current accounting issues concerning employee benefits october 13, 2008

26
Current accounting issues concerning employee benefits October 13, 2008

Upload: brittney-park

Post on 01-Jan-2016

223 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Current accounting issues concerning employee benefits October 13, 2008

Current accounting issues concerning employee benefits

October 13, 2008

Page 2: Current accounting issues concerning employee benefits October 13, 2008

2

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.

Page 3: Current accounting issues concerning employee benefits October 13, 2008

3

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.

Page 4: Current accounting issues concerning employee benefits October 13, 2008

4

Diagnostic activities

Workstream Activities

Accounting and reporting

► Assess universe of retirement plans and compensation programs

► Document non-U.S. retirement plans and related IFRS positions already taken, if any

► Identify the major GAAP differences for retirement plans and compensation programs and provide an assessment of where the Company’s current Financial Reporting will be affected by IFRS

► Identify accounting areas requiring further investigation and evaluation that could be addressed in the next phase of the project

► Review financial documentation produced by actuaries, identify areas for further study

Page 5: Current accounting issues concerning employee benefits October 13, 2008

5

Diagnostic activities

Workstream Activities

Tax ► Coordinate accounting, reporting and tax workstream associated with compensation programs and retirement plans

► Identify the nature of potential effects of IFRS conversion on existing and future tax positions

► Evaluate impact of IFRS on compensation related chargeback agreements

► Identify potential conversion considerations in connection with third party administrator reporting packages and administrative processes

► Identify matters requiring further investigation and evaluation

Page 6: Current accounting issues concerning employee benefits October 13, 2008

6

Diagnostic activities

Workstream Activities

Business processes and systems

► Assess data challenges for share-based compensation arrangements

► Evaluate ability of current third party administrator's to provide required reporting data for compensation programs and retirement plans

Page 7: Current accounting issues concerning employee benefits October 13, 2008

7

Diagnostic activities

Workstream Activities

Regulatory and industry

► Understand the company's regulatory reporting requirements in each jurisdictions and assess IFRS impact

► Evaluate impact of regulatory rules on required transitional elections

► Evaluate impact of IFRS on compensation and retirement plan reporting

Page 8: Current accounting issues concerning employee benefits October 13, 2008

8

Diagnostic activities

Workstream Activities

Change management, communication and training

► Raise awareness of the IFRS issues within the company and give momentum to the IFRS conversion project

► Understand the company's organizational structure and knowledge management approach

► Develop and execute communication protocols► Recommend an overall training roadmap to

embed IFRS knowledge in the organization► Clarify roles and responsibilities

Page 9: Current accounting issues concerning employee benefits October 13, 2008

9

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?

Page 10: Current accounting issues concerning employee benefits October 13, 2008

10

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

Page 11: Current accounting issues concerning employee benefits October 13, 2008

11

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 plan’s overfunded status or a liability for a plan’s underfunded status

► Requires fiscal year-end measurement date for all employers

► Balance sheet changes flow through other comprehensive income (net of tax), not P&L

► Immediate recognition of gains, losses, plan amendments, etc.

Page 12: Current accounting issues concerning employee benefits October 13, 2008

12

FAS 158

PPA

►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

Coordinating FAS 158 and PPA

► 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

Page 13: Current accounting issues concerning employee benefits October 13, 2008

13

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

Page 14: Current accounting issues concerning employee benefits October 13, 2008

14

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 IRS’s 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

Page 15: Current accounting issues concerning employee benefits October 13, 2008

15

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

Page 16: Current accounting issues concerning employee benefits October 13, 2008

16

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?

Page 17: Current accounting issues concerning employee benefits October 13, 2008

17

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

Page 18: Current accounting issues concerning employee benefits October 13, 2008

18

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.

Page 19: Current accounting issues concerning employee benefits October 13, 2008

19

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

Page 20: Current accounting issues concerning employee benefits October 13, 2008

20

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

Page 21: Current accounting issues concerning employee benefits October 13, 2008

21

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?

Page 22: Current accounting issues concerning employee benefits October 13, 2008

22

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?

Page 23: Current accounting issues concerning employee benefits October 13, 2008

23

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

Page 24: Current accounting issues concerning employee benefits October 13, 2008

24

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

Page 25: Current accounting issues concerning employee benefits October 13, 2008

25

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

Page 26: Current accounting issues concerning employee benefits October 13, 2008