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What is a Pension Expense?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 28 August 2016
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    Conjecture Corporation
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A pension expense is any type of expense that an employer incurs while managing a pension plan for his or her employees. Expenses of this type are recorded in the accounting reports and records of the firm, with the different transactions often accounted for using the most appropriate accounting method. The range and scope of pension expense involved with a given pension plan will depend on the overall structure of that plan, including the management of any matching of employee contributions that the employer chooses to make to the individual employee pensions.

There are several different types of transactions that may be included as pension expense in the accounting records of the employer. Any service costs associated with the management of the plan are included, along with projections and actual amounts realized on the return of the assets that help to generate interest income that is in turn added to the balance of the pension plan. Several amortized expenses may also be included, such as the amortized gains or losses associated with the plan, and any amortization that may occur with various transitional assets or obligations.

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The amount of pension expense is usually recorded on the income statement created by the business, and will reflect the total amount of expense accrued between the start and ending dates that appear at the top of the statement. This approach makes it relatively easy to track gains or losses in the value of the pension program. Elsewhere in the accounting records, more detailed information is provided that helps to support those figures appearing on the income statement, making it relatively easy to identify the reasons for the gains or losses.

As with most types of financial plans, the structure of the actual pension plan will determine what types of transactions may be considered pension and expense and which ones are not. A pension plan that relies solely on employee contributions with no type of matching contribution by the employer will be relatively simple in terms of expense line items. When the employer does make contributions that are based on a matching program, or on factors such as the years of service of a given employee or the gross income earned by an employee in a calendar year, the range of expenses that would apply and be recorded may be somewhat greater. Governmental regulations regarding the establishment and management of pension plans will also play a role in determining whether a transaction qualifies as a pension expense, or if the transaction should be accounted for in some other manner.

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