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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 158 what has fasb wrought

SFAS 158What has FASB Wrought?

John Stokesbury

Josh Bank

CCA/SOA

EB Spring Meeting

May 31, 2007

sfas 158 topics
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

expense
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

footnote disclosures
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

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  • Accrued/(Prepaid) Pension Cost no longer shown… they’ve been replaced by funded status (current+noncurrent liability or noncurrent asset)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

disclosure of funded status
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

aggregation of plans
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

aggregation of plans company a
Aggregation of plans: Company A
  • .

2007 CCA/SOAEmployee Benefits Spring Meeting

aggregation of plans company a9
Aggregation of plans: Company A
  • .

2007 CCA/SOAEmployee Benefits Spring Meeting

aggregation of plans company a10
Aggregation of plans: Company A
  • .

2007 CCA/SOAEmployee Benefits Spring Meeting

current and noncurrent liabilities current and noncurrent assets
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

current vs noncurrent assets liabilities
Current vs noncurrent assets/liabilities
  • 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

current vs noncurrent assets liabilities13
Current vs noncurrent assets/liabilities
  • 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

additional permanent disclosure requirements
Additional permanentdisclosure 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

additional permanent disclosure requirements15
Additional permanent disclosure requirements
  • 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

additional transitional disclosure requirements
Additional TransitionalDisclosure 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

measurement dates
Measurement dates
  • 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

measurement date transition
Measurement date transition
  • 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

measurement date transition19
Measurement date transition
  • 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

new data remeasurements
New data remeasurements
  • 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

remeasurement example
December 31, 20X6

$200

$40 (est.)

Remeasurement example

January 1, 20X7

$205

$44

  • Benefit Obligation
  • 20X7 NPPC

2007 CCA/SOAEmployee Benefits Spring Meeting

remeasurement example cont d
Remeasurement example (cont’d)
  • 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

remeasurement example cont d23
Remeasurement example (cont’d)
  • 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

amendments to sfas 87 106
Amendments to SFAS 87 / 106
  • 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

reconciliations of oci and funded status
Reconciliations of OCIand 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

reconciliations of funded status
Reconciliations of funded status
  • 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

reconciliations of funded status27
Reconciliations of funded status
  • “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

reconciliations of funded status28
Reconciliations of funded status
  • 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

interim reporting
Interim reporting
  • 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

international issues
International issues
  • 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

case study international
Case study - international
  • 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

case study international35
Case study - international
  • 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

slide36
Q&A

2007 CCA/SOAEmployee Benefits Spring Meeting

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