to: accounting staff
from: Nicole Bailey, controller
subject: Company a pension plans reporting & segments
cc: John Person, Ceo
Company A offered two different pension plans to its employees and also reported two different segments. With the recent acquisition of Company A, I have found it in everyones best interest to review/introduce the financial reporting requirements for a defined contribution plan, a defined benefit plan, and other postretirement plans (OPRBs) along with an overview of the process for eliminating the two segments.
A defined contribution plans reporting is very straightforward because the risk is transferred to the employee and the amount of money to be contributed by our organization is known and fixed. For example, if we agree to match and invest up to 3% of an employees salary for each year that they work for us, we are able to record exactly how much our obligation to our employees is each year. We can simply expense the required contribution as it is incurred (Schroeder, et al, 2011).
A defined benefit plan carries much more risk and its reporting is much more difficult to project because of several variables (mortality, turnover, compensation levels, and length of service). Its recorded expense, the annual pension fund obligation, is calculated using a formula usually created by an actuary, and is only an estimate. The Financial Accounting Standards Board (FASB) requires that all pension providing organizations financial statements must include (1) the net assets available for benefits, (2) changes in net assets that occur during reporting period, (3) the actuarial present value of accumulated plan benefits, and (4) plans amendments and changes in actuarial assumptions that will have/have had a significant effect on the actuarial present value of accumulated plan benefits (Schroeder, et al, 2011).
Disclosure is a very important part of of FASB ASC 715-30-Defined Benefits Plans??”Pension; we are required to disclose the details of the pension plan, the actuarial formula used to determine our obligation, groups included in coverage, types of assets held, etc… It is only recently that such detailed disclosures became necessary, but this initiative stems from the lack of understandability of financial statements (Schroeder, et al, 2011).
Other postretirement benefit plans, like health insurance and life insurance, are to be estimated and expensed during the employees working years. This method is consistent with the matching principle by expensing the corporate costs of an employee during the time that the employee is producing revenue (Schroeder, et al, 2011).
In light of our recent business combination, our Chief Executive Officer has expressed his intention to combine the two separate segments of Company A to keep in line with our singular method of reporting finances. First, the expenses of the segments need to separated into avoidable and unavoidable costs. The avoidable costs will disappear with the dissolution of the segments and the unavoidable costs will have to be absorbed. The elimination of the segments will have to be disclosed in the financial statement in the notes (Incremental Analysis, 2011).
CliffsNotes.com. Examples of Incremental Analysis. 1 Aug 2011
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2011). Financial accounting theory and analysis: Text readings and cases (10th ed.). Hoboken, NJ: Wiley.
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