Quiz 23: Employers Accounting for Pensions
FAS 87 FAS 87 were introduced to achieve four objective of accounting for pension plans. The first objective was to measure pension costs which would provide better terms and costs of employee's pension over his service with employer. The second objective was to provide pension plan which is more comparable. The third objective was to provide more disclosure so that users can understand the effect of pension plan and four objective was to improve financial reporting. FAS 87 included recognition of pension plan costs rather than funding level under defined benefit plan. The funding level was not impacted with FAS 87 as it provided more guidance related to how pension costs should be recognized and the what the costs consists of. The funding required under defined benefit plan was same as per governmental constraint that is minimum or maximum amount required to be funded. FAS 87 provided way the financial reporting for pension costs should be undertaken and the amount of funding required did not change.
Accounting procedures for pension plan had been composed of various components that is controlled separately by Financial Accounting Standard Board (FASB) statements. FAS 87 refers to Financial Statement No. 87 of Employers' Accounting for Pensions that aims at establishing standards for the financial accounting and reporting for an employer that provides pension plans and benefits to the employees. Prior to FAS 87, various accounting conventions were applied for such pension plans offered by the employer. Before 1966, the traditional approach was followed for pension cost accounting which resulted in the method of recording of contribution made by the employer as pension expenses. After this period, Accounting Principle Board No. 8 "Accounting for the Cost of Pension Plans" (APB 8) governed employer pension plans. This lead to upgrading of the traditional method of pension cost accounting into a methods that involved minimum and maximum annual cost on the basis of actuarial method. In 1974, with a passage of Employee Retirement Income Security Act (ERISA), two statements were added that included FAS 35 which established rules that helped in proper governance and measurement of accounting principles related to pension accounting. FAS 36, "Disclosure of Pension Information" dealt with the method in which the disclosure regarding the plan assets and liabilities in the financial statement to be made by the employer should be made to the employee. Thus, prior to FAS 87 following accounting conventions were used for pension plans.
FAS 87 FAS 87 were introduced to achieve four objective of accounting for pension plans. The first objective was to measure pension costs which would provide better terms and costs of employee's pension over his service with employer. The second objective was to provide pension plan which is more comparable. The third objective was to provide more disclosure so that users can understand the effect of pension plan and four objective was to improve financial reporting. In case of FAS 87, if there is difference in net periodic pension cost and employer contribution an adjustment was made to balance sheet amount reported regarding pension plan. If the pension costs were higher than employer contribution then liability was recognized and if pension costs were lower than employer contribution then asset was recognized. FAS 87 required to recognize pension liability in case of underfunded plan that is if liabilities accumulated benefit obligation was higher than plan assets. However no assets were recognized for over funded status and thus the allocation of assets reduced under FAS 87. However, if additional liability was recognized with respect to underfunded status then equal amount was recognized as intangible asset in balance sheet. The amount of asset recognized would not be higher than unrecognized prior service costs.