A pension plan reports resources held for participants and the transactions affecting those resources. Under U.S. generally accepted accounting principles (GAAP), the plan constitutes a reporting entity distinct from its sponsoring employer.
- A defined benefit plan promises retirement benefits determined by a formula, commonly incorporating compensation, service, or a fixed benefit for each service year.
- A defined contribution plan provides individual accounts and specifies contributions, with benefits depending on contributions, allocated investment results, expenses, and applicable forfeitures.
- A defined contribution pension plan remains within that reporting model when trustees select investments. Participant investment direction does not determine plan classification.
Both plan types report net assets and their changes. A defined benefit plan also presents accumulated benefit information because its promised retirement payments are not determined solely by individual account balances.
The defined benefit package does not invariably require four separately titled statements. Benefit information can appear in separate statements, accompanying notes, or permitted combined presentations, provided each information category remains complete and relevant dates agree.
Common mistakes
- Actuarial benefits treated as payable. The incorrect subtraction produces , an unsupported residual rather than Alder's required net-asset amount.
- Cash substituted for contributions. Using Alder's $150,000 receipts understates contributions by .
- Realized appreciation counted twice. Adding Alder's realized appreciation again produces , an unsupported return that includes the same gain twice.
Bottom line
- Both plan types present net assets available for benefits and changes in those net assets, together with explanatory notes.
- Defined benefit reporting additionally presents accumulated benefits and significant changes, using permitted separate, combined, or note presentation.
- Plan accumulated benefits remain separate from operating liabilities and the employer's projected benefit obligation.
- Ordinary investments generally use fair value, participant notes use principal plus accrued interest, and qualifying direct contracts use contract value.
Exam shortcut
The benefit promise determines classification before investment choices enter the analysis. Retirement payments and contributions to individual accounts indicate different reporting models. Each supplied amount belongs to an asset, operating liability, annual addition or deduction, transfer, or separate actuarial exhibit. Opening receivables collected and opening payables settled are removed from cash activity before current-period contributions and expenses are calculated.
The full lesson (about 5,869 words, 39 min read) adds 3 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.K1
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