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Peter Thomas

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Pensions: Issues/imp points:
-money put into an independent trust, to protect the employee in case the company goes out of business.
- For DCP, employer’s contribution is defined, hence the risk of the investments is on the employee once
the contribution is made to the trust. (promise fulfilled)
- For DBP, employer retains the risk even after putting in money in the trust because they must fulfill the
promise of delivering the promised pensions. So risk not transfer red till pension is collected.
- Pension plan liabilities are off balance sheet, but they meet the definition of a liability because
employer retains the risk of non performance by the trust. This is a good example of a political
compromise where economic reality is not well por trayed.
- Pension plan assets are off balance sheet, but if the risk is on the employer if the trust doesnt perform
well, they should be rewarded if the trust performs better than expected. Not likely an asset because the
questions are…does the company have control, any future benefit? Can they take the money out if a
surpl us exists?
- Hence, a pension plan asset should be considered carefully as it could be GAAP created (due to defer r ed
charges such as PSC), or it could come as a result of a sur plus..but can the firm take the money out?
- Deferred gains/losses often result in an asset on the balance sheet for a company even if the plan is in a
deficit position! Does that portray economic reality? This is done by GAAP to smooth out pension
expense, to avoid huge fluctuations…keeping the defer red costs off balance sheet. But is GAAPs role to
smooth or to portray economic reality?
- Lots of argument behind PSC and defer r ing them over service life. Some believe that since these are
costs that have already been realized, shouldnt the company expense them? Counter argument is that
these costs will be realized in the future as employees will be more satisfied.
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