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Are you prepared for FAS 158?
Presented by:
Ken Newhouse, ASA, EA, MAAA
Associate Actuary, Pension Services
CUNA Mutual Group
Employee Benefit Products
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Before We Get Started...
• Adjust screen by shrinking left and bottom windows (or hit F11)
• I will periodically un-mute everyone for questions, but submit questions in the meantime
• Session will be recorded• Please don’t put us on hold
Employee Benefit Products
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I am not an accountant!*
* The information contained in this presentation should not be considered tax advice
Employee Benefit Products
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Are you ready for FAS 158?
• Logistics of transition and new reporting requirements
• Preview of new report and how it will be used during transition
• Impact of transition on balance sheet
• Determination of Net Periodic Pension Cost
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Logistics of Transition
Prepaid Pension Expense
Net Pension Asset or Liability
Other Comprehensive
Income
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Logistics of Transition
Problem:• Net Pension Asset/Liability and OCI values not known until FYE
Solution:• Within two weeks after FYE, FAS 158 report will be issued to show these values and the recommended journal entries
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Logistics of Transition
Last Valuation FYE
1/1/07 12/31/07
12/31/2007 FAS 158 Report
1/1/2008Valuation
Report
12/31/08Transition
FAS 87 Accounting FAS 158 Accounting
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New FAS 158 Report
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New FAS 158 Exhibit C
Transition Journal Entries
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New FAS 158 Exhibit B
Use FAS 87 Journal Entries Prior Year
Use FAS 158 Journal Entries Current Year
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Logistics of Transition
• Liabilities projected from last valuation date
• Assets up to date– If any assets not held by CMG
must wait for asset statement– RPP and IMAP asset info accessed
electronically
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Logistics of Transition
• NPPC for upcoming year is estimated– Significant changes in census may
result in updated NPPC in valuation report
– Common causes are key retirements, large pay increases, new participants entering the plan
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Accounting Evolution
FAS 87/88
Basic Pension Accounting Rules
1989
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Accounting Evolution
FAS 106
Accounting for Other
Postretirement Benefits
1995
FAS 87/88
Basic Pension Accounting Rules
1989
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Accounting Evolution
FAS 106FAS 87/88
FAS 132
Uniform Disclosure
1998
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Accounting Evolution
FAS 106FAS 87/88
FAS 132
FAS 132(R)
Increased Disclosure Requirements
2003
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Accounting Evolution
FAS 106FAS 87/88
FAS 132
FAS 132(R)
FAS 158
Transparency
2007
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Balance Sheet
Assets Liabilities
AssetsLiabilities
Equity
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Balance Sheet
Assets Liabilities
Assets(Value of Home
= $300K)
Liabilities(Mortgage =
$200K)
Equity ($100K)
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CU Balance Sheet
Assets Liabilities
Cash & Invest
Loans
Other
Liabilities
Deposits
Member’s Equity
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Member’s Equity
• Reserves• Undivided Earnings• Accumulated Other Comprehensive Income (OCI)– Unrealized GL on AFS Securities– Unrecognized GL in Pension Plan
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CU Balance SheetAssets Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided Earnings 40
OCI (5)
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Net Worth
• Net Worth is Reserves plus Undivided Earnings
(60 + 40 = 100 million)
• Net Worth Ratio isNet Worth divided by Total Assets
(100M / 1B = 10%)
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Funded Status of Pension Plan
• Net Pension Asset (Liability)
Plan Assets less
Projected Benefit Obligation
• Shown on balance sheet as “other asset” if overfunded or “other liability” if underfunded
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Funded Status
New FAS 158 Exhibit A
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Change in Funded Status
• Change in PBO+Service Cost (benefit accruals)+ Interest Cost– Benefit payments
• Change in Plan Assets+Contributions+ Investment return– Benefit payments
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Change in Funded Status
• Expected changes are expensedService CostInterest CostExpected Return on Assets
• Other changes not expensedContributions (comes from cash)Benefit payments (reduces both side)Gains or losses (goes to OCI)
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Change in Funded Status
PBO Assets Net Liability
Begin 7,800 6,800 +1,000
Benefits Paid -100 -100 0Gain/Loss 600 200 400
Service Cost 460 460Interest Cost 440 440Exp Return 500 -500Contribution 700 -700
End 9,200 8,100 +1,100
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Change in Funded StatusLiability Equity Asset
Net Liability
Undivided Earnings OCI Cash
Amort Loss -100 100
-400-300
Gain/Loss 400
Service Cost 460 -460Interest Cost 440 -440Exp Return -500 500
Contribution -700 -700
Change 100 -500 -700
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Journal EntriesDebit Credit
Net Periodic Pension CostUndivided earnings 500Net pension liability 400OCI 100
ContributionsNet pension liability 700Cash 700
Gains or LossesOCI 400Net pension liability 400
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New FAS 158 Exhibit D
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New FAS 158 Exhibit D
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Pension Expense
+ Service Cost + Interest Cost – Expected Return on Assets+ Amortization of Loss (Gain)
= Net Periodic Pension Cost
No change!
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Net Periodic Pension Expense
New FAS 158 Exhibit A
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Transition to FAS 158
• No change in NPPC• Prepaid Pension Expense will become Net Pension Liability or Asset
• Unrecognized Gains/Losses will Reduce OCI
• Previous OCI resulting from unfunded ABO is reversed
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Prepaid Pension Expense
Unrecognized Losses
Old FAS 87 Exhibit
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Journal EntriesDebit Credit
Transition to FAS 158Prepaid pension expense 2,200Net pension liability 1,100OCI 3,300
• Prepaid pension expense was $2.2 million
• PBO exceeds assets by $1.1 million
• Unrecognized loss was $3.3 million
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New FAS 158 Exhibit C
Transition Journal Entries
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CU Balance Sheet Before FAS 158Assets Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided Earnings 40
OCI (5)
Employee Benefit Products
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CU Balance Sheet After FAS 158Assets Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided Earnings 40
OCI (5)
X
X
X
48
156
(8)
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Net Worth After FAS 158
• Net Worth is unaffectedReserves plus Undivided Earnings
(60 + 40 = 100 million)
• Net Worth Ratio isNet Worth divided by Total Assets
(100M / 998M = 10.02%)
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Journal Entries (Overfunded Plan)
Debit CreditTransition to FAS 158Prepaid pension expense 4,000Net pension asset 1,000OCI 3,000
• Prepaid pension expense was $4 million
• Assets exceed PBO by $1 million
• Unrecognized loss was $3 million
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CU Balance Sheet After FAS 158Assets Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided Earnings 40
OCI (5)
X
X
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(8)
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Unrecognized Loss
• Decreasing discount rates• Investment earnings less than expected
• Salary increases larger than expected
• Super-sized lump sums• Decreasing turnover
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Moody’s Aa
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
Dec '99
Jun '00
Dec '00
Jun '01
Dec '01
Jun '02
Dec '02
Jun '03
Dec '03
Jun '04
Dec '04
Jun '05
Dec '05
Jun '06
Dec '06
Jun '07
8,800,000
7,100,000
5,800,000
4,700,000
Liability
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Prefund $5MBefore After
Funded StatusProjected Benefit Obligation 9,200 9,200
Plan Assets 8,100 13,100
Net Pension Liability (Asset) +1,100 -4,100
Net Periodic Pension Cost
Benefit Costs 1,135 1,135
Expected Return on Assets 585 960
Net Periodic Pension Cost 550 175
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Journal EntriesDebit Credit
ContributionsNet pension liability 1,000
Net pension asset 4,000
Cash 5,000
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Balance SheetAssets Liabilities
Cash 300 Liabilities 156
Loans 650 Deposits 750
Other 48 Reserves 60
Undivided Earnings 40
OCI (8)
X X
X
155
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295
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Measurement Date = FYE
• Effective for FYE after 12/15/2008• FYE is generally date for which you have your financial audit completed, but check with auditor
• We’ll assume no change for 2006, but please let us know if you want to change
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Key Changes
• Measurement Date = FYE• Unrecognized items reduce Equity (i.e. Other Comprehensive Income)
• Expense calculation is same• Prefunding still works• Effective FYE after 6/15/2007
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Questions?
If you have questions after the show please e-mail:
kenneth.newhouse@cunamutual.com
We look forward to future sessions with your credit union.
THANK YOU for Attending
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