Teaching The Interrelationships Among Costs, Expense, And Liability Of A Defined Benefit Pension Plan

Abstract

The Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS #158).  Their intent is to comprehensively reconsider the accounting for postretirement benefit plans in phases.  The first phase was to provide timely and significant improvements and resulted in SFAS #158.  The object of this Statement is to improve the understandability and representational faithfulness of the amounts reported in the employer’s statement of financial position by recognizing as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan.  The purpose of this paper is to provide a logical approach for teaching accounting for a defined benefit pension plan.  This objective will be accomplished by providing a discussion with detailed illustrations of the interrelationships of the effects on income (both operating income and other comprehensive income) and the amount reported on the balance sheet.