Post on 31-Mar-2015
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Pensions & Other Post Employment Benefits – ASC Topic 715 (A Review)
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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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 Fund
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 (net) obligation is reported on balance
sheet Additional items 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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Components of Pension Expense
Service costInterest costExpected return on plan assetsAmortization (if any) of Transition gain or loss (now rare) Prior service cost Unrecognized gain or loss
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Valuation on Balance Sheet
We report the net of PBO and Plan Assets on the balance sheet.If Plan Assets > PBO, amount is reported 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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Impact on the Statement of Comprehensive Income
SCI used to have a deferred pension cost in certain cases (related to the minimum liability requirement which no longer exists)Now there are potentially 3 items of other comprehensive income:
Transition amount (rare for pension plans) Prior service cost Actuarial gains and losses
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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 lossPrior service costUnrecognized 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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Working paper approach
This is similar to workpaper approach 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! – example next slide
EoY = end of yearBoY = beginning of year
“Roll-forward” Displays – ASC 715-20-55-17
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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
Newer disclosures (FSP FAS132R-1 Issued Dec 08)
Even 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 31
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ASC 715-20-55-17
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ASC 715-20-55-17
.] •
FSP FAS132R-1 Issued Dec 08
Effective date – fiscal years ending after Dec. 15, 2009 – so applies to VLT Inc footnote disclosure! Early adoption is permitted Comparative information for prior
years is not required the first time through
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Other Postretirement Benefits
Mostly in ASC 715
Appendix Material in KWW text
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Other Post-retirement Benefits
The accounting is similar to pension accounting EXCEPT that the terminology is slightly
differentExpected postretirement benefit obligation (EPBO).
Accumulated postretirement benefit obligation (APBO).
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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 (if there are any assets – mostly unfunded).
Amortizations (transition, prior service cost and unrecognized gain or loss)
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Comparing Pension & OPEB
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