Please write a separate case reply for each attached case, each reply must be at least 350 words in length. Your replies should be a substantive critique and add new information concerning the subject matter of your other classmates' cases. Each reply must cite at least 3 sources. Acceptable sources include peer-reviewed journal articles, FASB Codification, the textbook, and the Bible. Each Reply must be in APA format.

Running head: CASE 14-1 1 Case 14-1: Pension Benefits Joshua S. McDonald Liberty University CASE 14-1 2 Case 14-1: Pension Benefits A key consideration in the employer employee relationship is the nature of retirement benefits. Historically, employers have sought to provide for the retirement needs of their employees (Schroeder, Clark, & Cathey, 2014, p. 487) as they were considered \"assets\" to the company. Over time they nature of these provisions have shifted the risk of retirement benefits from the employer to the employee, as defined benefit pension agreements have shifted to defined contribution plans (de Thierry, Lam, Harcourt, Flynn, & Wood, 2014, p. 655). Over the course of this discussion board, these two methods will be examined, as well as the actuarial methods used to fund such arrangements. Defined benefit plans (a.ii) In a defined benefit plan, contributions from the employer are determined by the amount of benefits to be paid out to recipients in the future (Schroeder et al., 2014, p. 487). Under these plans, future pension income is clear; as the employee knows what their future benefit will be (de Thierry, 2014, p. 655). While there are many ways to determine this benefit, it is often based upon the salary of the employee in their final years of employment (de Thierry et al., 2014, p. 655). The accounting for such plans is difficult, since the risks are endured by the employers. This results in cash outflows to retirement plans not always equaling the periodic pension expense (Schroeder et al., 2014, p. 488). These plans become even more complex when one considers the payments necessary to satisfy future pension obligations (Schroeder et al., 2014, p. 489). Because of this, employers often enlist the assistance of actuaries to determine these payments (Schroeder et al., 2014, p. 489). CASE 14-1 3 The cost approach (b.i) One of the methods actuaries use to determine payments needed to fund future pension benefit requirements is the cost approach. Under this method, the total benefits to be paid out are estimated, and then the equal annual payment required meeting that benefit is determined (Schroeder et al., 2014 p. 489). This annual payment is then adjusted by the amount of interest that the contribution is expected to earn (Schroeder et al., 2014, p. 489). The benefit approach (b.ii) The second approach used by actuaries is termed the benefit approach. This technique estimates the present value of employee pension benefits earned up to date (Schroeder et al., 204, p. 489). This is accomplished by either determining the pension cost and liability based upon salary levels (known as the accumulated benefits approach) or the estimated final pay at retirement (known as the benefits/years of service approach) (Schroeder et al., 2014, p. 489). Defined contribution plans (a.i) While defined benefit plans are determined by the future benefits to be paid, defined contribution plans are determined by a specified amount the employer is to contribute each period (Schroeder et al., 2014, p. 487). The accounting for such plans is far less complex than defined benefit plans, as pension expense is equal to the periodic payments made by the employer (Schroeder et al., 2014, p. 488). This is because the risk of future benefits does not reside with the employer, but the employee, as there is no guarantee of final income (de Thierry, 2014, p. 655). The only guarantee the employee has under these plans is the contribution from the employer. CASE 14-1 4 Biblical consideration For Christian employers, the determination of what form of retirement benefits to offer employees should be considered. On the one hand, defined benefit plans are complex, and tend to be costly to employers (Schroeder et al., 2014, p. 488). At the same time, defined contribution plans tend to benefit financial intermediaries, and not the employers or employees (de Thierry et al., 2014, p 655). Employees incur risk under these plans, and lose out on the guaranteed benefit provided in defined benefit arrangements. Employers suffer under defined contribution plans as well, as work performance and turnover increase, as defined benefit plans encourage loyalty to their employer and encourage strong work ethic, as the end benefit is often determined by ending salaries (de Thierry et al., 2014, p. 661). So what does this have to do with Christian employers? Christian employers have a responsibility to take care of their employees, and compensate them justly for their services (Deuteronomy 24:14-15, ESV). While defined benefit plans technically meet the compensation component, they do not seek to meet the needs of those under their care. Employers should treat employees with justice and fairness (Colossians 4:1, ESV). By instituting a defined benefit plan, employees are justly compensated for their years of service to employers. But does this reality outweigh the costs associated with such plans, which are prohibitive? While there may be no clear answer for the Christian employer, it is an important thing to consider. CASE 14-1 5 References de Thierry, E., Lam, H., Harcourt, M., Flynn, M., & Wood, G. (2014). Defined benefit pension decline: The consequences for organizations and employees. Employee Relations, 36 (6,) p.654 - 673. doi: http://dx.doi.org.ezproxy.liberty.edu:2048/10.1108/ER-02-2013-0020 Schroeder, R.G., Clark, M.C., & Cathey, J.M. (2014). Financial Accounting Theory and Analysis: Text and Cases (11th Ed.). Hoboken, NJ: Wiley. Case 14-2 Pension Accounting Terminology Preliminary Views The increased number of defined benefit pension plans and FASB's contention that pension information was inadequate resulted in the Preliminary Views proposal. The Preliminary Views proposal addressed comparability deficiencies among reporting companies and detailed the amount of the annual pension expense to be recognized. The annual pension expense would be the sum of the increase attributable to employee service, accrual of interest from the obligation, increase in pension plan assets from any earnings, and amortization of the valuation allowance (Schroeder, Clark & Cathey, 2014). The AICPA opposed the viewpoint of the Preliminary Views proposal. The AICPA's apprehensions were related to their belief that the amounts associated with pension costs did not meet the classification of assets and liabilities, and that pension costs were fundamentally contracts which should be accounted for as covered services are performed (2014). In addition, critics noted that there was not a concrete manner to determine the pension liability and the obligation was subject to too many assumptions. There were many inconsistencies from period to period and some pension obligations were omitted from financial statements. SFAS No. 87 The Statement of Financial Accounting Standards (SFAS) No. 87 was issued in response to the controversies surrounding the measurement of cost and reporting of liabilities in defined benefit pension plans. The statement maintains that the amount of employer period contributions should not dictate the method of recording the obligation. To provide more useful financial information, the FASB reiterated the effectiveness of accrual accounting which encompasses more than cash transactions (FASB.org, 2016). The board also noted that this statement is not intended to imply that employer funding decisions are not an important component of reporting for defined benefit pension plans, but that it was not the only component. The service cost, interest cost, return on plan assets, amortization of prior service cost, amortization of gains and losses, and amortization of the transition amount are required to be included in the net pension cost (Schroeder, Clark & Cathey, 2014) a. Discuss the following components of annual pension cost: i. Service Cost - The service cost represents the present value of the projected benefits earned by employees in the current period (Schroeder, Clark & Cathey, 2014). The service cost is based on the company's chosen actuarial funding approach. Service cost is normally the largest component of the pension liability. ii. Interest Cost - The pension liability is calculated at present value, but accrues interest every year. The interest cost is determined by accruing interest on the pension liability from the previous year (2014). iii. Actual return on plan assets - The actual return on plan assets is the interest, dividends, and capital gains earned from assets in a pension fund (2014). The actual return on plan assets reduces the company's pension liability. iv. Amortization of unrecognized prior service cost - The prior service cost is the recognition of pension expense caused by a retroactive change to the benefit formula. The prior service cost must be amortized over the average remaining years of service (2014). v. Amortization of transition amount - The significant changes required by SFAS No. 87 prompted the FASB to allow a transition period. The resulting unrecognized net asset or net obligation was called the transition amount. The transition amount is amortized, straight-line basis, over the average of the employees average remaining years of service (2014). b. Discuss the composition and treatment of the minimum liability provision. The FASB requires recognition of a liability when the accumulated obligation surpasses the fair value of plan assets. The liability only considers present salary levels. The minimum liability does limit the extent to which plan losses and amendments can result in omissions of certain liabilities (FASB.org). This is a safeguard to ensure that the fair value of the plan assets do not significantly fall below the plan needs and is a part of being adequately prepared. The Bible addresses preparedness in Psalms 6:6-8 which states, \"Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest\" (English Standard Version). References FASB.org. (2016). Summary of statement No. 87. Retrieved from: http://www.fasb.org/summary/stsum87.s html. Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2014). Financial accounting theory and analysis: Text and cases (11th ed.). Hoboken, NJ: Wiley. ISBN: 9781118582794. Reply Quote Email Author