Case 14-12 Pension Theory

Many business organizations have been concerned with providing for the retirement of employees since the end of WWII. This concern has resulted in the establishment of private pension plans in many companies.

The substantial growth of these plans, both in numbers of employees covered and in amounts of retirement benefits, has increased the significance of pension costs in relation to the financial position, results of operations, and cash flows of many companies. In examining the costs of pension plans, it is necessary to understand several concepts. The components of pension costs that the concepts represent must be dealt with appropriately if generally accepted accounting principles are to be reflected in the financial statements of entities with pension plans.

Required:

a. Define a private pension plan. How does a contributory pension plan differ from a noncontributory plan?

b. Differentiate between accounting for the employer and accounting for the pension fund.

c. Explain the terms funded and pension liability as they relate to:

1. The pension fund.

2. The employer.

d. 1. Discuss the theoretical justification for accrual recognition of pension costs.

2. Discuss the relative objectivity of the measurement process of accrual versus cash (pay-as-you-go) accounting for annual pension costs.