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- Retirement benefits come in two forms: (a) Pension benefits under which the employer promises monetary benefits to the employee after retirement, and (b) Other post retirement benefits under which the employer provides other benefits besides monetary benefits to employees after retirement. These can be in the form of health care and life insurance benefits.
- A pension plan is described as an agreement between an employer and an employee whereby the employer agrees to pay monetary benefits to the employees on their retirement.
- Under Pension Accounting, the liability to be shown on the balance sheet of the employer company is the difference between the value of the assets (pension fund) and the value of the pension liability. Hence, Pension Accounting deals with the valuation of pension liability and pension assets.
- Net periodic pension cost consists of the following components: (a) Service cost, (b) Interest cost on projected benefit obligation, (c) Actual return on plan assets, (d) Gain or loss, and (e) Amortization of unrecognized prior service cost.
- The framework for pension accounting is specified under SFAS 87 of US GAAP. SFAS 87 specifies the accrual basis of accounting for pension costs. It basically contains three characteristics: (a) Delayed recognition, (b) Reporting of net pension costs, and (c) Offsetting of assets and liabilities.
- Statement FAS 106 of US GAAP establishes the standard for employers' accounting for post retirement employee benefits other than pensions.
- Accounting for Retirement benefits are also discussed under IAS 19 and AS-15.
- Analyzing pensions and other post retirement benefit figures reported in the financial statements is extremely vital for any financial analyst because of the magnitude of these figures and the possibilities existing for manipulation and distortion in their computation. The analysis can be taken up from three angles: (a) Income statement effect, (b) Balance sheet effect, and (c) Effect of actuarial assumptions.