Accounting for Defined Contribution Pension Plans
Under a defined contribution plan, the employer pays a specified amount into an employee’s plan each period. Since this amount is known and there is no further risk associated with the payment from the company’s perspective, accounting for such plans is fairly simple.
On the income statement, the amount of the contribution would be recorded as an operating expense (typically under selling, general and administrative expense) in the period the employee earns the benefit.
On the balance sheet, if the contribution is paid in the same period as the employee earns the benefit no entries are necessary. If, however, benefits earned in one period are paid in the next, the company will have to record a liability for the amount they owe the employee until it is paid. This amount will typically fall under accrued salary or other accrued expenses.
For analysts and investors, the analysis is also straightforward. Since the amount is known and that amount is recorded on the income statement and (if necessary) the balance sheet, no adjustments are necessary.
For more information, see all articles on: Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
