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Pension Past Service Costs

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					Pension Plan
Past Service Pension Cost and Funding

Nonfunded pension plan - Pension payments to retired employees are made directly by the company as they
 become due.
Funded pension plan - Pension payments to a trustee or an independent third party who then makes the payment
 to the retired employee as they become due or…
 Pension payments to an insurance company who assumes all obligations for payments of benefits as they
 become due.
If the funds are under the control of the employer the pension plan is unfunded.

Normal pension cost - Cost determined by actuarial calculations for the service credits earned by employees
during the current year. Exclusive of any past service cost or interest thereon.
           Funded each period in an amount sufficient to satisfy the normal service credits earned by the
            employees. The cost should be recognized in the period the service credits are earned even if not
            funded. Accrual method of accounting.

Past service cost - Cost related to service credits for employees for years prior to the inception of the pension
plan. The pension plan when formed must address prior service costs in order for the pension plan to recognize
past services. A pension plan can also be amended to include recognizing past services.
            Funded at the inception of the plan in full or over a fixed number of periods in the future. Past service
            cost must be amortized after the date of plan inception and be included in total pension cost each year.
            Amortization should be based on a rational and systematic plan over a period subject to the particular
            circumstances. The actuarial cost method should state the normal pension cost and the past service cost.
            Accrual method of accounting

The provision for pension cost should not be less than the total of:
Normal Cost.
Interest on unfunded past service cost.
Vested benefits.

The provision for pension cost should not be greater than the total of:
Normal Cost.
Ten percent of the past service cost - 1 Year of total past service cost if amortized over ten years.
Interest equivalent on the difference between the pension cost and amount funded.


Example:
                                                     Amortization

Past service cost amount            $ 100,000.00
Interest rate                                 3%

Amortization Period 10 Years                         $ 100,000.00                    Funding Period 8 Years
Present Value of Annuity of 1                       8.5302028                 Present Value of Annuity of 1
Amortization per Period                           $ 11,723.05                 Funding per Period




                                               Amortization
                                               Reduction for      Pension
     Year                         Amortization   Interest          Cost           Funding

1                                 $ 11,723.05                   $ 11,723.05 $      14,245.64
2                                   11,723.05 $         75.68     11,647.37        14,245.64
3                                   11,723.05          153.63     11,569.43        14,245.64
4                                   11,723.05          233.91     11,489.14        14,245.64
5                                   11,723.05          316.61     11,406.44        14,245.64
6                                   11,723.05          401.78     11,321.27        14,245.64
7                                   11,723.05          489.51     11,233.54        14,245.64
8                                   11,723.05          579.88     11,143.17        14,245.64
9                                   11,723.05          672.95     11,050.10
10                                  11,723.05          341.45     11,381.60

                                  $ 117,230.51 $      3,265.40 $ 113,965.11 $ 113,965.11

Entry Year 2                                                       Debit           Credit

Pension cost - amortization of past service cost                $ 11,647.37
Deferred charge - payment in excess of pension cost                2,598.27
Cash                                                                          $    14,245.64


     Year                                                         Funding         Interest


1                                                               $ 14,245.64 $       3,000.00
2                                                                 14,245.64         2,662.63
3                                                                 14,245.64         2,315.14
4                                                                 14,245.64         1,957.23
5                                                                 14,245.64         1,588.57
6                                                                 14,245.64         1,208.86
7                                                                 14,245.64           817.76
8                                                                 14,245.64           414.92

                                                                $ 113,965.12 $     13,965.11
Example:
                                                    Amortization

Past service cost amount            $ 100,000.00
Interest rate                                 3%

Amortization Period 10 Years                        $ 100,000.00                 Funding Period 12 Years
Present Value of Annuity of 1                          8.5302028                 Present Value of Annuity of 1
Amortization per Period                             $ 11,723.05                  Funding per Period




                                                    Amortization
                                                    Addition for     Pension
     Year                           Amortization      Interest        Cost           Funding

1                                   $ 11,723.05                    $ 11,723.05 $      10,046.21
2                                     11,723.05 $         50.31      11,773.36        10,046.21
3                                     11,723.05          102.12      11,825.17        10,046.21
4                                     11,723.05          155.49      11,878.54        10,046.21
5                                     11,723.05          210.46      11,933.51        10,046.21
6                                     11,723.05          267.08      11,990.13        10,046.21
7                                     11,723.05          325.40      12,048.45        10,046.21
8                                     11,723.05          385.46      12,108.51        10,046.21
9                                     11,723.05          447.33      12,170.38        10,046.21
10                                    11,723.05          511.06      12,234.11        10,046.21
11                                                       576.69         576.69        10,046.21
12                                                       292.61         292.61        10,046.21

                                    $ 117,230.51 $      3,324.00 $ 120,554.50 $ 120,554.50

Entry Year 2                                                          Debit           Credit

Pension cost - amortization of past service cost                   $ 11,773.36
Pension liability - pension cost in excess of payment                            $     1,727.15
Cash                                                                                  10,046.21




     Year                                                            Funding         Interest


1                                                                  $ 10,046.21 $       3,000.00
2                                                                    10,046.21         2,788.61
3                                                                    10,046.21         2,570.89
4      10,046.21       2,346.63
5      10,046.21       2,115.64
6      10,046.21       1,877.72
7      10,046.21       1,632.67
8      10,046.21       1,380.26
9      10,046.21       1,120.28
10     10,046.21         852.50
11     10,046.21         576.69
12     10,046.21         292.61

     $ 120,554.52 $   20,554.50
 the company as they

o then makes the payment

of benefits as they




 arned by employees

dits earned by the
are earned even if not


 eption of the pension
pension plan to recognize

 in the future. Past service
 otal pension cost each year.
od subject to the particular
cost and the past service cost.




                                    Funding




ing Period 8 Years                $ 100,000.00
ent Value of Annuity of 1         7.0196922
 ing per Period                 $ 14,245.64




                 Over (Under) Funding
                 Balance Sheet Asset -
                     Deferred Charge
                  Amount          Balance

             $       2,522.59 $ 2,522.59
                     2,598.27    5,120.85
                     2,676.21    7,797.07
                     2,756.50   10,553.57
                     2,839.20   13,392.76
                     2,924.37   16,317.13
                     3,012.10   19,329.24
                     3,102.47   22,431.70
                   (11,050.10)  11,381.60
                   (11,381.60)      (0.00)




                  Principal       Balance

                                $ 100,000.00
             $      11,245.64      88,754.36
                    11,583.01      77,171.35
                    11,930.50      65,240.85
                    12,288.41      52,952.44
                    12,657.07      40,295.37
                    13,036.78      27,258.59
                    13,427.88      13,830.71
                    13,830.72          (0.01)

             $ 100,000.01
                                 Funding




 ing Period 12 Years           $ 100,000.00
ent Value of Annuity of 1          9.954004
 ing per Period                $ 10,046.21




               Under (Over) Funding
              Balance Sheet Liability -
                  Pension Liability
                Amount           Balance

             $      1,676.84 $ 1,676.84
                    1,727.15    3,403.99
                    1,778.96    5,182.95
                    1,832.33    7,015.28
                    1,887.30    8,902.58
                    1,943.92   10,846.50
                    2,002.24   12,848.74
                    2,062.30   14,911.04
                    2,124.17   17,035.22
                    2,187.90   19,223.12
                   (9,469.52)   9,753.60
                   (9,753.60)       0.00




                 Principal       Balance

                               $ 100,000.00
             $      7,046.21      92,953.79
                    7,257.60      85,696.19
                    7,475.32      78,220.87
    7,699.58   70,521.29
    7,930.57   62,590.71
    8,168.49   54,422.23
    8,413.54   46,008.68
    8,665.95   37,342.73
    8,925.93   28,416.80
    9,193.71   19,223.10
    9,469.52    9,753.58
    9,753.60       (0.02)

$ 100,000.02

				
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posted:10/31/2011
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