Chapter 20 - Pensions Retirement benefit to each employee usually built on a formula based on years of service and salary For example: 1.5% x # of years workedx average annual salary Benefit payments usually have restrictions: vesting period, earliest age you can start receiving, etc. So this gives us an idea how the employee thinks about it......
LiabilityAsset Pension Benefit Obligation (PBO)Plan Assets (PBO is measured inpresent value)(so are Plan Assets) Beginning Balance- withdrawals (payouts) from theplan + service cost (debit to pensionexpense) + interest cost (debit to pension expense)Beginning Balance + Contributions to the plan - withdrawals (payouts) from the plan +actualreturn on plan assets
Components of Pension Expense (income statement) Service Cost (current year) - Our employees have worked one more year, impacting the original formula.Given in problems (actuary tells us). Interest Cost - Our employees are one year closer to payout, so the present value of that obligation gets bigger (one extra year of "t" until payment gone, or one fewer year to discount back to).Typically this year's beginning PBO+/- any adjustments (coming later) x "settlement rate"provided by actuary. Expected Return on Plan Assets (reduces pension expense, or credits)
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