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

Pension expense is computed exactly the same way:




Service cost
Interest cost
Expected return on plan assets
Amortization (if any) of
 Transition gain or loss


Prior service cost
Unrecognized gain or loss
2

We are now reporting the net of PBO and
Plan Assets on the balance sheet.
If Plan Assets > PBO, reported net as a longterm 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
3

Impacts the Statement of
Comprehensive Income
SCI used to have a deferred pension cost in certain cases (related to the minimum liability requirement which is gone)
Now there are potentially 3 items of other comprehensive income:
 Transition amount


Prior service cost
Actuarial gains and losses
4

The new rules primarily apply to defined benefit plans
5

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
6

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
7

Chart from UK but trend is probably same in US
8

Services
Employer
Current
Employees
Wages and Salaries
Pension
Fund Defined Benefits
Retired
Employees
9

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
10

reported in note
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)
11

Discount rate

Rates on high-quality fixed-income investments with maturities consistent with expected payments to retirees
 Generally equivalent to a portfolio of zerocoupon bonds with appropriate maturities
Expected rate of return

Based on long-term rate of return anticipated given investment of plan assets
12

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
13

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
14

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
15

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.
16

Kieso, Weygandt & Warfield 11 th ed.
Illustration 20-14, page 1034
17

This is similar to workpaper approach I used to use and that used in Kieso Intermediate
18

19

Working Paper – Pension
Expense
Pension Worksheet 1 2 3 4 5
SFAS NO. 158 Accounts on Employer's Books
Other comprehensive income stmt Income Stmt
Pension
Expense
BS
Cash
Transition
(Gain)/Loss
6
BS
Net actuarial
(gain)/loss
Prior Service
Cost 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
20

Interest cost = discount rate * beginning balance in PBO
Expected return = expected return rate * beginning balance in Plan
Assets
21

A working paper for pensions
22

23

Each blue row must add across to ZERO
Funded status must equal PBO +
Plan Assets
Balance forwards
Balance forwards
Plug to balance
JE
{row=0}
24



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

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

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

A lot 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
31

Effective date – fiscal years ending after
Dec. 15, 2009
Early adoption is permitted
Comparative information for prior years is not required the first time through
Extra credit on WFF if you attempt the additional disclosures in the FSP!
32

FASB 106
Appendix Material in KWW text
Also changed by FASB No. 158
33

The accounting is similar to pension accounting EXCEPT that
 the terminology is slightly different
 EPBO
 APBO
34

Kieso, Weygandt & Warfield 11 th ed.
Illustration 20A-3, page 1056
35

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
36

Kieso, Weygandt & Warfield 11 th ed.
Illustration 20A-2, page 1056
Cost attributed to period from hire to eligibility (vesting)
37

Would be the same as a pension worksheet with modified labels at the top


Pension Expense becomes Postretirement
Benefit Expense.
PBO becomes APBO.
38

39

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)
40

Pension benefits
Name of obligation Projected benefit
Components of benefit cost obligation (PBO)
Service cost
Interest cost
(Expected return)
Amortization of
Prior service cost
Plan Assets
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.
Disclosure requirements
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
41