CHAPTER 14 PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Dec 28, 2015
Accounting for the Cost of Pension Plans
Types of plansDefined contributionDefined benefit
Actuarial funding methods for defined benefit plans
Cost approachBenefit approach1 Accumulated benefits approach2 Benefits/years of service approach
Historical Perspective
ARB No. 47
Accounting Research Study No. 8
APB Opinion No. 8
Measuring total costAllocating cost to proper accounting periodProviding cash to fund the pension planDisclosure
APB Opinion No. 8 Issues
Normal cost
Past service cost
Prior service cost
Actuarial gains and losses
Accounting Method Under APB No. 8
MinimumNormal costInterest on unfunded prior or post service costA provision for any vested benefit
MaximumNormal cost10% of past and prior service costInterest equivalent
Reasons for APB’S Inability to Reach A Conclusion
Two views of pensions1 A means of promoting efficiency
therefore, pension costs are associated with the plan and not specific individuals
2 A form of supplemental benefits therefore, they are related to specific employees
The Pension Liability Issue
Issues involved in preliminary viewsPeriod over which to recognize pension costs
How to spread pension cost over periods
Whether to include pension information on balance sheets
Balance Sheet
Pension Information
The Pension Liability Issue
Position taken was that liability should be recognized on the balance sheetPension benefit obligation
+ Actuarial present value of accumulated benefits with salary progression
– Less pension assets
+ Plus or minus valuation allowance
Opposition by AICPA
BalanceSheet
SFAS No. 87
Pension information should be prepared on the accrual basis while retaining three fundamental aspects of previous requirements
1. Delayed recognition of certain events2. Reporting net cost3. Offsetting assets and liabilities
Changes from APB Opinion No 8:1. Standardized method of measuring pension cost2. Immediate recognition of a pension liability when the accumulated
benefit obligation exceeds the fair value of plan assets3. Expanded disclosure requirements
Pension Cost
Components:Service cost
Interest cost
Return on plan assets
Amortization of unrecognized prior service cost
Amortization of gains and losses
Amortization of transition amount
Minimum liability recognitionWhen accumulated benefit obligation exceeds plan assets
Disclosures Required Under SFAS No. 87
A description of the plan including
groups covered
type of benefit formula
funding policy
types of assets held
significant nonbenefit liabilities
any matters affecting comparability of information presented
Net periodic pension cost by components
A schedule reconciling funding status with the amounts reported on the balance sheet by category.
SFAS No. 87 Theoretical Issues
Projected benefits approach
The settlement rate
Return on plan assets
Reporting the minimum liability
Accounting for the Pension Fund
Requires information on pension plan financial statements
Net assets available for benefits
Changes in net assets
Actuarial present value of accumulated plan benefits
Effects of certain factors
The Employee Retirement Income Security Act (ERISA)
Goals 1. create standards for the operation of
pension funds
2. correct abuses in the handling of pension funds
Concerned only with funding policies
Does not impact on the determination of periodic pension expense
Other Postretirement Benefits
SFAS No. 106 deals with several benefits offered to retired employees the most important are health insurance and life insurance
These benefits are offered in exchange for current service
similar to defined benefit pension plansshould be accounted for as such over the working life of employees
Prior treatment was pay-as-you-goEconomic consequences arguments of SFAS No. 106
Accounting Treatment Required By SFAS No. 106
Service cost
Interest
Amortization of prior service costs
Amortization of transition amount
Disclosure
SFAS No. 132
New requirements including:1 Standardization of the disclosure requirements
for pensions and other postretirement benefits
2 Requiring the disclosure of additional information on changes in the benefit obligation and fair value of plan assets
3 Eliminates some other disclosure requirements
The benefit to financial statement users includes disaggregated information on the six components of pension cost
Financial Analysis of Retirement Benefits
Individual components of pension cost have been found to convey different information to financial statement users
Economic consequences of SFAS No. 106
Best Buy no pension plan
no disclosure of any information on other postretirement benefits.
Circuit Cityhas a defined benefit pension plan
does not offer other postretirement benefits.
International Accounting Standards
The IASC has issued two standards affecting accounting for retirement benefits
1. A revised IAS No. 19, “Retirement Costs and Expenses”
2. IAS No. 26, “Accounting and Reporting by Retirement Benefit Plans”
IAS No. 19Retirement Costs and Expenses
Major provisions are:1. For defined contribution plans:
periodic contributions are recognized as expenses
2. For defined benefit plans:a) Current service cost should be recognized as an
expense
b) Past service costs, experience adjustments and changes in assumptions are to be recognized as expenses in a systematic manner over the working life of current employees.
c) Preferred method is the accrued benefit valuation method but projected benefit valuation method is acceptable
FASB Staff Review of IAS No 19
The original staff review noted that the social contract between employers and employees may be different in foreign countries
New standard is an improvement but allows similar plans to be accounted for differently under U. S. GAAP and IASC standards.
IAS No. 26: Accounting and Reporting by Retirement Benefit Plans
Separate reporting standards for defined benefit and defined contribution pension plans
No FASB staff review
Defined Contribution
Objectives
provide information about the plan and the performance of
investments
Defined Benefit
provide information that is useful in assessing the
relationship between plan resources and
future benefits
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Prepared by Richard Schroeder, DBAKathryn Yarbrough, MBA