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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. Defined contribution plans.

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Pensions other post employment benefits asc topic 715 a review

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


Defined contribution plans
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


Defined benefit plans
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



Defined benefit pension plan

Services

Wages and Salaries

Contributions

Pension Fund

Retired Employees

Defined Benefits

Defined Benefit Pension Plan

Employer

Current Employees


Pension approaches
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


Measures of pension liability

PV of Expected

Cash Flows

Measures of Pension Liability

ABO is still reported in note

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

  • 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


Components of pension expense
Components of Pension Expense

  • Service cost

  • Interest cost

  • Expected return on plan assets

  • Amortization (if any) of

    • Transition gain or loss (now rare)

    • Prior service cost

    • Unrecognized gain or loss


Valuation on balance sheet
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 asset

  • If PBO > Plan Assets (and plan assets exist), probably reported as noncurrent liability

  • If there are no Plan Assets, liability is divided between current and noncurrent liabilities


Impact on the statement of comprehensive income
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


Net periodic pension cost
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 loss

      • Prior service cost

      • Unrecognized gain or loss


Pension definitions
Pension Definitions

  • 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

  • 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


10 corridor amortization
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 ofyear, or

    • market-related value of plan assets at the beginning of the year.


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


Working paper approach

Working paper approach

This is similar to workpaper approach used in Kieso Intermediate




A working paper for pensions1

Interest cost = discount rate * beginning balance in PBO

Expected return = expected return rate * beginning balance in Plan Assets

A working paper for pensions




Self checking features

Funded status must equal PBO + Plan Assets

Plug to balance JE {row=0}

Self-checking features

Each blue row must add across to ZERO

Balance forwards

Balance forwards


Settlements curtailments
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)


Pension disclosures fas 132 r
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


Pension disclosures fas 132 r1
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


Pension disclosures reconciliations
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



Pension disclosures
Pension Disclosures

  • 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

  • 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
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



Asc 715 20 55 171

.]

ASC 715-20-55-17


Fsp fas132r 1 issued dec 08
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


Other postretirement benefits

Other Postretirement Benefits

Mostly in ASC 715Appendix Material in KWW text


Other post retirement benefits
Other Post-retirement Benefits

  • The accounting is similar to pension accounting EXCEPT that

    • the terminology is slightly different

      • Expected postretirement benefit obligation (EPBO).

      • Accumulated postretirement benefit obligation (APBO).


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


Apbo vs epbo
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


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

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


Postretirement benefit worksheet
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.



Net periodic postretirement benefit cost
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)


Comparing pension opeb
Comparing Pension & OPEB


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