Current accounting issues concerning employee benefits

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• Current accounting issues concerning employee
  benefits
• October 13, 2008

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IFRS retirement plans

• Some matters for consideration
• Multi-employer plans
• Lump sum payments
• Gain / loss recognition
• Overfunded plans

• Our perspective
• U.S. actuaries not prepared to produce IFRS
  valuation reports
• HR may not understand financial / tax
  implications well enough to request and provide
  appropriate data.
• Multi-functional (HR, tax, legal, financial
  reporting, accounting, payroll) administrative
  process documentation and modification due to
  IFRS standards.
• Third party administration challenges.

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IFRS compensation programs

• Some matters for consideration
• Pay and performance alignment
• Pro-rata vesting
• Deferred taxes and chargeback agreements
• Recognition of employment tax costs

• Our perspective
• Process and plan redesign considerations
  surrounding performance metrics.
• Multi-functional (HR, tax, legal, financial
  reporting, accounting, payroll) administrative
  process documentation and modification due to
  IFRS standards.
• Data and analysis challenges of financial
  modeling for share-based compensation
  arrangements.
• Third party administration challenges.

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Diagnostic activities
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Diagnostic activities
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Diagnostic activities
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Diagnostic activities
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Diagnostic activities
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Issues or opportunities?

• What is our long-term pension funding strategy?
• How can we maximize our tax deductions?
• What is the impact on company cash flow?
• Do these changes impact our loan covenants and
  financing strategies?
• What is the effect under FAS109?

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Pension Protection Act (PPA)

• Pension Protection Act signed into law in August
  2006
• Generally effective for plan years beginning on
  or after 1 January 2008
• Requires higher funding levels to maintain
  qualified plan status
• Deduction limits
• Maximum deductible amount had increased from 100
  to 150 of the current plan liabilities
• Increases allowable deductions for an employer
  that maintains both a defined benefit and defined
  contribution plan

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FAS 158

• FASB issued statement 158 on September 29, 2006
• Generally effective for company fiscal years
  ending after December 15, 2006
• Amends FASB Statements No. 87, 88, 106, and
  132(R)
• Requires balance sheet recognition of an asset
  for a plans overfunded status or a liability for
  a plans underfunded status
• Requires fiscal year-end measurement date for all
  employers
• Balance sheet changes flow through other
  comprehensive income (net of tax), not PL
• Immediate recognition of gains, losses, plan
  amendments, etc.

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Coordinating FAS 158 and PPA
PPA
FAS 158

• Tax deductible contribution increases
• Assess whether plan is at-risk or subject to
  benefit restrictions
• Long-tem funding strategy opportunities
• Increased reporting and disclosure requirements
• Impact on design, communication and operation of
  pension plans

• Modifications to funding, investment, and benefit
  policies
• Budgeting disclosure implications due to fiscal
  year-end measurement date requirement
• Implications for unfunded obligations on loan
  covenants and financing strategies
• Determination and segregation of current and non
  current amounts pursuant to FAS 109

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Executive compensation-Code Section 162(m)

• Annual 1 million deduction limit applies to
• Compensation other than performance-based
  compensation
• Covered employees of public companies
• Performance-based compensation
• Compensation paid solely upon attainment of one
  or more pre-established, objective performance
  goals set up by a compensation committee of
  outside directors
• Shareholder approval of the goal and compensation
  committee certification that the goal is met

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Executive compensation-Code Section 162(m)

• PLR 200804004-reversed previous IRS position
• Compensation is not performance based if
  payments are made upon involuntary termination
  without regard to performance goal
• Revenue Rule 2008-13- confirms the IRSs new
  position
• Provides a prospective effective date if either
• The performance period begins on or before
  January 1, 2009
• The compensation is paid pursuant to contract in
  effect on February 21, 2008 (without renewals or
  extensions)
• Level of authority for claiming a deduction could
  have significant impact on Financial statement
  and tax return

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Executive compensation-Code Section 162(m)

• FAS 109/FIN 48 support
• Assess documentary compliance
• Assess operational compliance
• Develop processes and controls
• Composition of Compensation Committee
• Timing of shareholder approval
• Timing of goal-setting and goal-attainment
  certification
• Structure in place to ensure performance goals
  are objective

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Executive compensation- equity/incentives

• Assess global equity tax deductions
• U.S. deduction is not available for foreign
  awards
• Availability of deduction in a particular country
• Country specific requirements for securing a
  deduction (corporate chargeback arrangements,
  etc.)
• Does the plan meet tax favored status in foreign
  country?

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Executive compensation-Code Section 280G

• Code Section 280G Mitigation Strategies
• Shareholder vote for privately held corporations
• Demonstrate with clear and convincing evidence
  that potential parachute payments constitute
  reasonable compensation for
• Pre-change in control services
• Post-change in control services
• Abiding by a non-compete

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Executive compensation-Code Section 280G

• FAS 109/FIN 48 support
• Review Code Section 280G calculations
• Assess risk associated with Section 280G tax
  positions
• Assess operational and documentary compliance
  with Section 280G where relevant e.g.,
  shareholder approval requirements
• Code Section 280G gross-ups require proxy
  disclosure statements under new SEC proxy
  disclosure rules.

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Employee benefits

• Generally exempt from income taxes therefore few
  issues that may trigger the application of FIN 48
• The existence of the Employee Plans Compliance
  Resolution System could meet the conditions of an
  administrative practice or precedent
• Few exceptions to the general rule include
• Plan invested in UBIT triggering investments
• Application of 409(p) to ESOPs

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Health and welfare plans

• General IBNR ( claims incurred but not reported)
• Amount of deduction
• 461 all events test
• Pre-funding through VEBA to accelerate deductions
  for
• Claims incurred but not reported
• Retiree medical
• Severance
• Disability
• Others

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Health and welfare plans

• Determination of UBIT Liability
• Structure of trust and treatment of income
• Calculation of trust income used to pay
  administrative expenses
• Distributions or items other than administrative
  expense?

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Health and welfare plans

• Accelerated Severance Plan Funding
• Amount available for accelerated deduction
• Segregated funds or not segregated funds
• Retiree Medical Plans Self Funding FAS 106
  Liabilities
• Segregation of FAS 106 asset
• Ruling in Wells Fargo case
• Qualified SUB payments
• How were pre-funding and deduction determined?

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Other Areas to Consider

• 401(k) acceleration
• Compensation earned based on 404(a)(6) or Notice
  2002-48 special exceptions
• 404(k) deduction
• Statutory requirements- amount of deduction
• Structure of the funding arrangement
• Fringe benefits and perquisites
• Corporate aircraft consider valuation aspects,
  and interplay of income and deduction
• Country Club memberships, tickets, suites, and
  corporate apartments

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Employee benefit accounting

• FAS 132(R)-a Employers Disclosures about
  Postretirement Benefit Plan Assets (proposed FSP)
• Application of FAS 157
• Proposed effective date
• Management responsible for fair valuation

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IRS large plan audit initiative

• The IRS has instituted changes in targeting and
  performing standard audits of qualified plans.
  The new philosophy emphasizes
• Risk-based targeting of plans chosen
• A limited and focused audit methodology that
  expands only if noncompliance is identified
• If the initial review does not yield problems and
  appropriate controls exist, the agent will close
  the audit

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