CM2 has not offered retirement benefits to its employees but is looking for information on pension retirement plans. Naturally, when you show up for work, Conner and Martin suggest that you gather information and fill them in on possible benefit plans and their accounting consequences.
Instructions (a) Research the authoritative literature (using the FASB Codification) for information about two types of retirement pension plans that might be adopted—defined-contribution plans and defined-benefit plans. Write a memo explaining these plans and describing their costs and benefits.
(b) After you present the memo and explain the concept of pension retirement plans, Conner and Martin chime in and say they have read in the news that many companies are “singing the blues” because they have severely underfunded pension plans and face huge shortfalls in covering their looming pension obligations. However, they are also quite confused because years ago, these same companies were on top of the world when their pension plans were overfunded. How, they wonder, can this happen in a relatively short period of time?
Explain to Conner and Martin how this can happen for defined-benefit pension plans. In your discussion, address the following:
(1) Five components of pension expense.
(2) The concept of “smoothing” in terms of gains/losses (delayed recognition).