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September 21, 2005
Struggling with pension accounting
I'm trying to get a handle on accounting for pensions -- specifically, defined benefit plans -- for an exam next Tuesday in ACC 455. This is one of those accounting topics that you can't figure out on the fly -- you just have to do enough of them that you memorize how it works. Such unintuitive concepts as the "Corridor Method" of amortization for unrecognized gains and losses... drive me nuts. (With the Corridor Method, you amortize the difference between the gain/loss of plan assets and 10% more or less than the Pension Benefit Obligation or the fair market value of plan assets. That is, you amortize anything outside the 10% "corridor" away from the PBO or plan asset value. The 10% figure is completely arbitrary -- a compromise between FASB, who wanted honest pension accounting, and sneaky corporate executives who wanted to smooth out fluctuations in their pension-plan assets.)
Why, I hear you asking, are they making us spend so much time learning the arcane details of defined-benefit accounting, when very few companies have defined-benefit pensions anymore? (A DB plan is an old-fashioned "company pension," where the employee doesn't have to pay in -- the company puts money aside to pay for the employee's retirement benefits. These days, most companies have "defined contribution" plans -- in the private sector, usually 401(k) plans -- where you put so much of your paycheck away, pre-tax, usually matched in part by company contributions.) Well, I chalk it up to conservatism on the part of the business school and the accounting faculty. Accountants are notoriously resistant to change.
In any case, I recommend buying one-week coffee futures....
Posted by Urbie at September 21, 2005 01:14 PM