Question Six: &n

Question Six: (10points)

Pension as post retirement employee benefits is difficult to recognize and measure but the standards required to represented in the financial statements, explain pension, the difficulty that faced pension measured and how should we recognize and represent the pension in the financial statements?

Expert Solution

Pension can be referred as an amount or a sum of money accumulated as a fund by deducting from employee's salary or added by the employer. These sum of money is given to the employees after they retire in the form of mothly pension to provide a support to their employees after they retire.

Basically there are two types of pension plan. Defined benefit plan is the pension plan where employees are given a certain sum of money after retirement. While in defined contribution plan, employees set aside a particular sum of money from employee's salary and is invested and at the time of retirement the sum of money which has finally being accumulated at the time of retirement is given to respective employees.

The problems faced in measuring pension is analysing the pension adequacy. It has two approached that us income approach and consumption approach. While measuring the pension, it should be properly analyzed on both approaches.

There should be an approach made in a way that olderly people are not facing poverty and that the amount given is adequate for their consumption. So, it is very important to measure the pension according to the income, and the consumption level of the employees.

So, therefore, it is effective to recognise pension according to how much one consumption so as to live a standard life. Accordingly one has to be given pension. It is the major objective to iradicate poverty for their employees on retirement.

For reporting in financial statements:

Defined contribution plan is an expense for the company because company provides a percentage of salary to employees as additional amount which is to be invested. So it decreases the cash resources of company. Thus in financial statements,it is represented as a expense.

At the time of emplyees being working, the amount of pension is as a liability for the company and for the total year an employee is working, the profit and loss account of the company is debited and pension account is being credited.

Once the retirement period approaches, the pension account is debited and cash account is credited.

So, this is the representation of the pension in the financial statements.

ekkarill92 answered 2 years ago

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