Pension plans: Accounting for annuity costs based on past services;

              Accounting Research
BULLETINS
•
Issued by the Committee on Accounting Procedure,
American Institute of Accountants 13 East 41st Street. New York 17, N. Y.
Copyright 1948 by American Institute of Accountants
November, 1948 No. 36
Pension Plans
Accounting for Annuity Costs Based on Past Services
1. When costs incur red under pension plans are based in part on services performed prior to the adoption of the plan, the problem arises whether that portion of the costs which are attributable to such services are applicable to the past or to the present and future periods and, accordingly, whether they should be charged to income. This bulletin deals with the accounting treatment of such costs arising out of past services when incurred under pension plans involving payments to outside agencies such as insurance companies and trustees.
2. The committee has undertaken a statement on this subject at this time because of the trend toward expansion of pension plans to cover a wider and much larger group of employees, often at sub-stantially increased costs, and in order to narrow the area of differ-ence in the accounting treatment accorded in actual practice to annuity costs based on past services. Self-administered and informal plans which do not require payments to outside agencies are not specifically dealt with because of their special features and lack of uniformity. The principles set forth herein, however, are generally applicable to those plans as well.
3. Charges with respect to pension costs based on past services have often been made to surplus on the grounds that such payments are indirectly compensation for services and, since the services upon which the payments are computed were performed in the past, the compensation should not be permitted to affect any period or periods other than those in which the services involved were performed. In other cases all annuity costs based on past services have been charged to income in the period of the plan's inauguration as a current cost of originating the plan. In still other cases the position has been taken that a pension plan cannot bring the anticipated benefits in the future unless past as well as future services are given recognition and,
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