Pension PlansPension PlansAn IntroductionAn Introduction

(Level 3 undergraduate)(Level 3 undergraduate)

Dr. Mahfoudh Hussein Mgammal6/ 01/2016

Outline Outline

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. Conclusion Conclusion

IntroductionIntroduction Pension Funding Pension Funding – the cash contributions – the cash contributions

that are made to the pension plan. that are made to the pension plan.

Pension Accounting Pension Accounting – the annual pension – the annual pension expense calculation and disclosure of a pension plan’s assets expense 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.

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).

Types of Pension PlansTypes of Pension Plans1.1. Defined contribution:Defined contribution:

employee bears risk, no firm liabilityemployee bears risk, no firm liability

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

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.

Types of Pension PlansTypes of Pension Plans2.2. Defined benefit:Defined benefit:

firm bears risk and has liability (our focus)firm bears risk and has liability (our focus)

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

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

Accounting for PensionsAccounting for Pensions Pension cost should be accrued and recognized in Pension 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

ConclusionConclusionIntroduction 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