Page 86 - Group Insurance and Retirement Benefit IC 83 E- Book

INTRODUCTION:

IN THE past two or three years there has been considerable activity on the part of the
accounting profession to establish greater uniformity in the charges made on corporate

financial statements for the cost of pension plans. Many actuaries, accountants, and
others interested in the problem have attempted to develop a procedure that will satisfy

all parties concerned. The purpose of this paper is to set forth the nature of this problem,

to give a r6sum~ of what is currently being done, and to suggest possible solutions.

One of the principal problems existing in this area is that different technical terms mean

different things to different people. Thus it is essential to have a clear definition of the
terms as they are used in this paper. These follow:

a) True cost.--This is a theoretical figure which is defined as the amount which should
be contributed for the plan in a given year on the basis that, if this same cost (expressed

in dollars or percentage of payroll) were contributed for every year in perpetuity, all the
commitments of the pension plan would be fully met, and at no time in the future would

either more or less than this amount ever have to be contributed. Actually, this true cost

can never be computed for a plan in effect but can only be estimated.

b) Past-service cost: This is the amount that would have been in the fund as of the
effective date of the pension plan for the employees then included if the plan had always

been in effect, if the company had always contributed the normal cost for the plan, and if

the actuarial assumptions had been exactly realized.

c) Prior-service cost.--This is the amount that would have been in the fund as of the date
of the valuation of the pension plan for the employees then included if the plan had

always been in effect, if the company had always contributed the normal cost for the
plan, and if the actuarial assumptions had been exactly realized. This is the net