Funding, as it relates to retirement benefit plans, is simply adding money or investments to the account.

This can be done by payroll deductions from an employer, automatic fund transfers from a bank account, transfers from another retirement account or by simply depositing a cheque. Pension funding is governed by laws which determine the annual minimum required contribution and the annual maximum tax-deductible contribution.

Charging, in relation to retirement benefit plans,on the other hand, refers to funds being deducted from that account for various reasons. Some of the most common charges are management fees, yearly maintenance fees, commissions on investment products or termination fees.

The two general types of pension plans are defined benefit plans and defined contribution plans. A defined-contribution plan specifies the employers contribution to the plan usually based on a formula, which may consider such factors as age, length of service, employers profit, or compensation levels.A defined-benefit plan, on the other hand,specifies a determinable pension benefit that the employee will receive at a time in the future. The employer must determine the amount that should be contributed now to provide for the future promised benefits.

In a defined-contribution plan, the employers obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined-benefit plan, the employers obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits.

Bethlehem Steels private pension plan is an arrangement whereby a company undertakes to provide its retired employees with benefits that can be determined or estimated in advance from the provisions of a document or from the companys practices.In a contributory pension plan the employees bear part of the cost of the stated benefits whereas in a noncontributoryplan the employer bears the entire cost. Bethlehem has noncontributory defined benefit pension plans.

The six basic components of net periodic pension cost are: 1. Service costthis is the increase in the projected benefit obligation at the date of adoption or amendment of a plan from retroactive benefits given to employees for years of service provided before the date of adoption or amendment. It isthe actuarial present value of benefits of the pension benefit formula to employee service during the period. 2. Interest costthe increase in the projected benefit obligation as a result of the passage of time. 3. Expected return on plan assetsThe expected return on plan assets is the expected rate of return multiplied by the fair value of the plan assets or a market- related asset value of the plan assets 4. Amortization of prior service costthe cost of retroactive benefits granted in a plan amendment (including initiation of a plan). 5. Gains and lossesa change in the value of either the projected benefit obligation or the plan assets resulting from experience different from that assumed or expected or from a change in an actuarial assumption.

6. Amortization of net transition asset or obligation - This indicates the funded status of the plan. The employer records the amortization over average remaining service of plan employees or over 15 year period, if the service period is below 15 years.

THE SERVICE COST COMPONENT OF NET PERIODIC PENSION EXPENSE This is determined as the actuarial present value of benefits attributed by the pension benefit formula to employee service during the period. The plans benefit formula provides a measure of how much benefit is earned and, therefore, how much cost is incurred in each individual period. The FASB concluded that future compensation levels had to be considered in measuring the present obligation and periodic pension expense if the plan benefit formula incorporated them. Simply put, it is the discounted PV of benefits earned by an employee during the current period. SERVICE COST = (cost - addition to pension expense)

THE INTEREST COMPONENT This component is the interest for the period on the projected benefit obligation outstandingduring the period. The assumed discount rate should reflect the rates at which pension benefits could be effectively settled (settlement rates). Companies should look to rates of return on high quality fixed-income investments currently available whose cash flows match the timing and amount of the expected benefit payments. Interest Cost = (cost - an addition to pension expense)

THE EXPECTED RETURN ON PLAN ASSETS COMPONENTS

This component is calculated as future value of plan assets at the end less future value of plan assets in the beginning plus Benefits paid during the year less contributions made during the year. EXPECTED RETURN ON PLAN ASSETS = (change in the future value of the plan assets from the beginning to the end of the year) + benefits paid to employees - contributions from employer

This accounting principle requires companies to use the accrual basis of accounting. The matching principle requires that expenses be matched with revenues. The theoretical justification for accrual recognition of pension costs is based on the matching principle. Pension costs are incurred during the period over which an employee renders services to the enterprise; these costs may be paid upon the employees retirement, over a period of time after retirement, as incurred through funding or insurance plans, or through some combination of any or all of these methods.

Accrual accounting provides greater objectivity in the annual measurement of pension costs if actuarial funding methods are applied to actuarial valuations to determine the provision for pension costs. While cash accounting provides a more precise determination of the final cost, accrual accounting provides a more objective measure of the annual cost.

In concluding, the matching principle applies to pension accounting in the way that accrual-basis accounting, re the matching principle, recognizes pension cost as it is incurred and attempts to recognize pension cost in the same period in which the company receives benefits from the services of its employees.

A pension plans obligation can be vested, accumulated or project benefit obligation. They can increase or decrease from on period to the next because of a number of reasons. These reasons include, but are not limited to: Interest cost - As interest accrues on the plan, the obligation increases with the passage of time. Benefits paid - As benefits are paid to pensioners, the benefit obligation decreases. Actuarial Adjustments - These are changes made to the underlying assumptions of the plan on a go-forward basis. These types of changes can both increase or reduce pension obligations, depending on the change. Plan amendmentsAny pension benefits given to employees or pensioners retroactively. Such awards will cause an increase in the obligation. Current service - as time passes, in most cases the benefits earned by employees through years of service or salary increases will cause the pension obligation to increase. Increase or decrease in compensation levels An increase or decrease in inflation Increase or decrease in market Risk - Market risk is the risk associated with changes in the value of the investments in the plan. When the value of the investment plan increases or decreases so does the obligation.

Pension plan assets or pension fund increases or decreases from one period to another for a number of reasons. Some of the reasons for the change are as follows:

 Expert Contribution- Expertise in math expertise is often significant when dealing with retirement assets, generally and in the estimation of plan assets and growth trends in particular. Actuaries use their knowledge of to help companies evaluate how much to contribute. Being that Actuaries can only estimate this increases risk and uncertainty, which in turn can increase or decrease the pension plans assets. Asset Fluctuations - Pension plan assetsinclude everything a company acquires in benefit of the plan. These often include investments in securities. A pension plan's assets increase or decrease over time when an employer makes periodic cash contributions and or withdrawals. They also see an increases if economic conditions improve, and vice versa. Correspondingly, plan resources decrease if the economy turns sour, and investors bid the values of stocks and bonds lower (Codijia). Retired persons - Plan assets are used to pay for retiree benefits, and as such if additional persons retire, there will be a decrease in pension plan assets Regulatory Context- Government tries to ensure that companies set enough cash aside to afford payment of employee retirement benefits. This may cause pension fund assets to increase or decrease with certain considerations such as actuarial assumptions. Change in Accounting Principle -Companies can elect to change their accounting method for the amortization of gains and losses through net periodic benefit cost, or to change the market-related value of plan assets.

Pension benefits are paid far out into the future, but how and when theyll be paid is uncertain. Both pension funding and accounting require assumptions to be made about the future. These assumptions are called actuarial assumptions and they, along with current plan participant data

and the benefit formula described in the pension plan, are used to project future benefits. There are two primary types of assumptions selected: Economic assumptions dealing with current interest rates, salary increases, inflation and investment markets. How will market forces affect the cost of the plan? Demographic assumptions about the participant group make-up and expected behaviour and life expectancy. How will participant behaviour affect the cost of the plan?

Economic Assumptions Interest Rate This assumption is used to discount future benefits to determine plan liabilities and it should be a reasonable expectation of the future rate of return on the pension plans assets. For pension accounting, this is called the discount rate and must reflect either the marketrates currently applicable to settling the benefit obligation or the rates of return on highquality fixed income securities at the measurement date. The measurement date is a dateselected by the company that is generally the last day of the companys fiscal year but maybe up to three months earlier. Expected Long-term Rate of Return on Assets This assumption is used to determine the expected return on assets during the year. This assumption reflects the average rate of earnings expected on current and future investments to pay benefits. It is a long-term assumption that is reviewed regularly but generally changes when the long-term view of the market changes or with shifts in the plans investment policy. Salary Scale This assumption is used to project an individuals future compensation in pension plans that provide benefits based on compensation. The salary scale assumption

reflects expected inflation, productivity, seniority, promotion and other factors that affect wages. Inflation For pension accounting, this is used to project items, which increase with the Consumer Price Index (CPI).Inflation is also used as a basis for determining other economic assumptions because inflation is a fundamental component of each of the economic assumptions.

Demographic Assumptions: Actuaries use rates (probabilities) to model the uncertainty of participant behavior. Some typical demographic assumptions are: Withdrawal or Termination Assumptions how long will participants continue to work for this employer? Mortality Assumptions how long will employees live? Retirement Assumptions when will participants retire and begin receiving benefits? Disability Assumptions will participants become disabled and no longer be able to work?

A liability arises when employee did not use all of his/her compensated absences. In this case a liability is accrued for the unused portion. The Statement of Financial Accounting Standards, SFAS No. 43 entitled Accounting for Compensated Absences states that the following conditions must be met for compensation for future vacations to accrue: The obligation is attributable to employees' services already performed. That is, Services of the employees have to be previously rendered. The paid absence can be taken in a later yearthe benefit vests (will be compensated even if employment is terminated) or the benefit can be accumulated over time.

 Payment is probable and the amount can be reasonably estimated

The liability for future vacation usually is accrued at the existing wage rate rather than at a rate estimated to be in effect when absences occur. And as such, if wage rates have risen, the difference between the accrual and the amount paid increases compensation expense that year.

An enterprise should recognise the expected cost of short-term employee benefits in the form of compensated absences under IAS 19, paragraph 10 as follows: a. in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and b. in the case of non-accumulating compensated absences, when the absences occur.

Simply put, accruing compensation matches the cost of vacation benefits to the period in which services are rendered and results in recognition on measurable liability.

An enterprise should measure the expected cost of accumulating compensated absences as the additionalamount that the enterprise expects to pay as a result of the unused entitlement that has accumulated atthe balance sheet date.

REFERENCES

Codjia, M. What Makes a Pension Plan Asset Increase or Decrease From One Period to the Next? Retrieved on November 1, 2011 from http://www.ehow.com/info_8378417_pension-decrease-one-period-next.html

Deloitte Audit and Enterprise Risk Services.Pension Accounting Considerations Related to Changes in Amortization Policy for Gains and Losses and in the Market-Related Value of Plan Assets, Financial Reporting Alert 11-2

Intermediate Accounting eBook 6/e. Retrieved on November 1, 2011 from http://connect.mcgraw-hill.com

Kieso, Intermediate Accounting, 13/e