CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsHard
A state government implemented a new pension plan for its employees during the current fiscal year. The actuarially determined contribution for the year was $10,000,000. However, due to budget constraints, the state only contributed $8,000,000 to the pension plan. On the government-wide financial statements, what amount should the state report as pension expense for the year, assuming no other changes in net pension liability?
- A$2,000,000
- B$8,000,000
- C$0
- D$10,000,000
Show answer & explanationAnswer & explanation
Correct answer: D. $10,000,000
Government-wide financial statements use full accrual accounting, similar to business-type accounting. Under this method, pension expense is recognized based on the actuarially determined contribution, which represents the cost of benefits earned by employees during the period, regardless of the actual cash contribution made. The $2,000,000 under-contribution would increase the Net Pension Liability.
Why the other options are wrong
- A. This represents the under-contribution, which affects the Net Pension Liability, not the pension expense for the period.
- B. This represents the cash contribution, which is relevant for governmental funds but not for government-wide pension expense under full accrual.
- C. This would be incorrect as pension expense is incurred.
Government-Wide Pension Expense (Full Accrual)
Under full accrual accounting for government-wide statements, pension expense is recognized based on the actuarially determined cost of benefits earned by employees during the period, rather than the cash contribution.
- Uses full accrual accounting.
- Based on actuarial valuations.
- Differences between expense and cash contributions adjust Net Pension Liability.
Memory trick: Government-Wide: Think of it like a business, full picture, not just cash.