The main types of retirement accounts in existence today are:
- Defined Benefit Plans
- Defined Contribution Plans
The difference between these two lies not only within the way in which the beneficiary (i.e., the retiree) but also in how the company reflects these obligations on the balance sheet.
A defined benefit plan is commonly known as a pension plan. The employee gets a certain amount of money every pay period for a defined period of time once the specific rules are met. The benefit to the employee is fixed and does not
A defined contribution plan is what people generally hold in their 401k. The company will deposit X amount of dollars every year, and then it absolves all responsibility. If the market goes down, then the retiree gets less money – the converse is also true, if the market goes up the retiree can make more money.
Balance Sheet Recognition of FASB ASC 715
Due to the volatility associated with amounts recorded for pension plans, the FASB decided to implement specific rules to smooth out the annual reporting for these on the balance sheet. Such implementation resulted in the concepts of the Pension Benefit Obligation (PBO) and the Accumulated Benefit Obligation (ABO). It is important to note that the ABO is smaller than the PBO, because it does not take into account future salary increases. In the past, the minimum funding obligations (which is the ABO) was reported as the liability on the balance sheet, however no longer is allowable. Rather, than the larger of the two, the PBO or ABO must be reported which includes the assumptions of salary increases due to the going concern assumption of accounting. Offsetting entries to over or under funding of the plan must be recorded to Other Comprehensive Income.
Reporting Requirements of ASC 715
One change to the reporting requirements under this standard are that the over or under funding of a pension plan is required to be listed on the face of the financial statements, whereas in the past it had effectively been required to be listed in the notes to the financial statements. Also, any actuarial gains and losses, as well as prior service costs and credits, are to be included in other comprehensive income.
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