ASC 715: Defined Benefit Pension Plan Journal Entries

ASC 715: Defined Benefit Pension Plan Journal Entries

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Defined benefit pension plans are an essential component of employee compensation packages, providing retirement benefits based on factors such as years of service and salary history. The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 715, "Compensation - Retirement Benefits," governs the accounting for defined benefit pension plans. This article will explore the key aspects of ASC 715 and provide examples of journal entries to illustrate the accounting process for defined benefit pension plans.

 

ASC 715 Overview

ASC 715 provides guidance on accounting for pension and other postretirement benefits offered by employers to their employees. The primary objective of ASC 715 is to ensure consistent and transparent financial reporting of retirement benefit obligations and related costs. The standard requires companies to recognize the funded status of their defined benefit pension plans on their balance sheets and disclose comprehensive information about the plans in the notes to the financial statements.

 

Key Elements of ASC 715

 

  1. Projected benefit obligation (PBO): The present value of estimated future benefit payments to employees, based on their service history, salary, and other factors.
     

  2. Plan assets: Investments held by the pension plan, such as stocks, bonds, and real estate, to fund future benefit payments.
     

  3. Funded status: The difference between the PBO and the fair value of plan assets. A plan is underfunded if the PBO exceeds the fair value of plan assets, and overfunded if the fair value of plan assets exceeds the PBO.
     

  4. Pension expense: The annual cost of providing pension benefits, which includes service cost, interest cost, expected return on plan assets, and other components.
     

Journal Entries for Defined Benefit Pension Plans

To illustrate the process of accounting for defined benefit pension plans under ASC 715, let's consider a hypothetical company, XYZ Inc., with the following pension-related data for the year:

 

  1. Service cost: $300,000

  2. Interest cost: $200,000

  3. Expected return on plan assets: $150,000

  4. Actual return on plan assets: $140,000

  5. Employer contributions: $350,000

 

Here's how the journal entries for these pension-related transactions would look:
 

Pension expense calculation:

Pension Expense = Service Cost + Interest Cost - Expected Return on Plan Assets

Pension Expense = $300,000 + $200,000 - $150,000

1. Pension Expense = $350,000
 

Record pension expense:

Dr. Pension Expense $350,000

2. Cr. Pension Liability $350,000
 

Record employer contributions:

Dr. Pension Liability $350,000

3. Cr. Cash $350,000
 

Record the difference between expected and actual return on plan assets (unrecognized gain):

Dr. Pension Asset - Return on Assets $10,000

4. Cr. Pension Liability (Unrecognized Gain) $10,000

 

ASC 715 provides a framework for accounting for defined benefit pension plans, ensuring consistency and transparency in financial reporting. By following the guidelines set forth in ASC 715, companies can accurately reflect their pension obligations and related costs on their financial statements, providing investors with valuable information for decision-making. Understanding the journal entries involved in defined benefit pension plan accounting is crucial for businesses to maintain accurate financial records and comply with accounting standards.