Defined Contribution Plan Accounting

Hard Employee Compensation Defined Contribution Plans

A company, XYZ Corp, offers a defined contribution plan to its employees. In this type of plan, employees contribute a percentage of their salary, and the company matches a portion of these contributions. As part of the financial reporting process, XYZ Corp needs to account for these contributions correctly. Employees are allowed to allocate their contributions to various investment options, and the retirement benefit received depends on the performance of these investments over time.

Given the nature of defined contribution plans, consider the following statements regarding the accounting treatment of employee contributions and employer matching contributions:

Employer matching contributions should be expensed in the period they are incurred regardless of the funding policies of the plan.

Employee contributions can be recognized as an expense once deducted from salary, while employer contributions are recognized only when paid.

Both employee and employer contributions are recognized as liabilities on the balance sheet until paid.

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