Pensions other post employment benefits after sfas no 158
Download
1 / 39

Pensions Other Post Employment Benefits after SFAS No. 158 - PowerPoint PPT Presentation


  • 177 Views
  • Uploaded on

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. Types of plans. Contributory Plan

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Pensions Other Post Employment Benefits after SFAS No. 158' - Jims


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Pensions other post employment benefits after sfas no 158

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


Types of plans
Types of plans 158

  • Contributory Plan

  • Non-Contributory Plan

  • Defined Contribution Plan

  • Defined Benefit Plan


Defined contribution plans
Defined contribution plans 158

  • 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


Defined benefit plans
Defined benefit plans 158

  • 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


Defined benefit pension plan

Services 158

Wages and Salaries

Contributions

Pension Fund

Retired Employees

Defined Benefits

Defined Benefit Pension Plan

Employer

Current Employees


Pension approaches
Pension Approaches 158

  • 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


Capitalization approach to pensions
Capitalization approach to pensions: 158

  • Employer has full liability for benefits related to service already rendered by employee

    • Expense is recognized as employees work (service cost) and this increases the liability

  • Liability balance increases every year since present value of future benefits is larger (less time remains to cash outflow)

    • Liability is reduced through payments to retirees

  • Assets of the plan are considered pledged, collateral against a liability

    • Liability less designated assets reported on balance sheet (net presentation)


Measures of pension liability

PV of Expected 158

Cash Flows

Measures of Pension Liability

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)


Interest return rates
Interest/return rates 158

  • 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


What happens when
What happens when 158

  • Interest rates increase?

  • Interest rates decrease?



Accounts on employer s books
Accounts on Employer’s Books 158

  • Net Periodic Pension Cost (Expense)

    • Amount recognized by the employer on the income statement

    • Pension expense includes six basic elements (more later)

  • Other comprehensive income

    • Up to three amounts reported for changes in balance of AOCI amounts (see next slide)




Accounts on employer s books1
Accounts on Employer’s Books 158

  • On balance sheet – Net funded position

    • When PBO > Plan Assets, reported as noncurrent liability (with current liability if there are inadequate plan assets to cover current payments to retirees)

    • When Plan Assets > PBO, reported as noncurrent asset



Accounts on employer s books2
Accounts on Employer’s Books 158

  • Accumulated other comprehensive income (AOCI)

    • Account appears as part of owners’ equity section of balance sheet

    • Three pension related balances

      • Transition gain or loss

      • Prior service cost

      • Actuarial gains or losses



Self checking features

Plug to balance JE 158

Self-checking features

Funded status must equal PBO + Plan Assets

Each blue row must add across to ZERO

Balance forwards


Net periodic pension cost
Net Periodic Pension Cost 158

  • 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


Pension definitions
Pension Definitions 158

  • 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


Actuarial gains and losses
Actuarial Gains and Losses 158

  • 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


Kieso weygandt warfield 11 th ed illustration 20 14 page 1034
Kieso, Weygandt & Warfield 11 158th ed. Illustration 20-14, page 1034


10 corridor amortization
10% Corridor Amortization 158

  • 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.


Settlements curtailments
Settlements & Curtailments 158

  • 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)


Pension disclosures fas 132 r
Pension Disclosures [FAS 132(R)] 158

  • 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


Pension disclosures fas 132 r1
Pension Disclosures [FAS 132(R)] 158

  • 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


Pension disclosures reconciliations
Pension Disclosures: 158Reconciliations

  • 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


Pension disclosures
Pension Disclosures 158

  • 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


Current portion of liability
Current portion of liability 158

  • 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


Other postretirement benefits

Other Postretirement Benefits 158

FASB 106 Appendix Material in KWW text

Also changed by FASB No. 158


Other post retirement benefits
Other Post-retirement Benefits 158

  • The accounting is similar to pension accounting EXCEPT that

    • the terminology is slightly different

      • EPBO

      • APBO


Kieso weygandt warfield 11 th ed illustration 20a 3 page 1056
Kieso, Weygandt & Warfield 11 158th ed. Illustration 20A-3, page 1056


Apbo vs epbo
APBO vs EPBO 158

  • 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


Kieso weygandt warfield 11 th ed illustration 20a 2 page 1056
Kieso, Weygandt & Warfield 11 158th ed. Illustration 20A-2, page 1056

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


Postretirement benefit worksheet
Postretirement Benefit Worksheet 158

  • Would be the same as a pension worksheet with modified labels at the top

    • Pension Expense becomes Postretirement Benefit Expense.

    • PBO becomes APBO.



Net periodic postretirement benefit cost
Net periodic postretirement benefit cost 158.

  • 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)



ad