Accounting for Pension Plans & Segement Reportiing

I understand the recent acquisition of ABC Company (ABC) has introduced pension plans and operating segments both of which are unfamiliar to this organization. This memo will discuss pension plans and operating segments, and the required reporting that goes with both of them.

Pension Plans

Pension plans provide an avenue for companies to provide retirement benefits to its workforce. The company makes periodic payments to a third party called a funding agency. The agency is responsible for investing the funds and making payments to qualified recipients.

ABC implemented a defined contribution plan and a defined benefit plan as its pension plans. With a defined contribution plan the employer contributes a predetermined amount or percentage each period into the plan. The future benefits are the result of the return earned on the invested pension funds with no guarantee concerning the future benefit amount. A defined benefit plan is one in which the future benefit is calculated upfront based on criteria such as salary and years of service. The employer then makes annual contributions to the pension fund in amounts needed to fund the required future benefit amount.

Accounting for Pension Plans

With a defined contribution plan the employee accepts the risk of the future benefits, which means the employers only expense is the annual amount it contributes to the pension plan. Defined contribution plan financial statements should be prepared on the accrual basis of accounting and should disclose the existence of the pension plan, employee groups covered, the determination of contributions, and any significant changes that may affect comparability between periods.

The accounting required for a defined benefit plan is a bit more involved. The employer assumes the risk because it must make contributions large enough to meet the future pension benefits. However, these future pension benefits are difficult to predict because uncertainties such as turnover,...