Question

GAAP for pension plans requires companies with defined benefit pension plans to

a.recognize pension expense as an amount equal to the actual cash paid to retired employees.
b.disclose annual pension cost in a footnote only.
c.recognize a pension liability based on the projected benefit obligation concept.
d.recognize pension expense based on accrual-basis concepts.

Answer 1

GAAP requires companies with defined benefit pension plans to recognize pension expense based on accrual-basis concepts and to recognize a pension liability on their balance sheet based on the projected benefit obligation. Additionally, companies must provide detailed disclosures within their financial statements and contribute to the Pension Benefit Guarantee Corporation as a form of pension insurance.

Step-by-step explanation:

The Generally Accepted Accounting Principles (GAAP) for pension plans have specific requirements for companies that offer defined benefit pension plans. These requirements ensure transparency and accuracy in financial reporting. According to GAAP, companies must:

• Not recognize pension expense merely as the actual cash paid to retired employees. Instead, pension expense is accounted for on an accrual basis, which may differ from actual cash payments.
• Disclose the annual pension cost, not just as a footnote, but in their financial statements to provide clear information to stakeholders.
• Recognize a pension liability on their balance sheet, which is based on the projected benefit obligation concept. This includes the present value of all future pension payments owed to employees.
• Recognize pension expense using accrual-basis concepts to reflect the economic obligations and resources associated with pension plans over the period in which the related services are rendered by the employees.

Moreover, employers are mandated by law to pay a fraction of pension funds to the Pension Benefit Guarantee Corporation as a form of pension insurance, providing a safety net for workers if a company fails to meet its pension obligations. Furthermore, regulations penalize firms for underfunding their pension plans and mandate providing more information to employees about their pension accounts. These measures help protect the interests of employees and retirees.

It's also worth noting the shift from traditional defined benefit pension plans to defined contribution plans like 401(k)s and 403(b)s, which offer different benefits and portability.