclusive here. The funded status of the pension will have two primary elements which are the liabilities of the future and the pension fund or plan assets that shall be used to pay for retiree benefits. Thus these companies will have to recognize a big liability which could also in the process cut down the net worth of these companies and could also hinder the possibility to hinder dividend payments or jeopardize their lending agreements with other persons

Reporting of postretirement benefits in accounting statements

Using the generally accepted accounting principles we are guided to account for these post retirement benefits as follows. Please note that in the U.S it is slightly different on how they report these post retirement benefits in the books of accounts. Here we shall use the method of projected method to match these expenses to the different periods of service. The smoothing shall be accomplished by having a deferred recognition of the laid down and calculated actuarial gains or losses. There shall be amortization of prior service costs. In the international standard however the past service costs shall be recognized immediately and shall not be deferred at any one time. This means that these past expenses will be expensed immediately.

The looses and gains attributable to the actuarial valuations can be recognized in equity rather than in the earnings as under the amendments of the IAS 19 which started being effective in 2006. If in the earnings you may either have an immediate recognition of the amortization. In the current years statement of financial position there shall be no minimum liability that shall be reported and there shall be a limitation in the limitation of the recognition of the pension assets by the company.

When the contributors curtail to their pension plans they will incur losses and gains which are recorded differently since the employee will have terminated their pension plan however in the U.S it shall be recorded differently since they use their own particular standards. The termination benefits shall be expensed when the employer is committed to paying these. The expense for compensations on equity benefits are not recognized but only the current agenda items shall be recognized. Services previously rendered and all costs related to the retirees and the actively vested employees will be expensed and all the particular benefits to the multi employer shall be recognized too. There are complex rules set aside for the recording of these pensions in the statement of financial position in line with the generally accepted principles and also being in relation to the asset recognition. The U.S accounting policies are currently being merged in order to have just one accounting standard such that even the recognition of the actuarial valuations and the other changes are applicable uniformly to the whole of the world uniformly.

What is an actuary and what is the actuary's duty in this process?

Actuaries will normally play a very vital and big role on advising the companies on pension schemes and plans. Their services will range from a wide scope in that they may be included in defined risk areas to risk sharing or even to defined contributions schemes set aside under trust or contract. These professionals' advice trustees of the pension schemes and sponsor companies on any issues pertaining the pensions which may include scheme funding or even investments as to the same. The actuaries are important in that they will advice also on how to account for these pensions, designing these pensions, management of these risks, options of the defined risks and any corporate transactions and here is only when there can be a fundamental effect on the outcome. They may also be useful when scheme members have quite complex situations arising like when there are changes in the tax system and this affects the pension plans.

Actuaries will not be working alone in this but will collaborate with the pension lawyers and any other pension administrators in order to ensure that the schemes are all running well and they have been up to date and the standards of maintenance are high. As time goes by the actuary will be needed more as there will be changes in the investment markets and also with the ever changing laws, regulation and the guidance an actuary will be very vital in giving the advice of the future to ensure that the pension plans lack any encumbrances.

The actuaries will always advice the trustees of the pension schemes and sponsor companies on any issues concerning the pensions which may include scheme funding or even investments as to the same. The actuaries are important in that they will advice also on how to account for these pensions, designing these pensions, management of these risks, options of the defined risks and any corporate transactions and here is only when there can be a fundamental effect on the outcome. They may also be useful when scheme members have quite complex situations arising like when there are changes in the tax system and this affects the pension plans.

What are the legal considerations of such plans and what government agencies exercise control

The government will ensure that there are pension lawyers and any other pension administrators in order to ensure that the schemes are all running well and they have been up to date and the standards of maintenance are high.

The government will require the actuaries to always advice the trustees of the pension schemes and sponsor companies on any issues concerning the pensions which may include scheme funding or even investments as to the same. The actuaries are important in that they will advice also on how to account for these pensions, designing these pensions, management of these risks, options of the defined risks and any corporate transactions and here is only when there can be a fundamental effect on the outcome. They may also be useful when scheme members have quite complex situations arising like when there are changes in the tax system and this affects the pension plans.

Provide a discussion of all potential scenarios and the relevant accounting requirements

By applying the generally accepted accounting principles we are guided to account for these post retirement benefits as follows. Please note that in the U.S it is slightly different on how they report these post retirement benefits in the books of accounts. In this case we shall use the method of projected method to match these expenses to the different periods of service. The smoothing shall be accomplished by having a deferred recognition of the laid down and calculated actuarial gains or losses. There shall be amortization of prior service costs. In the international standard however the past service costs shall be recognized immediately and shall not be deferred at any one time. This means that these past expenses will be expensed immediately.

These particular looses and gains attributable to the actuarial valuations can be recognized in equity rather than in the earnings as under the amendments of the IAS 19 which started being effective in 2006. If in the earnings you may either have an immediate recognition of the amortization.

In the current years statement of financial position there shall be no minimum liability that shall be reported and there shall be a limitation in the limitation of the recognition of the pension assets by the company. When the contributors curtail to their pension plans they will incur losses and gains which are recorded differently since the employee will have terminated their pension plan however in the U.S it shall be recorded differently since they use their own particular standards.

There are termination benefits which shall be expensed when the employer is committed to paying these. The expense for compensations on equity benefits are not recognized but only the current agenda items shall be recognized. Services previously rendered and all costs related to the retirees and the actively vested employees will be expensed and all the particular benefits to the multi employer shall be recognized too.

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