An Introduction (Level 3 undergraduate)

1. Pension PlansPension Plans
An IntroductionAn Introduction
(Level 3 undergraduate)(Level 3 undergraduate)
Dr. Mahfoudh Hussein Mgammal
6/ 01/2016

2. OutlineOutline
1.1. IntroductionIntroduction
2.2. What is a pension plans?What is a pension plans?
3.3. Types of Pension PlansTypes of Pension Plans
4.4. Defined Contribution PlansDefined Contribution Plans
5.5. Defined Benefit PlansDefined Benefit Plans
6.6. Accounting for PensionsAccounting for Pensions
7.7. ConclusionConclusion

3. IntroductionIntroduction

Pension FundingPension Funding – the cash contributions– the cash contributions
that are made to the pension plan.that are made to the pension plan.
Pension AccountingPension Accounting – the annual pension– the annual pension
expense calculation and disclosure of a pension plan’s assetsexpense calculation and disclosure of a pension plan’s assets
and liabilities in a company’s financial statement.and liabilities in a company’s financial statement.

4. What is a pension?What is a pension?
 Pension Plan “A type of retirement plan,
usually tax exempt, wherein an employer
makes contributions toward a pool of
funds set aside for an employee's future
benefit” (Investopedia).

5. Types of Pension PlansTypes of Pension Plans
1.1. Defined contribution:Defined contribution:
employee bears risk, no firm liabilityemployee bears risk, no firm liability

6. Defined Contribution Plans
 Employer contributes a defined sum to a third party
– Ownership of plan assets assumed by plan trustee
 Employee assumes the economic risk
– No guarantee made by employer as to benefits paid
 Cost of the plan is known with certainty in the current
year

7. Defined Contribution Plans
 Liability reported if contribution (funding) is less than
required
 Asset reported if the amount contributed is more than
required for the period
 the employer may be obligated to make contributions for
previous employee services when there is an
amendment to the plan.

8. Types of Pension PlansTypes of Pension Plans
2.2. Defined benefit:Defined benefit:
firm bears risk and has liability (our focus)firm bears risk and has liability (our focus)

9. Defined Benefit Plans
 It is pension benefits to be received by employee after
retiring
 There will be enough pension assets to pay employer’s
obligation to employees. Example: employee will receive an
annual pension benefit on retirement .
 Pension benefits formula:
(Employee’s years of service and expected salary level at
retirement are usually key variables)
 Employer is the beneficiary of a defined benefit trust
 Pension obligations belong to the employer

10. Defined Benefit Plans
 The employer remains liable to ensure benefit payments, no
matter what happens in the trust
 Employer assumes economic risks
 Cost of plan not known with certainty, as it depends on
uncertain future variables.
 The pension expense is not same as cash funding contribution

 Actuarial assumptions used extensively in accounting for
defined benefit plans

11. Accounting for PensionsAccounting for Pensions
 Pension cost should be accrued and recognized inPension cost should be accrued and recognized in
accounting periods that benefit from employees’ serviceaccounting periods that benefit from employees’ service
 Two approaches to accounting for pension expenseTwo approaches to accounting for pension expense
– Immediate recognition approachImmediate recognition approach
 Allowed under PE GAAPAllowed under PE GAAP
– Deferral and amortization approachDeferral and amortization approach
 Required under IFRSRequired under IFRS
 Allowed under PE GAAPAllowed under PE GAAP

12. ConclusionConclusion
Introduction
and Benefit
Plan Basics
•Introduction
•Defined
contribution plans
•Defined benefit
plans
•Nature of pension
plans
Defined Benefit Pension
Plans
•The employer’s obligation
•Plan assets
•Funded status
•Benefit cost components
•Immediate recognition approach
•Deferral and amortization approach
•Other considerations
•Comparison of results
•Other defined benefit plans