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8 Feb 2011
Pensions: Issues/imp points:
-money put into an independent trust, to protect the employee in case the company goes out
of business.
- For DCP, employers 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 transferred 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 portrayed.
- 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 aredoes the company have control, any
future benefit? Can they take the money out if a surplus exists?
- Hence, a pension plan asset should be considered carefully as it could be GAAP created
(due to deferred charges such as PSC), or it could come as a result of a surplus..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 deferred costs off
balance sheet. But is GAAPs role to smooth or to portray economic reality?
- Lots of argument behind PSC and deferring 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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