Reporting Paper

Memorandum

To: CEO

From: Controller

Re: Pension plans and segment reporting

This memo will detail the reporting requirements for defined contributions, defined benefits, and other postretirement plans (OPEBs). Included is information on how to report the two segments, if kept, and how to eliminate those segments.

Plans and Reporting Requirements

A defined contribution plan is a plan in which the employer promises to contribute a certain amount into each period. However, there is no promise regarding the total benefits to be paid out. The benefits are determined by the return rate on the invested pension funds during the investment period. A defined benefit plan is a plan in which the benefits to be received is determined by the terms of the plan. The terms would be a percentage of the average highest five years of service for life. A defined contribution plan is straightforward, while the defined benefit plan is affect by a wide range of variables including length of service, mortality, and turnover. The risks of the defined benefit plan are with the employer because they need to ensure that the company makes a large enough contribution to meet the promised pension benefits.

In reporting the pension plans, SFAS No. 35 was made to provide financial information that is useful to determine that the pension can pay the benefits due now and in the future. The financial statements are required to include four categories of information:

1. Net assets available for benefits.

2. Changes in net assets during the reporting period.

3. The actuarial present value of accumulated plan benefits.

4. The significant effects of factors such as plan amendments and changes in actuarial assumptions on the year-to-year change in the actuarial present value of accumulated plan benefits (Cathey, Clark, Schroeder, 2005, pg. 456).

Information should be prepared using the accrual method. According to SFAS No. 87,...