Question

Discuss the role of Other Comprehensive Income in accounting for pension, including examples of when it is used. How does the use of this account coincide with the idea of “smoothing” of income?

Answer 1

Accounting for other benefits

In addition to pension accounting, companies also have to provide other benefits that are treated similarly to pensions from an accounting perspective.

For example, some companies continue to pay for medical services used by former employees who have retired. This is seen in several companies in the United States.

Similar to pension benefits, companies will accrue an expense for benefits earned by employees in that year and create a liability provision for those benefits that are to be provided in the future.

Although the general idea may seem straightforward, there are several other factors that must be considered.

For example, dissimilar to pension payments, the costs of healthcare services may change drastically over time and the use of these services is irregular compared to annuity payments like pensions.

Therefore, when accounting for other employee-related benefits, some may require proper professional and subjective judgment depending on the situation.

There are two types of pension available today : (a) Defined Contribution plan & (b) Defined Benefit Plan

Hence the pension amount with the other amounts need to be evened out by the Company based on profits earned by the Company in those years. If there is ahigh profit, a greater charge to PnL can be taken for Pension plus otherexpenses.

This way it can be smoothened.