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Web

Mining Wikipedia for accounting topics

Wikipedia logoWikipedia is a good source of information about a variety of topics. I’m pleased to find that it’s generally pretty good about accounting too.

The article on the Balance Sheet contains “case studies” showing the effect of some transactions on a very basic balance sheet.

As well, I’d never seen non-current liabilities referred to as “fixed” liabilities before, although I’m familiar with “fixed assets.” Guess I’d just never considered the contra terminology!

It makes sense though, given that they result in fixed costs to the business, in general.

The article on the Income Statement shows some examples from Colgate-Palmolive and Viacom and gives instructions on calculating earnings-per-share.

Pensions have been in the news lately, with FASB announcing revised standards regarding the funded status of defined benefit plans.

Wikipedia’s pension entry provides a solid description of the two types of pensions, defined benefit and defined contribution.

I learned something new on the pension page as well:

In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers’ contributions and taxes.

It’s not surprising to find out we don’t learn how to account for these types of pensions in school. It’s basically pensions on a cash basis. Pay the cash, recognize the expense.

Poor matching of expenses to the revenue they helped generate – which is no doubt why governments are the only organizations that get to use this type!

Have you ever contributed to Wikipedia?

Categories
Accounting Standards

Pension brouhaha south of the border

FASB is coming out with some tough new standards relating to defined benefit pensions that is expected to result in significant new liabilities (or increases to existing ones) for companies that had been accounting for their pensions under the more lax requirements of the old standard.

Defined benefit pension plans are definitely the more complicated type, compared to defined contribution. I’ve only worked on one pension audit thus far, and it was – luckily for me – a defined contribution. Auditing a defined contribution plan is easier to do because future estimates aren’t necessary. Defined benefit plans require an actuary to perform the highly specialized work.

Anyway, back to the change in the standard. Under the old standard:

Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits.

Pension accounting is one of those things you learn in a 2nd or 3rd year course at university and then pray you don’t have to see frequently in practice, unless you’re a masochist. It’s just so very complicated! I feel lucky that so far the only pension audit I’ve been on has been defined contribution.

Specifically, the new standard requires an employer to:

(a) Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status

(b) Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions)

(c) Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.

Sounds like they’ve improved things from both the investor viewpoint as well as the employee’s. This new standard brings up the issue of comprehensive income, which is a below-the-line adjustment to net income on the income statement. I believe the Canadian standards body has guidance out relating to it but it may or may not be in effect for year ends just yet.