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
1
Types of plans




Contributory Plan
Non-Contributory Plan
Defined Contribution Plan
Defined Benefit Plan
2
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
3
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
4
Defined Benefit Pension Plan
Services
Employer
Contributions
Wages and Salaries
Current
Employees
Pension
Fund
Defined Benefits
Retired
Employees
5
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 obligation is now reported on balance sheet
Additional items now on statement of
comprehensive income
6
Capitalization approach to pensions:
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)
7
Measures of Pension Liability
Benefits for vested and nonvested employees at
future salaries
Benefits for vested and nonvested employees at current
salaries
Benefits for
vested
employees
at current
salaries
PV of Expected
Cash Flows
Vested
Benefit
Obligation
Accumulated
Benefit
Obligation
Projected
Benefit
Obligation
(GAAP)
8
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
9
What happens when
Interest rates increase?
Interest rates decrease?
10
A working paper for pensions
11
Accounts on Employer’s Books
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)
12
Working Paper – Pension Expense
Pension Worksheet
SFAS NO. 158
1
2
Income Stmt
BS
Pension
Expense
Cash
3
4
5
Accounts on Employer's Books
Other comprehensive income stmt
Transition
(Gain)/Loss
Net actuarial
(gain)/loss
Prior Service
Cost
6
BS
Funded Status
7
8
Not on Books
Memorandum Amounts
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
13
A working paper for pensions
14
Accounts on Employer’s Books
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
15
A working paper for pensions
16
Accounts on Employer’s Books
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
17
A working paper for pensions
18
Self-checking features
Each blue row
must add
across to ZERO
Funded
status must
equal PBO +
Plan Assets
Plug to
balanc
e JE
Balance forwards
19
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
20
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
21
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
22
Kieso, Weygandt & Warfield 11th ed.
Illustration 20-14, page 1034
23
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.
24
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)
25
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
26
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
27
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!
EoY = end of year
BoY = beginning of year
28
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
29
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
30
Other Postretirement Benefits
FASB 106
Appendix Material in KWW text
Also changed by FASB No. 158
31
Other Post-retirement Benefits
The accounting is similar to pension
accounting EXCEPT that
 the terminology is slightly different
EPBO
APBO
32
Kieso, Weygandt & Warfield 11th ed.
Illustration 20A-3, page 1056
33
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
34
Kieso, Weygandt & Warfield 11th ed.
Illustration 20A-2, page 1056
Cost attributed to period from hire to
eligibility (vesting)
35
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.
36
Working paper for FAS106
37
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.
Amortizations (transition, prior service cost and
unrecognized gain or loss)
38
Comparing FASB 87 & 106
Name of obligation
Components of
benefit cost
Plan Assets
Disclosure
requirements
Pension benefits
Projected benefit
obligation (PBO)
Service cost
Interest cost
(Expected return)
Amortization of
Prior service cost
Transition amount
Excess gain/loss
Most pension plans have
assets set aside in a
trust which generate
returns that help offset
the interest cost
component of benefit
cost.
Extensive, including
reconciliation of change
in PBO and plan assets
Other postretirement benefits
Accumulated postretirement
benefit obligation (APBO)
Service cost
Interest cost
(Expected return)
Amortization of
Prior service cost
Transition amount
Excess gain/loss
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.
Same as pension but additional
disclosures regarding health care
inflation rate assumptions and
impact
39