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Reporting Paper
ACC/541
MEMORANDUM
TO:
Chief Executive Officer
FROM:
Financial Controller
DATE:
SUBJECT: Required Reporting for Pensions and Other Postretirement Plans
Several issues have to be considered in the wake of the firm’s recent acquisition of a new
company. First, the acquired company has two different pension plans whose reporting
requirements are unfamiliar to the firm. Second, the acquired company has two segments
that do not fit the firm’s requirements, and should be targeted for closure. Hence, this
memo describes the reporting requirements of pension plans, namely, defined contribution
plans, defined benefit plans and Other Postretirement Plans or OPEBs. In addition, this
memo describes how to close an unwanted segment.
Defined contribution plans are plans in which the employer agrees to pay a fixed amount to
the employee’s pension fund each year while the employee works for the company. In
comparison, defined benefit plans are plans in which the employer guarantees to pay the
employee a fixed monthly income for life at retirement. The fixed monthly income to be
paid to the employee is calculated using a pre-determined formula that usually takes into
account the employee’s years of service, annual salary, and in some instances, age (Ruppel,
2010). Both pension plans guarantee the employee will receive monetary compensations,
either directly or indirectly, from the employer at retirement.
The financial reporting of defined contribution plans is straightforward. The employer only
records the pension expense that equals the cash contribution to the employee. For
instance, when the company agrees to pay the equivalent of five percent (5%) of the annual
salary of the employee to the pension plan, the company’s financial reports would have to
reflect this pension expense. On the other hand, in reporting defined benefit plans, the
financial reports of the company would record the fixed retirement benefit and the
designated formula used to calculate it (Epstein, 2009).
The pension plan assets of the company are not recorded on the balance sheet. However,
these should be included in the disclosure notes alongside the financial statements since
they are important in determining the company’s pension expense (Epstein, 2009).
Another feature that should not be listed as a liability on the balance sheet is the Projected
Benefit Obligation or PBO. However, the funding status of pension plans must be reported
by companies in financial reports, whereby an overfunding is recorded as an asset, and an
underfunding is recorded as a liability (Pratt, 2010).
In addition to pension plans, companies can choose to offer other benefits known as Other
Postretirement Plans (OPEBs) to their employees. There are many types of OPEBs; these
include health care benefits, life insurance, legal services, long-term disability, hearing
disability, and vision disability. These benefits are also given when the employee retires
from service. According to the FASB Pre-Codification Standards, the accrual accounting of
these postretirement benefits should apply three basic aspects of pension accounting,
namely, delayed recognition of certain events, reporting net cost, and offsetting liabilities
and related assets. The company should expense retirement benefits while the employee is
still in active service. The company needs to expense in order to reduce liabilities when the
employee collects the benefits. The company records this type of liabilities on the balance
sheet.
According to Pratt (2010), gains and losses should not be reflected right away in the
income statement or pension expense. Rather, there should be a time delay as part of
income smoothing where these gains and losses can offset each other. Other important
information that must be included in reporting pension and postretirement plans are
pension expense, disclosure notes on the composition of the pension expense, and other
comprehensive income (e.g., gains or losses that are not immediately reflected in the net
income or pension expense).
Delaney and Whittington (2010) define a segment as a component of an organization that
can be assessed independently, and comes with its own discrete financial data from which
managers can make informed decisions. A company can eliminate an unwanted segment
through segment closing. This can be done by selling the segment, or transferring the
ownership of a segment to another company; discontinuing the operations of the segment;
or by terminating all business transactions that uses the segment (Proposed CAS 413, n.d.)
It is recommended that the company first determine if a segment has any avoidable and
unavoidable costs before it is closed. Avoidable costs are those that end when the segment
is closed, while unavoidable costs still persist even when the segment is closed, hence,
provisions must be made to transfer these expenses to other segments. In cases where the
company identifies unavoidable costs in the segment, the segment should only be closed
when the Chief Executive Officer and accounting department determine that the
unavoidable costs are higher than the income generated by the segment, hence, incurring
losses (Epstein & Jermakowicz, 2009).
Before closing the segment, the Chief Executive Officer should try to assess the effect of this
closure to the rest of the firm, in particular to the productivity and profit generating
capacity of the firm (Epstein & Jermakowicz, 2009). As a general guide, closing a segment is
advantageous only when it raises the profit levels of a company.
References
 Delaney, P. R. & Whittington, O. R. (2010). Wiley CPA Exam Review, 2011, Financial
Accounting and Reporting. NY: John Wiley and Sons.
 Epstein, B. & Jermakowicz, E. K. (2009). IFRS Convergence to U.S. GAAP on segment
reporting. Journal of Accountancy. Retrieved March 13, 2012, from
http://www.journalofaccountancy.com/Issues/2009/Apr/20081008.htm
 FASB Pre-Codification standards. (n.d.). FASB: Financial Accounting Standards Board.
Retrieved March 18, 2011, from http://www.fasb.org/summary/stsum106.shtml
 Pratt, J. (2010). Financial Accounting in an Economic Context. NY: John Wiley & Sons.
Proposed CAS 413 (n.d.). CAS pension harmonization ANPRM. 1-21.
 Ruppel, W. (2012). Wiley GAAP for Governments 2012: Interpretation and Application
of Generally Accepted Accounting Principles for State and Local Governments. NY:
John Wiley & Sons.