KODE MATA KULIAH: EA 33401

NAMA MATA KULIAH: TEORI AKUNTANSI

PERTEMUAN KE: 21 SC&C CH-14; PENSIONS &

OTHER POSTRETIREMENT BENEFIT
CHAPTER 14
PENSIONS AND OTHER
POSTRETIREMENT
BENEFITS
 Accounting for the Cost of Pension
Plans
• Types of plans
– Defined contribution
– Defined benefit

 Actuarial funding methods

for defined benefit plans
 Cost approach
 Benefit approach
1 Accumulated benefits approach
2 Benefits/years of service approach
Historical Perspective
APB Opinion No. 8

• Measuring total cost

• Allocating cost to proper
accounting
period
• Providing cash to fund the
pension plan
• Disclosure
 APB Opinion No. 8 Issues
• Normal cost
• Past service cost
• Prior service cost
• Actuarial gains and losses
 Accounting Method Under APB
No. 8
• Minimum
– Normal cost
– Interest on unfunded prior or post
service cost
– A provision for any vested benefit
• Maximum
– Normal cost
– 10% of past and prior service cost
– Interest equivalent
 APB’S Inability to Reach A Conclusion

• Two views of pensions

1 A means of promoting efficiency
 therefore, pension costs are associated with the plan and
not specific individuals
2 A form of supplemental benefits
 therefore, they are related to specific employees
 The Pension Liability Issue
• Issues involved in preliminary views
– Period over which to recognize pension costs
– How to spread pension cost over periods
– Whether to include pension
information on balance sheets
 The Pension Liability Issue
• Position taken was that liability should be recognized on
the balance sheet
Pension benefit obligation
+ Actuarial present value of accumulated benefits with salary
progression
– Less pension assets
Balance
+ Plus or minus valuation allowance
Sheet
• Opposition by AICPA
 SFAS No. 87
• Pension information
– should be prepared on the accrual basis
– while retaining three fundamental aspects of previous
requirements
1. Delayed recognition of certain events
2. Reporting net cost
3. Offsetting assets and liabilities
• Changes from APB Opinion No 8:
1. Standardized method of measuring pension cost
2. Immediate recognition of a pension liability when the
accumulated benefit obligation exceeds the fair value of plan
assets
3. Expanded disclosure requirements
 Pension Cost
• Components:
– Service cost
– Interest cost
– Return on plan assets
– Amortization of unrecognized prior service cost
– Amortization of gains and losses
– Amortization of transition amount
• Minimum liability recognition
– When accumulated benefit obligation exceeds plan assets
 Disclosures Required Under
SFAS No. 87
• A description of the plan  Net periodic pension cost by
including components
– groups covered
 A schedule reconciling
– type of benefit formula
funding status with the
– funding policy amounts reported on the
– types of assets held balance sheet by category.
– significant nonbenefit liabilities
– any matters affecting
comparability of information
presented
 SFAS No. 87: Theoretical
Issues

• Projected benefits approach

• The settlement rate
• Return on plan assets
• Reporting the minimum
liability
Accounting for the Pension
Fund
• Requires information on pension plan
financial statements
– Net assets available for benefits
– Changes in net assets
– Actuarial present value of accumulated
plan benefits
– Effects of certain factors
 The Employee Retirement
Income Security Act (ERISA)
• Goals
1. create standards for the operation of pension funds
2. correct abuses in the handling of pension funds
• Concerned only with funding policies
• Does not impact on the determination of
periodic pension expense
 Other Postretirement
Benefits
• SFAS No. 106
– deals with several benefits offered to retired employees
– the most important are health insurance and life insurance
• These benefits are offered in exchange for current
service
– similar to defined benefit pension plans
– should be accounted for as such over the working life of
employees
• Prior treatment was pay-as-you-go
• Economic consequences arguments of SFAS No. 106
 Accounting Treatment Required
By SFAS No. 106

• Service cost
• Interest
• Amortization of prior service costs
• Amortization of transition amount
• Disclosure
 SFAS No. 132

• New requirements including:

1 Standardization of the disclosure requirements for
pensions and other postretirement benefits
2 Requiring the disclosure of additional information on
changes in the benefit obligation and fair value of plan
assets
3 Eliminates some other disclosure requirements
• The benefit to financial statement users includes
disaggregated information on the six components of
pension cost
 SFAS No. 158
• Requires recognition of:
– Overfunding or underfunded DBPP or
OPBP
– Changes in funded status in the year
changes occur
 Financial Analysis of Retirement
Benefits
• Individual components of pension cost have been found
to convey different information to financial statement
users
• Economic consequences of SFAS No. 106
• Hershey
– has a defined benefit pension plan
– offers other postretirement benefits
• Tootsie
– has a defined benefit pension plan
– offers postretirement health care and
life insurance benefit plans
International Accounting
Standards
• The IASC has issued two standards
affecting accounting for retirement
benefits
1. A revised IAS No. 19, “Retirement Costs
and Expenses”
2. IAS No. 26, “Accounting and Reporting
by Retirement Benefit Plans”
 IAS No. 19:
Retirement Costs and Expenses
• Major provisions are:
1. For defined contribution plans:
 periodic contributions are recognized as expenses
2. For defined benefit plans:
a) Current service cost should be recognized as an expense
b) Past service costs, experience adjustments and changes in
assumptions are to be recognized as expenses in a
systematic manner over the working life of current
employees.
c) Preferred method is the accrued benefit valuation method
but projected benefit valuation method is acceptable
 IAS No. 26: Accounting and Reporting
by Retirement Benefit Plans
• Separate reporting standards for defined benefit and
defined contribution pension plans

Objectives

provide information
Defined about the plan and
Contribution the performance of
investments

provide information
that is useful in
Defined Benefit assessing the
relationship between
plan resources and
future benefits