Summary
Since the introduction of the first pension plan by American Express in 1875, traditional defined benefit pension plans have become an important source of millions of employees' retirement income. Changes in accounting for traditional pensions and other postretirement benefit plans may sharply increase the liabilities and expenses and decrease the equity shown on companies' financial statements and may further increase the risk and cost of these types of plans. These changes may affect employers' willingness to continue offering these plans. The primary focus of this case is to examine the potential short-term and long-term effects of recently promulgated and expected accounting changes on companies' financial statements, stakeholders, and willingness to offer these plans. The case can be taught at the same time that retirement benefits are covered in an intermediate accounting class, or in an advanced accounting class focusing primarily on underlying concepts.
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Extract
The Effect of Changes in Accounting for Defined Benefit Pensions and Other Postretirement Benefit Plans On Companies' Financial Statements and Stakeholders
INTRODUCTION
Accounting for pensions evolved from the "pay-as-you-go" basis to the full accrual basis. The currently pertinent primary accounting standard, Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers' Accounting for Defined Benefit Pensions," was issued by FASB in December 1985, effective for fiscal year 1987. SFAS 87 requires that a minimum liability is accrued if the present value of the pension obligation at current salary levels (ABO) exceeds pension assets.The currently pertinent accounting standard for accounting for non-pension retirement plans, (such as retiree health care plans), Statement of Financial Accounting Stan...See the full content of this document
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