The current memo is the response to your request about carrying out a research on the accounting for pension gains and losses in a defined-benefit plan. The research allows concluding that there are strict accounting requirement for pension and other retirement benefit gains and losses that should be accounted for and displayed in the company’s balance sheet.
Basics of accounting for pension gains and losses
The procedures according to which accounting for pension gains and losses I a defined-benefit plan is carried out are regulated by FASB ASC 715-30-60-1. To describe it briefly, an organization should present a comprehensive account of any gains and losses associated with pensions and any other types of retirement benefits. In addition, all prior service costs and other related credits should also be accounted for. Finally, transition assets and liabilities of an organization in relation to pension and other retirement benefits should also be accounted for in a comprehensive manner.
Rationale for the above accounting requirements
There is a considerable rational approach to the accounting requirements provided for the pension gains and losses in a defined-benefit plan. The standards set by FASB ASC 715-30-60-1 have three major groups of reasons behind them:
- The comprehensive manner of accounting for gains and losses from pensions and other retirement benefits in a defined-benefit pension plan allows the company to be well aware of its financial operations and conditions of its funds in regard to the retirement plans and schemes it adopts or plans to develop.
- The accounting requirements set by FASB ASC 715-30-60-1 allow the regulatory bodies of the country in which a company operates to properly audit and monitor the financial operations of this company. The point here is that retirement benefits other than pension payments might sometime become the sources of illegal schemes, and thus they require full and proper control.
- The standard established to account for gains and losses from pensions and other retirement benefit help lenders and potential investors of the company to study its financial performance, see if its operations are transparent and perfectly clear, and if there is a potential for investing into this company.
Balance sheet presentation
According to FASB ASC 715-20-65-1, pension gains and losses are represented in the company’s balance sheet as the comprehensive retirement income or comprehensive retirement liability. The former appears on the balance sheet if the company meets its retirement payment projections, while the latter shows up in the opposite case. Companies must reflect their retirement plans on balance sheets.
What I Have Learned from the from Writing the Memo
From writing the memo, I have learned at least for points useful in my further study and career development. First, I have learned how pension and other retirement benefits are accounted for according to the FASB ASC standards. Second, I have found out the rationale for the establishment of these specific accounting standards that concern pension schemes and retirement plans. Third, I have managed to understand that pension assets and liabilities should obligatory be reflected in the companies’ balance sheets, which is one of the conditions of a legal and transparent operation of every business company. Finally, I have gained considerable insights on accounting practices and codifications standards in general, which will hopefully be helpful to me in future.