Mortgages payable
A mortgage is a long-term debt secured by a real estate property such as a building or land. The mortgage is usually paid back in equal installments. These installments include a portion that is attributable to interest expense and the other to capital repayment.

Long-term leases
Companies generally acquire the right to use an asset by purchasing it outright. But in some cases companies can lease an asset as opposed to an outright purchase. Leases can be classified as operating leases or capital leases. Operating leases are defined as short-term leases by which the company enters into an agreement with the lessor to use the asset for a portion of the asset's economic life. The lessee (the company leasing the equipment) will have no obligation to purchase the asset in the future. Capital leases, on the other hand, are long-term leases that create a long-term obligation for the lessee. If the asset qualifies as a capital lease, the asset is recorded on the balance sheet and the present value of the lease obligations are also recorded on the balance sheet. The asset is amortized over the life of the lease by using a straight-line depreciation method. Each rental payment includes a portion that is allocated to interest expenses and repayment of principal.

Pensions
A pension plan is a qualified retirement plan set up by a corporation, labor union, government or other organization for its employees. A pension plan is an agreement under which the employer agrees to pay monetary benefits to employees once their period of active service has come to an end. A third party frequently manages the pension plan.

Look Out!
The CFA institute concentrates on two types of pension plans: defined-benefit plans and defined-contribution plans.

  • A defined-benefit pension plan promises a specific benefit at retirement to its employees. Since the benefits are defined, the employer is responsible for accumulating sufficient funds. Such plans insulate employees from investments that perform poorly, but it also prevents them from enjoying the entire upside potential of the pension if it does well.

    That said, pension funds are governed by the Employee Retirement Income Security Act of 1974 (ERISA), a more conservative investment approach, and large gains are unlikely to occur. Corporations refrain from setting up these types of plans because they can create enormous pension liabilities for a company if the pension's portfolio does not perform well.

    Defined pension plans need to be revalued periodically by an actuary. Under SFAS 87, companies are required to use the same actuarial cost method and are required to disclose assumptions about the pension obligation and pension cost. The major issue with SFAS 87 is that a company may make pension contributions using different assumptions when valuing the present value of the underlying assets using capital market assumptions.

  • A defined-contribution pension plan, by contrast, specifies how much the employer will contribute annually. The actual amount the employee will receive at retirement will depend on the overall performance of the pension fund. With such a plan, investments that perform poorly mean lower income in retirement, and vice versa. Under this plan the company does not carry any risk and does not create any pension liabilities if it pays its annual contribution amount. Contributions made are simply expenses on an annual basis and are usually discretionary.
  • Accounting for pension funds. To be able to pay their pension obligations, companies must accumulate funds known as the "plan assets". Plan assets are not formally recognized on the balance sheet, but are actively monitored in the employer's informal records. The plan assets can change due to returns on plan assets - such as dividends, interest, market-price appreciation and cash contributions - employer contributions and retiree benefits paid, which are benefits actually paid to retired employees. The composition of pension expenses is beyond this problem set.
Look Out!
Candidates should know that pension expenses are deducted from the income statement.

Though the pension plan assets and liabilities are not included in the financial statement, companies are required to include the following information in the footnotes:

  • The components of the annual pension expense
  • The projected benefit obligation (as well as the accumulated benefit obligation and vested benefit obligation)
  • Other information that makes it possible for interested analysts to reconstruct the financial statements with pension assets and liabilities included.


Post-Retirement Obligations

Related Articles
  1. Retirement

    The Investing Risk Of Underfunded Pension Plans

    Determine the risk to a company's EPS and financial condition resulting from an underfunded pension plan.
  2. Retirement

    7 Signs Your Pension Fund Is In Trouble

    Even if you're lucky enough to have a pension plan, you can't assume it'll pay out.
  3. Financial Advisor

    How to Advise Clients with Frozen Pensions

    Financial advisors are on the front line in advising clients impacted by a frozen pension. Here's what they need to consider.
  4. Retirement

    How to Spot Pension Fraud Before It Hurts You

    Don't let pension fraud threaten your livelihood after retirement. Here's what to watch out for.
  5. Retirement

    America's Frozen Pension Dilemma

    Unfortunately, there are several factors that have eroded the presence of pension plans in America, and workers need to be prepared to replace that expected income for their retirement years. ...
  6. Retirement

    Chipping Away At The Pension Freeze Trend

    Learn five steps that'll put your retirement back into your own hands.
  7. Managing Wealth

    How Pensions, Social Security Differ

    Both pensions and Social Security provide an income stream to retirees, but they differ widely on how they're structured and funded. Here's the lowdown.
  8. Retirement

    How To Evaluate Pension Risk By Analyzing Annual Costs

    Learn how to assess whether a company's pension plan is posing more risks than what the footnotes indicate.
  9. Financial Advisor

    How Do Pension Funds Work?

    Traditional private pension funds are well regulated by the government through ERISA and the PBGC. Alternative investments are aiding portfolio returns.
  10. Financial Advisor

    How Capital Gains Tax Works on Pension Funds

    Here's why capital gains tax does not affect the assets in pension funds.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center