In: Accounting
How do we account for Actual Return(s) on Plan Assets? How does the respective return affect the Pension Liability?
The term return on plan assets refers to the dividends, interest, and capital gains generated by assets held in a company's pension fund. Accounting rules require companies to differentiate between the expected and actual return on their plan's assets.
Companies provide employees with a pension plan as part of a larger array of employment benefits. The FASB Statement of Financial Accounting Standards No. 87 requires firms to measure and disclose pension obligations as well as the performance and financial condition of their plans at the end of each accounting period.
At the start of the year, companies will multiply the fair market value of the assets held in their pension funds by an estimate of the long-term rate of return on these investments. This return on plan assets reduces the company's overall pension expense. FASB rules require companies to differentiate between the following two measures:
RETURN ON PLAN ASSETS AFFECT THE PENSION LIABILITY AS BELOW :-
Pension expense = current service cost + interest cost – expected return on plan assets +/- amortization