Assignment 2: Defined Contribution Plan
Reporting Paper
ACC541
September 23, 2013
Thomas Gruber
Reporting Paper
MEMORANDUM
To: Thomas Gruber, CEO
From:
Date: September 23, 2013
RE: Pension Plans
Defined Contribution Plan
A defined contribution plan is a type of retirement plan where the employer contributes a certain amount each period to the plan but does not have any requirements as to the amount that will be paid out at retirement time. The amount that would be paid to the employee is determined only by what the return is on that investment. The risk for these types of retirement plans is on the side of the employee. The employer expense is equal to the amount that is removed from the employee’s paychecks and placed in the retirement account …show more content…
at the determined time. The company may opt to contribute to the fun in addition to the amount that the employee contributes. The financial statements will make note of “the existence of the plan, the employee groups covered, the basis for determining contributions, and any significant matters affecting comparability from period to period (such as amendments increasing the annual contribution percentage)” (Schroeder, Clark, & Cathey, 2011, p. 457). The amount of money that is placed within the account is a fixed amount, but the amount that is eventually paid out is completely dependent on the amount the account has earned.
Defined Benefit Plan
A defined benefit plan is a type of retirement plan where the pension benefits are paid out at a specific amount.
These plans follow a specific set of criteria to determine how much will be paid out at retirement age. These criteria might include length of time of employment, what the salary of the employee was, the health of the company, and the earnings for the pension fund assets. The risk in this type of benefit plan is on the employers because the company must place enough money in the account to meet the pension benefits that were promised to the employee. Defined benefit plans are typically funded solely by the company. Based on FASB ASC 715-30-05-4, “the amount of benefit paid depends on a number of future events that are incorporated in the plan 's benefit formula, often including how long the employee and any survivors live, how many years of service the employee renders, and the employee 's compensation in the years immediately before retirement or termination” (FASB …show more content…
2013). Other Postretirement Benefits
With other postretirement benefits, the FASB created a different set of standards.
FASB ASC 715-60-05 discusses these standards. Other postretirement benefits might pertain to tuition assistance, legal services, housing, or most significant being retiree healthcare benefits and life insurance. “FASC ASC 715 guidelines require that the cost other postretirement benefits be accrued over the working lives of the employees expected to receive them” (Schroeder, Clark, & Cathey, 2011, p. 470). With these types of benefits, there is no cap as to the amount the retired employee might receive. The costs of these types of benefits can be viewed typically in the notes of the financial statements. Other postretirement benefits are not vested benefits similar to the defined benefits plan. Once the employee leaves the company, if the employee did not retire, the employee forfeits the
benefit.
FASB ASC 960-40-25 states that for defined benefit pension plans and defined contribution pension plans, if the company plans to terminate the plan before the end of the year, the plan’s year-end financial statements shall be prepared on the liquidation of accounting (FASB 2013). The company has the option of terminating both the retirement plans and creating a new retirement plan for all employees in the company. FASB ASC 960-40-35-1 states “for terminating plan assets, changing to the liquidation basis will usually cause little or no change in values, most of which are fair values” (FASB 2013). Since the company has acquired another company, terminating and creating a new pension plan might be a positive option. The company also has the option of not creating a new pension plan. The recommendation would be to create a new defined contribution plan where the employees can put aside pre-tax dollars into a 401(k) with a small matching from the company.
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (Tenth ed.). Danvers, MA: John Wiley & Sons, Inc.
FASB ASC. 2013. Retrieved from https://asc.fasb.org/home
ACC541
September 23, 2013
Thomas Gruber
Reporting Paper
MEMORANDUM
To: Thomas Gruber, CEO
From:
Date: September 23, 2013
RE: Pension Plans
Defined Contribution Plan
A defined contribution plan is a type of retirement plan where the employer contributes a certain amount each period to the plan but does not have any requirements as to the amount that will be paid out at retirement time. The amount that would be paid to the employee is determined only by what the return is on that investment. The risk for these types of retirement plans is on the side of the employee. The employer expense is equal to the amount that is removed from the employee’s paychecks and placed in the retirement account …show more content…
at the determined time. The company may opt to contribute to the fun in addition to the amount that the employee contributes. The financial statements will make note of “the existence of the plan, the employee groups covered, the basis for determining contributions, and any significant matters affecting comparability from period to period (such as amendments increasing the annual contribution percentage)” (Schroeder, Clark, & Cathey, 2011, p. 457). The amount of money that is placed within the account is a fixed amount, but the amount that is eventually paid out is completely dependent on the amount the account has earned.
Defined Benefit Plan
A defined benefit plan is a type of retirement plan where the pension benefits are paid out at a specific amount.
These plans follow a specific set of criteria to determine how much will be paid out at retirement age. These criteria might include length of time of employment, what the salary of the employee was, the health of the company, and the earnings for the pension fund assets. The risk in this type of benefit plan is on the employers because the company must place enough money in the account to meet the pension benefits that were promised to the employee. Defined benefit plans are typically funded solely by the company. Based on FASB ASC 715-30-05-4, “the amount of benefit paid depends on a number of future events that are incorporated in the plan 's benefit formula, often including how long the employee and any survivors live, how many years of service the employee renders, and the employee 's compensation in the years immediately before retirement or termination” (FASB …show more content…
2013). Other Postretirement Benefits
With other postretirement benefits, the FASB created a different set of standards.
FASB ASC 715-60-05 discusses these standards. Other postretirement benefits might pertain to tuition assistance, legal services, housing, or most significant being retiree healthcare benefits and life insurance. “FASC ASC 715 guidelines require that the cost other postretirement benefits be accrued over the working lives of the employees expected to receive them” (Schroeder, Clark, & Cathey, 2011, p. 470). With these types of benefits, there is no cap as to the amount the retired employee might receive. The costs of these types of benefits can be viewed typically in the notes of the financial statements. Other postretirement benefits are not vested benefits similar to the defined benefits plan. Once the employee leaves the company, if the employee did not retire, the employee forfeits the
benefit.
FASB ASC 960-40-25 states that for defined benefit pension plans and defined contribution pension plans, if the company plans to terminate the plan before the end of the year, the plan’s year-end financial statements shall be prepared on the liquidation of accounting (FASB 2013). The company has the option of terminating both the retirement plans and creating a new retirement plan for all employees in the company. FASB ASC 960-40-35-1 states “for terminating plan assets, changing to the liquidation basis will usually cause little or no change in values, most of which are fair values” (FASB 2013). Since the company has acquired another company, terminating and creating a new pension plan might be a positive option. The company also has the option of not creating a new pension plan. The recommendation would be to create a new defined contribution plan where the employees can put aside pre-tax dollars into a 401(k) with a small matching from the company.
References
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial Accounting Theory and Analysis (Tenth ed.). Danvers, MA: John Wiley & Sons, Inc.
FASB ASC. 2013. Retrieved from https://asc.fasb.org/home