Pensions

1
Pensions Other Post Employment Benefits after
SFAS No. 158

• Includes certain slides provided by authors of
  Skousen, Stice Stice and Kieso, Weygandt
  Warfield Intermediate Accounting textbooks, as
  modified and adapted by Teresa Gordon

2
The good news

• Pension expense is computed exactly the same way
• Service cost
• Interest cost
• Expected return on plan assets
• Amortization (if any) of
• Transition gain or loss
• Prior service cost
• Unrecognized gain or loss

3
Big Change Valuation on BS

• We are now reporting the net of PBO and Plan
  Assets on the balance sheet.
• If Plan Assets gt PBO, reported net as a long-term
  asset
• If PBO gt Plan Assets (and plan assets exist),
  probably reported as noncurrent liability
• If there are no Plan Assets, liability is divided
  between current and noncurrent liabilities

4
Impacts the Statement of Comprehensive Income

• SCI used to have a deferred pension cost in
  certain cases (related to the minimum liability
  requirement which is gone)
• Now there are potentially 3 items of other
  comprehensive income
• Transition amount
• Prior service cost
• Actuarial gains and losses

5
A Bit of Review

• The new rules primarily apply to defined benefit
  plans

6
Defined contribution plans

• A plan that provides benefits based solely on
  what has been contributed and the earnings
  thereon lt 401(k) gt
• Amounts to be funded are determined by the plan
• No promise for specific future benefits.
• Independent third party holds assets
• Risk borne by employee
• Accounting relatively straightforward

7
Defined benefit plans

• A pension plan that determines the amount of
  benefit to be provided
• Contributions based on estimated amounts needed
  to meet expected payments
• Form versus substance of trust
• Risk borne by employer
• Accounting by employer is complicated

8
Chart from UK but trend is probably same in US
9
Defined Benefit Pension Plan
Employer
Current Employees
10
Pension Approaches

• Before FASB 87 88
• pay as you go or noncapitalization
• FASB 87 88
• Capitalization approach
• Full obligation reported only in notes
• FASB 158
• Pension post-retirement benefit cost is same as
  FASB 87
• Full obligation is now reported on balance sheet
• Additional items now on statement of
  comprehensive income

11
Measures of Pension Liability
ABO is still reported in note
Benefits for vested and nonvested employees at
future salaries
Benefits for vested and non- vested employees at
current salaries
Accumulated Benefit Obligation
Projected Benefit Obligation
Benefits for vested employees at current salaries
Vested Benefit Obligation
(GAAP)
12
Interest/return rates

• Discount rate
• Rates on high-quality fixed-income investments
  with maturities consistent with expected payments
  to retirees
• Generally equivalent to a portfolio of
  zero-coupon bonds with appropriate maturities
• Expected rate of return
• Based on long-term rate of return anticipated
  given investment of plan assets

13
Net Periodic Pension Cost

• Net periodic pension cost (the expense) consists
  of six basic elements
• Service cost
• Interest cost
• Expected return on plan assets
• Amortization (if any) of
• Transition gain or loss
• Prior service cost
• Unrecognized gain or loss

14
Pension Definitions

• Prior Service Cost (PSC)
• Cost of benefits granted for service rendered
  prior to the inception of the plan
• Increases PBO at date of amendment but cost is
  amortized to expense over future years
• Reduces funded status since PBO is higher
• Recognized as charge to OCI at date of plan
  amendment
• Amortization method recommended
• Years of service method
• Straight-line or other methods that amortize PSC
  faster are also acceptable

15
Actuarial Gains and Losses

• Actuarial assumptions are subject to inaccuracies
  as time goes by and circumstances change
• There is a materiality provision for determining
  when gains and losses are sufficiently large to
  require amortization (charge to expense)
• 10 Corridor Rule

16
10 Corridor Amortization

• Amortization is required only on the portion of
  unrecognized net gain or loss that exceeds 10 of
  the greater of
• PBO at beginning ofyear, or
• market-related value of plan assets at the
  beginning of the year.

17
Kieso, Weygandt Warfield 11th ed. Illustration
20-14, page 1034
18
Modifying the Workpaper

• This is similar to workpaper approach I used to
  use and that used in Kieso Intermediate

19
A working paper for pensions
20
Working Paper Pension Expense
21
A working paper for pensions
22
A working paper for pensions
23
A working paper for pensions
24
Self-checking features
Each blue row must add across to ZERO
Balance forwards
Balance forwards
25
Settlements Curtailments

• Additional FASB standards govern major changes in
  pension plans
• Settlements
• No further obligations to some or all employees
• Curtailments
• Results in significant reduction in expected
  years, or
• No further accrual of benefits
• Handling will require further research (primarily
  FASB 88)

26
Pension Disclosures FAS 132(R)

• Amount and types of assets held
• Assumptions related to discount rate, rate of
  increase in compensation, expected return on plan
  assets
• Alternative amortization policies
• Past practice or history of regular benefit
  increases

27
Pension Disclosures FAS 132(R)

• The details for net periodic pension cost
• the service cost component.
• the interest cost component.
• the expected return on plan assets FAS 132
• the amortization of PSC, transition amount and
  unrecognized gain/loss (separately)
• Gain or loss from settlement or curtailment of
  plan

28
Pension DisclosuresReconciliations

• The fair value of plan assets (changes between
  BOY and EOY)
• PBO Obligation (changes between BOY and EOY)

Easily obtained from our work paper!
EoY end of yearBoY beginning of year
29
Pension Disclosures

• Employers with multiple plans
• Information can be combined but the computations
  are made for each individual plan
• Net position for over-funded plans would be
  reported in noncurrent assets
• Net position for under-funded plans would be
  reported in liabilities
• Part may be reported as a current liability
• See next slide

30
Current portion of liability

• The current portion (determined on a plan-by-plan
  basis) is the amount by which the actuarial
  present value of benefits in PBO that are payable
  in the next 12 months exceeds the fair value of
  plan assets
• As always, the operating cycle might be longer
  than 12 months in which case wed use the
  operating cycle

31
FSP FAS132R-1 Issued Dec 08

• A lot more disclosures are now required
• Detailed discussion of investment objectives
  strategies
• Disclosures about significant concentrations of
  risk
• Follows the FASB No. 157 fair value measurement
• Disclosures about categories of plan assets
• Disclosures by hierarchy levels

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Example from FSP
33
Example from FSP
34
Example from FSP
35
FSP FAS132R-1 Issued Dec 08

• Effective date fiscal years ending after Dec.
  15, 2009
• Early adoption is permitted
• Comparative information for prior years is not
  required the first time through
• Extra credit on WFF if you attempt the additional
  disclosures in the FSP!

36
Other Postretirement Benefits

• FASB 106 Appendix Material in KWW text
• Also changed by FASB No. 158

37
Other Post-retirement Benefits

• The accounting is similar to pension accounting
  EXCEPT that
• the terminology is slightly different
• EPBO
• APBO

38
Kieso, Weygandt Warfield 11th ed. Illustration
20A-3, page 1056
39
APBO vs EPBO

• Prior to the date on which an employee attains
  full eligibility for the benefits that employee
  is expected to earn
• APBO lt EPBO
• On and after the full eligibility date,
• APBO EPBO
• In other words
• EPBO gt APBO until the employee has earned the
  right to full benefits
• EPBO APBO after the employee has worked long
  enough to earn full eligibility

40
Kieso, Weygandt Warfield 11th ed. Illustration
20A-2, page 1056

• Cost attributed to period from hire to
  eligibility (vesting)

41
Postretirement Benefit Worksheet

• Would be the same as a pension worksheet with
  modified labels at the top
• Pension Expense becomes Postretirement Benefit
  Expense.
• PBO becomes APBO.

42
Working paper for FAS106
43
Net periodic postretirement benefit cost.

• The expense basically includes the same elements
  as pension cost
• Service cost -- the actuarial present value of
  benefits attributed to services rendered by
  employees during the period.
• Interest cost -- the interest on the beginning
  balance of the accumulated postretirement benefit
  obligation
• Less expected return on plan assets.
• Amortizations (transition, prior service cost and
  unrecognized gain or loss)

44
Comparing FASB 87 106