Question

a.) Distinguish between Total Pension Liability and Net Pension Liability.

b.) What items make up Pension Expense under a defined benefit pension plan?

Answer 1

A.

Net Pension Liability (NPL) - Each employer's share of the unfunded liability (Total Pension Liability minus the Pension Plan's Fiduciary Net Position) associated with their employees who participate in company.

Total Pension Liability - The portion of the actuarial present value of projected benefit payments (reflecting projected service and anticipated salary and benefit increases) that is attributed to past periods of company member service, similar to current Actuarial Accrued Liability (AAL), determined under the Entry Age Actuarial Cost Method, calculated using the Discount Rate.

B.

Pension expense is the amount that a business charges to expense in relation to its liabilities for pensions payable to employees. The amount of this expense varies, depending upon whether the underlying pension is a defined benefit plan or a defined contribution plan. The characteristics of these plan types are as follows:

• Defined benefit plan. Under this plan, the employer provides a predetermined periodic payment to employees after they retire. The amount of this future payment depends upon a number of future events, such as estimates of employee lifespan, how long current employees will continue to work for the company, and the pay level of employees just prior to their retirement. In essence, the accounting for defined benefit plans revolves around the estimation of the future payments to be made, and recognizing the related expense in the periods in which employees are rendering the services that qualify them to receive payments in the future under the terms of the plan