At the end of the period, the aggregated amount accrued then
should equal the then present value of the expected benefits to the employee.
But don't forget to include any beneficiaries if they're covered and
covered dependents that in exchange for the employee's service to that date.
So, let's look at the quick example of this.
So, an entity enters into a contract with a 55 year-old employee who
has worked 5 years for the entity.
Do you reward them for good service?
The contract states that in exchange for past and future services,
the entity will pay an annual pension of $20,000 to the employee,
commencing immediately on employee's retirement.
Now, the actuarial present value of a lifetime annuity of $20,000 that begins
at the employee's expected retirement date, would be accrued as of the date of
the contract is entered into because if the employee is fully eligible for
the pension benefit at that date.
So if the contracts states, we're going to pay you a bunch of
benefit of $20,000, it's fully vested today.
That's a past service request.
We're going to fully accrued that benefit today.
Now, well be a present value benefit.
You're going to look at based on the estimate retirement date of the employee.
So lets tweak that scenario a little bit.
What if future services actually required?
What if the contract stipulates that the employee must work an additional five
years to qualify for the $20,000 annuity?
Well then, the benefit would be accrued in a systematic and
rational manner over the next five years.
So what if those, the first 20,000 is vested but if they work an additional
five years, they will get $20,000 more for a total benefit of $40,000.
Well then that benefit attributable to the past service would be accrued immediately,
and the additional benefit would be accrued, again, in a systematic and
rational manner over the next five years.
So this is a little bit less complicated accounting, but of course there'll be
more volatility involved in this, as you have a smaller pool of employees,
maybe just a pool of one, and your assumptions don't really apply.
But you are going to have immediate recognition for
any changes to the plan upon initiation of the plan.
You're going to accrued the amounts that you expect to be
the present value of the future benefits at the retirement date, thank you.