Pension Accounting Terminology

This document provides an overview of pension accounting terminology, including service cost and interest cost. It also discusses accounting for other postretirement benefits. The document includes answers to specific questions and references for further reading.

Running Head: FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
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1FINANCIAL ACCOUNTING
Table of Contents
Part A- Pension Accounting Terminology.................................................................................2
Answer to Question a.............................................................................................................2
Service Cost.......................................................................................................................2
Interest Cost.......................................................................................................................2
Part B- Accounting for other Postretirement Benefits...............................................................3
Answer to Question b.............................................................................................................3
Reference....................................................................................................................................4

2FINANCIAL ACCOUNTING
Part A- Pension Accounting Terminology
Answer to Question a
1)
Service Cost
One of the main component the pension expenses is the service cost. The employers
incur liability for every year of the service of employee. Hence, it refers to the employer’s
required amount that must kept aside for each year for covering benefits of the employees’
pension upon the retirements. It is represented by the present value of the benefits of the
projected retirement that is earned by the covered employees for the current year. It depends
upon the factors such as early retirement, increase in salary and job promotions as it
influences the amount of final benefit. The overall funding will also depends on the variables
such as return on the fund of assets, interest expenses prior of the service cost, gains and
losses of plan plan’s formula changes (Munnell & Aubry, 2016).
2)
Interest Cost
Interest rate is represented by the accumulated interest on the balance that is unpaid of
the obligations of the projected benefit as there is increase in the employee’s service time.
The projected benefit obligation is defined as current values of all the benefits earned by the
employee during their employment. It is with each of completing the service; the employees
are closer to one year for receiving the benefits of retirement. Since pension’s deferred
compensation agreement, the employer incurs liability until the retirement of the employees.
The employer at the discounted rate records this cost. Discount rate is set by the market
interest rate on the premium (Bauman & Shaw, 2014).

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Part B- Accounting for other Postretirement Benefits
Answer to Question b
Other Post-Retirement benefits are the benefits, which is other than the distributions
of pension that is paid during the years of retirement to the employees. The benefit of the post
retirement benefit includes medical plans and life insurance, or premium of such benefits and
arrangements of the deferred-compensation. However, this benefits are mostly paid by the
employer, the employees that are retired shares these benefits in the cost through the co-
payments, deductibles payments as well as making the contribution of the employee to the
plan as and when required (Bartram, 2015).
The benefits under this category include all the benefits of non-cash payments that is
available to the employees are dental, legal services, vision care as well as tuition care. These
additional benefits that is along with the benefits of the traditional pension, is the large
expenditures of the companies by offering these plans, particularly if the firm funds these
plans fully. The cost associated with these plans are shown in the financial statements of the
company, usually found in the notes, that also discloses the obligation’s size that is along
with the fact that how effectively fund is funded (Munnell, Aubry and Crawford, 2016).
The benefits of the post-retirements ate provided by the agencies of the federal and
the local government, public as well as private companies and non-profit organization’s such
as religious group, charities, colleges as well as universities. These benefits can be paid in
part or in full by the entire, by the employers or by the combinations of these two (Munnell,
Aubry and Crawford, 2016).

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Reference
Bartram, S.M., 2015. Corporate post-retirement benefit plans and leverage. Review of
Finance, 20(2), pp.575-629.
Bauman, M. P., & Shaw, K. W. (2014). An analysis of critical accounting estimate
disclosures of pension assumptions. Accounting Horizons, 28(4), 819-845.
Munnell, A. H., & Aubry, J. P. (2016). An Overview of the Pension/OPEB Landscape. CRR
WP, (2016-11).
Munnell, A.H., Aubry, J.P. and Crawford, C.V., 2016. How Big a Burden Are State and
Local OPEB Benefits?. Center for Retirement Research at Boston College, (48).