Pension Accounting, Please help!
Under FAS 158, when a company recognizes the funded status on its Balance Sheet, how does the Balance Sheet Balance?
For example:
A company's has an OVERfunded pension plan of $500, which it records on the balance sheet as an asset.
A = L + E
$500 = ? +?
Capital allocated to Reserve Account Class 3 (Pension) - Obligation to Pension Account = $500
I don't expect the obvious parsing is the answer you are looking for.
My question is more conceptual than technical. I am having a hard time visualizing how the Balance Sheet actually balances when the value of the pension assets fluctuates in an accounting period.
For example: If the pension assets dramatically decrease in an accounting period, then the fair value of the plan assets will decrease; however, assuming no change in the PBO, the PBO will stay the same.
Beginning Acct'g Period: Assuming the funded status = 0
A = L + E, the balance sheet will balance
Next Acct'g Period: the funded status will be < 0
A < L + E, the balance sheet will not balance because the PBO will be greater than the fair value of the plan assets.
What are the adjustments, or actions, that the company will take to make the balance sheet balance?
Sounds like an OCI (Other Comprehensive Income) item thus recorded in Equity Accounts.
I am inclined to agree with you Pat. It is my speculation that an offsetting adjustment is located in AOCI, but I am still not sure.
I'm not up to date on pension entries so my answer was speculation only. Good luck.
Can anyone recommend an accounting textbook that would have an answer to this question?
No textbook but here's support for my speculation.
From BSX 10-K: FASB Statement No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, we use a December 31 measurement date for these plans and record the underfunded portion as a liability, and recognize changes in the funded status through other comprehensive income.
Projected Benefit Obligation (PBO) less Fair Value of Plan Assets = Underfunded PBO Recognized
Pat - very nice find.
Great support for your speculation. I am thinking that BSX is most likely an exception compared to most other companies that used DB pension plans. Note that CAT, T, GE all have DB pension plans, but in their case they record the increases/decrease of the funded status through the net periodic pension cost that flows through net income, not primarily through OCI.
I came to this conclusion b/c BSX does not record any net periodic pension cost in the DB pension footnote.
Pensions are Separate Trusts Governed by ERISA. I thought a contribution to a pension
trust is an irrevocable assignment per restricted accounts catagory 3 (trust fund).
Curious. Why is "overfunding" an "income" item, distinguished from an asset of the entity?
Current accounting excludes "underpayments" to pension funds (so-called mark-to-market
rules). I suppose the recognition rule requires listing at some point. Hmmm.
I remember the 1980s "takeover" era when corporations were purchased, in part, with
capital from lenders based on available cash in pension funds, revealed on balance sheets.
Speculation:
Entity allocations to employee pension funds are expenses in current year, hence not
"income". You Ledgerer's require recognition associated with expense (double entry
rule). Ergo, income allocation to an account with current year expense less "overfunding"?
Ledger accounting and tax accounting may differ on pension trust asset classification.
Below find quote relating to current year vs. subsequent allocation to expense. I suspect
options to purchase stock contributed to a pension plan is an example of a noncurrent
year expense. The forum poster's question related to "cash".
Sec. 103
Employee fringe benefits are supplemental compensation provided to or on behalf of an
employee and/or their dependents [ex.: life or health insurance] on a current basis...
Employee fringe benefits are generally partially or totally excludeable by
the employee, are not subject to FICA and FUTA taxes, and are deductible
(at cost) by the employer in the current year.
Book: US Master Compensation Tax Guide
http://books.google.com/books?id=7hl...%20tax&f=false
Last edited by Helse; 11-05-2009 at 02:41 PM.
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