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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

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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 lossPrior service costUnrecognized gain or loss

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Big Change = Valuation on BS

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

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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

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A Bit of Review

The new rules primarily apply to defined benefit plans

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Defined contribution plans

A plan that provides benefits based solely on what has been contributed and the earnings thereon < 401(k) > 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

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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

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Chart from UK but trend is probably same in US

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Defined Benefit Pension Plan

EmployerCurrent

Employees

Services

Wages and Salaries

Pension Pension FundFund

Con

trib

uti

on

s

Retired EmployeesDefined Benefits

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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

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Measures of Pension Liability

VestedBenefit

Obligation

AccumulatedBenefit

Obligation

ProjectedBenefit

Obligation

Benefits forvestedemployeesat currentsalaries

Benefits for vested and non-vested employees at current salaries

Benefits for vested and nonvested employees at future salaries

(GAAP)

PV of ExpectedCash Flows

ABO is still

reported in note

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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

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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

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Pension DefinitionsPrior 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

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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

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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 of

year, or market-related value

of plan assets at the beginning of the year.

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Kieso, Weygandt & Warfield 11th ed. Illustration 20-14, page 1034

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Modifying the Workpaper

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

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A working paper for pensions

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Working Paper – Pension Expense

Pension Worksheet 1 2 3 4 5 6 7 8SFAS NO. 158

Income Stmt BS BS

Pension Expense Cash

Transition (Gain)/Loss

Net actuarial (gain)/loss

Prior Service Cost Funded Status

Projected Benefit

Obligation Plan Assets

BALANCE FORWARD

Service Cost

Interest Cost

Expected return on plan assets

Corridor Amount

AOCI Actuarial (BoY)

Excess

AMORTIZATIONS:

Unrecognized gain/loss

Prior Service Cost

Transition Amount

Contributions to Pension Plan

Retirement Benefits Paid by Plan

Actual Return on Plan Assets

Actuarial Adjustments to PBO

Amounts for journal entry:

AOCI balance forward

BALANCES AT YEAR END

Not on BooksMemorandum AmountsOther comprehensive income stmt

Accounts on Employer's Books

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A working paper for pensions

Interest cost = discount rate * beginning balance in PBO

Expected return = expected return rate * beginning balance in Plan Assets

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A working paper for pensions

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A working paper for pensions

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Self-checking featuresEach blue row

must add across to

ZERO

Balance forwards

Balance forwards

Funded status

must equal PBO + Plan

Assets

Plug to balance

JE {row=0

}

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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)

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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

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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

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Pension Disclosures:Reconciliations

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

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Pension DisclosuresEmployers 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

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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 we’d use the operating cycle

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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FSP FAS132R-1 Issued Dec 08

Effective date – fiscal years ending after Dec. 15, 2009Early adoption is permittedComparative information for prior years is not required the first time through

Extra credit on WFF if you attempt the additional disclosures in the FSP!

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Other Postretirement Benefits

FASB 106

Appendix Material in KWW textAlso changed by FASB No. 158

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Other Post-retirement Benefits

The accounting is similar to pension accounting EXCEPT that the terminology is slightly

differentEPBOAPBO

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Kieso, Weygandt & Warfield 11th ed. Illustration 20A-3, page 1056

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APBO vs EPBO

Prior to the date on which an employee attains full eligibility for the benefits that employee is expected to earn APBO < EPBO

On and after the full eligibility date, APBO = EPBO

In other words EPBO > APBO until the employee has earned the

right to full benefits EPBO = APBO after the employee has worked long

enough to earn full eligibility

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

Cost attributed to period from hire to eligibility (vesting)

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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.

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Working paper for FAS106

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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)

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Comparing FASB 87 & 106 Pension benefits Other postretirement benefits

Name of obligation Projected benefit obligation (PBO)

Accumulated postretirement benefit obligation (APBO)

Components of benefit cost

Service cost Interest cost (Expected return) Amortization of

Prior service cost Transition amount Excess gain/loss

Service cost Interest cost (Expected return) Amortization of

Prior service cost Transition amount Excess gain/loss

Plan Assets Most pension plans have assets set aside in a trust which generate returns that help offset the interest cost component of benefit cost.

These arrangements are rarely funded, that is, there are probably no plan assets and therefore no deduction for expected return on plan assets in the computation of postretirement benefit cost.

Disclosure requirements

Extensive, including reconciliation of change in PBO and plan assets

Same as pension but additional disclosures regarding health care inflation rate assumptions and impact