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SFAS 158 What has FASB Wrought?. John Stokesbury Josh Bank CCA/SOA EB Spring Meeting May 31, 2007. SFAS 158 - Topics. Expense Footnote disclosures Measurement dates Remeasurements and rollforwards Reconciliations of OCI and funded status Interim reporting International issues

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SFAS 158What has FASB Wrought?

John Stokesbury

Josh Bank

CCA/SOA

EB Spring Meeting

May 31, 2007


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SFAS 158 - Topics

  • Expense

  • Footnote disclosures

  • Measurement dates

  • Remeasurements and rollforwards

  • Reconciliations of OCI and funded status

  • Interim reporting

  • International issues

  • Case study

  • Q&A

2007 CCA/SOAEmployee Benefits Spring Meeting


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Expense

  • On the surface, SFAS 158 does not change calculation of net periodic benefit cost (expense)

  • One possible exception is how companies with foreign plans might account for foreign currency translation of unrecognized gains/losses, prior service costs and transition amount when they are amortized into expense

    • this issue will be discussed in the International Issues section

2007 CCA/SOAEmployee Benefits Spring Meeting


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Footnote disclosures

  • No major (fundamental) new measurements

  • Balance sheet disclosure of funded status

  • Aggregation of plans

  • Current vs. non-current assets & liabilities

  • Elimination (redefinition) of accrued/(prepaid) pension cost

  • Transitional disclosures and bookkeeping

  • Permanent changes to disclosures

  • Adjustment to retained earnings upon change in measurement date (next section)

2007 CCA/SOAEmployee Benefits Spring Meeting


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No fundamental new measurements

  • Fundamental elements of footnote information are basically the same

  • Displayed differently and in different places (and with some different names)

  • Accrued/(Prepaid) Pension Cost no longer shown… they’ve been replaced by funded status (current+noncurrent liability or noncurrent asset)

  • It’s a little harder (and easier) to confirm that the footnote “balances”.

  • Pre-158 recursion formula was (roughly)

    • ABL/(PBC)0+NPPC-Contrib+ΔAML=ABL/(PBC)1

2007 CCA/SOAEmployee Benefits Spring Meeting


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Disclosure of funded status

  • Balance sheet disclosure of funded status

    • Essentially, an adjustment to equity equal (in many cases) to unrecognized amortization balances

    • In other cases, the hit to equity is just the excess of PBO over ABO

    • Also may lose an intangible asset, but who ever missed an intangible asset?

  • Four elemental balance sheet components are eliminated, and three new ones are introduced (one has the same name but is redefined)

2007 CCA/SOAEmployee Benefits Spring Meeting


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Aggregation of plans

  • Pension and OPEB numbers must be shown separately. Otherwise numbers can be aggregated or disaggregated at will (within reason)

  • However, always need to disclose, either explicitly or through the way you aggregate:

    • ABO and assets for ABO-unfunded plans

    • PBO and assets for PBO-unfunded plans

  • Old habits may die hard, or not at all

    • US vs. non-US plans

    • Qualified vs. non-qualified plans

  • What do your clients’ disclosures look like?

2007 CCA/SOAEmployee Benefits Spring Meeting


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Aggregation of plans: Company A

  • .

2007 CCA/SOAEmployee Benefits Spring Meeting


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Aggregation of plans: Company A

  • .

2007 CCA/SOAEmployee Benefits Spring Meeting


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Aggregation of plans: Company A

  • .

2007 CCA/SOAEmployee Benefits Spring Meeting


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Current and noncurrent liabilities, (Current?) and noncurrent assets

  • Surplus (=Asset on Balance Sheet)

    • Always Noncurrent?

    • A few large employers have chosen to interpret Paragraph 8(o) – Expected reversion during upcoming 12 months – as current asset

  • Deficit (=Liability on Balance Sheet)

    • Current liability: Excess (if any) of the present value of expected benefit payments in following 12 months over assets (note that this is a rolling 12 months)

      • Non-qualified (and qualified unfunded non-US) pension plans and OPEB plans

      • Unfunded OPEB plans

    • The rest of the deficit is Noncurrent liability

2007 CCA/SOAEmployee Benefits Spring Meeting


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Current vs noncurrent assets/liabilities noncurrent assets

  • Example 1

    • Benefit Obligation: ($300)

    • Assets: $100

    • Funded Status: ($200)

    • Expected Benefit Payments: $50

    • The company classifies the entire $200 liability as a noncurrent liability since the fair value of the plan’s assets is sufficient to cover the present value of expected benefit payments over the next 12 months.

2007 CCA/SOAEmployee Benefits Spring Meeting


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Current vs noncurrent assets/liabilities noncurrent assets

  • Example 2

    • Benefit Obligation: ($240)

    • Assets: $40

    • Funded Status: ($200)

    • Expected Benefit Payments: $50

    • The company should record a current liability of $10 and a noncurrent liability of $190.

2007 CCA/SOAEmployee Benefits Spring Meeting


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Additional permanent noncurrent assetsdisclosure requirements

  • Amount of net gain or loss and prior service cost or credit recognized in OCI, separated into two categories:

    • Amounts arising during the period

    • Amounts subsequently recognized as components of net periodic benefit cost

  • Amount of any transition asset or obligation recognized as a component of net periodic benefit cost

2007 CCA/SOAEmployee Benefits Spring Meeting


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Additional permanent disclosure requirements noncurrent assets

  • Amount of unrecognized transition obligation/asset included in accumulated OCI

  • Estimated portion of each unrecognized item that will be recognized in expense for the next fiscal year

  • Amount and timing of any plan assets expected to be returned to the entity during the next fiscal year

2007 CCA/SOAEmployee Benefits Spring Meeting


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Additional Transitional noncurrent assetsDisclosure Requirements

  • Incremental effect of applying FAS 158 on individual line items in year-end balance sheet (only required in initial year of adoption of FAS 158)

  • Adjustments to retained earnings and accumulated OCI for change in measurement date (only required in initial year of aligning measurement date with fiscal year-end)

2007 CCA/SOAEmployee Benefits Spring Meeting


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Measurement dates noncurrent assets

  • Must now coincide with sponsor’s year-end

  • Details of early adoption are evolving

    • May need to act in Q1 of transition year

  • Transition for change in measurement date

    • Remeasurement method

    • “15-month” method

  • Significant events during “gap” period

2007 CCA/SOAEmployee Benefits Spring Meeting


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Measurement date transition noncurrent assets

  • Two alternatives

    • Dual Measurement: Calculate expense for period between old measurement date and fiscal year-end (adjustment to retained earnings) and then remeasure again at year-end to calculate annual expense

    • “15-month” Alternative (e.g. calendar fiscal and Sept 30 measurements): Use results at old measurement date to determine net periodic benefit cost for next 15 months. Three-fifteenths of this is adjustment to retained earnings and twelve-fifteenths is net periodic benefit cost

2007 CCA/SOAEmployee Benefits Spring Meeting


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Measurement date transition noncurrent assets

  • Curtailments and Settlements

    • If occur between measurement date and fiscal year-end, effects are recognized in earnings when incurred and not in adjustment to retained earnings

    • Might trigger additional measurement dates prior to alignment

    • If transition at December 31, 2008, then 2008 would capture 15 months of special events

2007 CCA/SOAEmployee Benefits Spring Meeting


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New data remeasurements noncurrent assets

  • Yearend measurements based on beginning of year data

  • Following year expense based on new census data

  • What assumptions are used in updated measurements?

  • What expense is recorded prior to updated results?

  • How does OCI reflect updated results?

2007 CCA/SOAEmployee Benefits Spring Meeting


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December 31, 20X6 noncurrent assets

$200

$40 (est.)

Remeasurement example

January 1, 20X7

$205

$44

  • Benefit Obligation

  • 20X7 NPPC

2007 CCA/SOAEmployee Benefits Spring Meeting


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Remeasurement example (cont’d) noncurrent assets

  • January 1, 20X7

    • Benefit Obligation increases by 5 (about 2.5% difference – attributable to demographic experience)

      • Service Cost and Interest Cost change

    • Unrecognized Loss increases by 5

      • Corridor and Amortization Amount change

    • Charge to Other Comprehensive Income increases by 5 (Equity reduced by 5)

    • May be a significant change in Equity

2007 CCA/SOAEmployee Benefits Spring Meeting


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Remeasurement example (cont’d) noncurrent assets

  • 20X7 NPPC

    • 1Q and 2Q expensed 25% of 40,

    • Updated results in early 3Q

      • YTD Accrual is 20

      • YTD Accrual should be 21

    • How to reflect difference?

    • 3Q and 4Q will each expense 25% of 44

2007 CCA/SOAEmployee Benefits Spring Meeting


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Amendments to SFAS 87 / 106 noncurrent assets

  • Basis for Discount Rate

    • Added paragraph 44A (and 31A, SFAS 106), retained paragraph 44 (and 31, SFAS 106)

  • Implementation Guides (FSP 158-1)

    • Incorporated into “A” level guidance

    • Amendments to conform to SFAS 158

2007 CCA/SOAEmployee Benefits Spring Meeting


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Reconciliations of OCI noncurrent assetsand funded status

  • From accrued/prepaid pension cost to prepaid benefit cost/accrued benefit liability to funded status

  • Reconciliation of OCI

  • Reconciliation of funded status

  • Interplay between expense, funded status and OCI

  • Formal disclosure requirements vs. internal checking mechanisms

2007 CCA/SOAEmployee Benefits Spring Meeting


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Reconciliations of funded status noncurrent assets

  • Fundamental (direct) method: (FS1) = (FS0) +

    • (Service cost)

    • (Interest cost)

    • Expected return on assets

    • Contributions

    • (Losses)/gains on obligations and assets

    • Other events that affect benefit obligation

  • If no gains/losses or significant events this is just a standard rollforward of assets and obligations

2007 CCA/SOAEmployee Benefits Spring Meeting


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Reconciliations of funded status noncurrent assets

  • “Accrued/prepaid” method: (FS1) = (FS0) +

    • (NPPC)

    • Contributions. Done… except that…

    • You then have to back out certain elements that don’t affect funded status, and add in others that do

  • This can be somewhat opaque, but the elegance and compactness can be worth it

  • Let’s compare/contrast the old accrued/prepaid recursion formula with the funded status reconciliation (see following slides and/or Excel illustration)

2007 CCA/SOAEmployee Benefits Spring Meeting


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Reconciliations of funded status noncurrent assets

  • The first slide shows all of the details of this “accrued/prepaid method” funded status reconciliation in one continuous mess

  • In the second slide we eliminate certain individual items that are both added and subtracted in the from the reconciliation, leaving, in effect, the “fundamental method” funded status reconciliation

  • The third slide shows how we recast the reconciliation, breaking it into two pieces, one of which comes right out of the FAS 158 sample disclosure

2007 CCA/SOAEmployee Benefits Spring Meeting


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2007 CCA/SOA noncurrent assetsEmployee Benefits Spring Meeting


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2007 CCA/SOA noncurrent assetsEmployee Benefits Spring Meeting


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2007 CCA/SOA noncurrent assetsEmployee Benefits Spring Meeting


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Interim reporting noncurrent assets

  • Additional interim reporting requirements under SFAS 158 (some are subtle)

  • Reconciliation of OCI and funded status – a second look

  • Reconciliation of current / non-current assets / liabilities

  • Trend toward more rigorous interim reporting and recording processes

  • Logistics: multi-plan and multi-country FAS coordination

2007 CCA/SOAEmployee Benefits Spring Meeting


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International issues noncurrent assets

  • Getting the word out

    • To local management

    • To local actuaries

  • Local vs. corporate GAAP and bookkeeping

  • Foreign currency translation in general

  • Foreign currency translation of AOCI reclassification into earnings

  • Other international issues

2007 CCA/SOAEmployee Benefits Spring Meeting


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Case study - international noncurrent assets

  • Major multinational company with >100 plans in >35 countries

  • Non-US fiscal year is 11/30/06, US fiscal year is 12/31/06

  • Required to adopt SFAS 158 for US plans

    • What about the foreign (11/30/06) plans?

  • Major communications and education campaign (actuaries, local finance)

  • Development of consistent reporting vehicle for a dozen actuarial firms

2007 CCA/SOAEmployee Benefits Spring Meeting


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Case study - international noncurrent assets

  • Year-end processes and timeline

  • Oversight and direction

  • Sample valuation report

  • Intermediate consolidation reports

  • Consolidated draft footnote

  • Final product: 10-K à la SFAS 158

  • 2007 interim reporting and preparation for year-end 2007

2007 CCA/SOAEmployee Benefits Spring Meeting


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Q&A noncurrent assets

2007 CCA/SOAEmployee Benefits Spring Meeting


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