The Accounting and Auditing Function as it Relates to Pension Plans

These assumptions, therefore, determine the contributions and thus the quantity of income which is deferred from taxation.

When the pension plan is established, it is crucial that these assumptions be carefully determined and their calculations documented. In 1989, the Internal Income Service (IRS) started out an audit system formulated to attain more back taxes from pension dollars whose interest rate assumptions or retirement ages the IRS observed unrealistic. The agency expected to realize more than $660 million from its efforts, but was unable to win the very first three cases it took to court.

According to Statement of Financial Accounting Standards (SFAS) 35, issued by the Financial Accounting Standards Board (FASB),

assumed rates of return shall reflect the expected rates of return during the periods for which payment of advantages is deferred and shall be consistent with returns realistically achievable on a kinds of assets held by the plan as well as the plan's investment policy.

Recognizing that these guidelines have been vague and that businesses could justify a wide amount of discount rates and nevertheless be in compliance, SFAS 87 determines that it is appropriate for companies to use accessible data about rates applied in pricing current annuity contracts. SFAS 87 introduces the idea how the discount rate should successfully reflect the settlement in the obligation.

 

The last step during the substantive testing phase is to examine the adequacy of the presentation and disclosure of pension plans. The auditor should review financial statements to determine that pension plans and related accounts are correctly classified and described, and that all material data is disclosed. The auditor ought to determine that accounting and disclosures for employee pension plans are in accordance with new accounting rules as well as government and tax related regulations and laws.

It is essential that the accountant examine that pension plans be properly classified. SFAS 87 prohibits the sponsor of several plans from netting the obligations and assets of individual plans unless the assets of a single plan is also applied to meet the obligations of another. To determine compliance in this situation, the auditor have to separate the assets and obligations of the plans and determine the funding, liability and tax portions separately.

There are other Statements which govern how pension plan accounting is performed. SFAS 35 requires that plan investments, except for contracts with insurance companies, be reported at fair value. The exception to fair value reporting has been utilized to similar contracts issued by financial institutions other than insurance companies. In 1992, this statement was amended to need that all investment contracts be reported at fair value.

Under SFAS 87 and 106, disclosed info need to be in a form that enhances understanding and increase intercompany comparability of employee benefit plans. SFAS 87 requires that corporations disclose the part of pension expense in financial statements footnotes. As well as the net periodic price disclosure, corporations need to give a particular reconciliation schedule to link the funding in the plan reputation and also the amounts shown on a balance sheet.

 

Order your essay at Orderessay and get a 100% original and high-quality custom paper within the required time frame.