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The objective of these new standards is to improve the way state and local governments normally prepare reports on their pension liabilities and expenses. The logic behind that is, it will create and project a highest level of faith and confidence in the representation of the full impact of these obligations. One of the improvements is that net pension liabilities will be reported on the balance sheet. That change is to provide to citizens and all the users of financial reports producing by governmental entities a better representation of the size and nature of the financial obligations.
For financial reporting purposes we distinguish two types of pension plan; a defined benefit plan and a defined contribution plan. Both plans will provide income steam to retirees. Nevertheless, a defined plan is based on the benefit terms and a contribution plan is grounded on the amount the employee would contribute over his or her working life period; it is a compound of actual earnings on investment of the aggregate amount contributed and other factors.
Moreover, a defined benefit plan can be classified into two subcategories; one based on the number of governments participating in a particular pension plan and the other if assets and obligations are shared among the participating governments. Distinction is also made on the number of employers participating to the plan and the number of employers that have access to the funds. A single employer plan is the one in which assets are combined for investment purposes, but each employer’s share of the pooled assets will be legally used to pay the benefits to only its employees; and a cost-sharing employer or multiple plan in the one in which participating employers pool or share obligations to provide pensions to their employees and plan assets can be used to pay the benefits of employees of any participating employer.
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