Defined Benefit Asset vs Liabilty.

Llouise12y ago

Can anyone tell me how to figure out if it's a defined benefit asset or liability when calculating the accounting treatment for a DBP? In the accounting treatment for a defined benefit plan, the extract for Profit or Loss is Current Service cost = 20.0 Past Service Cost = 0.0 Net interest on defined benefit (asset)liability = 0.5 (5% x 200) - (5% x 190) Net Expense = 20.5 So if it's an asset you subtract and if it's a liability you add. So how do you figured out if it's an asset of liability? I have a feeling it's if the difference between Present Value of obligation less Fair Value of plan assets increases (liabilty) or decreases (asset) but I can't find a definitive answer. So if: 1 Nov x6 PV of Obligation = 200 1 Nov x6 FV of Plan Assest = 190 Difference: 10 31 Oct x7 PV of Obligation = 240 31 Oct x7 FV of Plan Assets = 225 Difference : 15 Increased so a liability? Is this correct Or do you add them together 1 Nov x6 PV of Obligation = 200 1 Nov x6 FV of Plan Assest = 190 Totals: 390 31 Oct x7 PV of Obligation = 240 31 Oct x7 FV of Plan Assets = 225 Totals: 465 Increased so a liability. The question I've pulled these numbers from is a BPP question, number 10 Macaljoy, and the answer states it's a liability but not why. I'd just like to understand the rule as to why. Does anyone know? Thanks

NNgu12y ago#1

What is confusing you is the defination of a liability and an asset. Put simply, id say Net liability = Plan liability - Plan Asset, allways. The way you account for an increase or a decrease in a provision is the same way you account for an increase in the obligation. By the way, the plan asset arises out of the firm setting aside resources to meet the future obligation, say in your instance you have an obligation (liablility) to pay 200 in x6, however you have an asset "money" set aside for this which is 190, so your net liability is 10. SFP should have a DBP Liabilty of 10. What goes to the SPL is the "movement" between succesive net obligations. If the plan was established in x6, ie, had 0 bal in x5, then in the SPL you have an xpense of 10 to complete the double entry. In x7 the net obligation has moved from 10 in x6 to 15. So the increase in provision of 5 goes to SPL as an expense while your SFP will have 15 as a liability. Take other numbers as "workings" for the liability in the SFP and the pension cost in the SPL, you will not loose the bigger picture. If the assets investments set aside exceed the liability then you have a net asset - follow the the entries you do for an incease/decrease in debtors/prepayments. I hope I am clear enough

Llouise12y ago#2

Thanks so much, this is really clear and heaps helpful! Thanks!!!