1. Pensions & Other Post Employment Benefits – ASC Topic 715 (A Review)
4/5/2017
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

2. Defined contribution plans
4/5/2017
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
Independent third party holds assets.
Size of pension trust depends on amounts contributed to trust, earnings on the trust, withdrawals from the trust and treatment of terminations.
Sometimes these plans are purely optional and grow only from payroll deductions authorized by employee. However, most of the time, the employer matches all or part of the employee’s contribution to the 401k plan.
For government and nonprofit employees, the plans are 403(b) and there’s another kind available with a different number and slightly different rules. Federal law specifies maximum contributions and when you can first withdraw money and when you have to start withdrawing your money 2 5 6 6 6

3. 4/5/2017
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 7 7 7

4. Chart from UK but trend is probably same in US
4/5/2017
Chart from UK but trend is probably same in US

5. Defined Benefit Pension Plan
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Defined Benefit Pension Plan
Services
Employer
Current Employees
Pension Fund
Contributions
Wages and Salaries
Form versus substance of trust.
Form is a trust which is a separate entity.
Substance is that both assets and obligations belong to employer (subject to laws like ERISA).
**There are separate rules that govern accounting for the pension trust fund
-”special industry” guidance ASC 960, 962 & 965
Retired Employees
Defined Benefits

6. Pension Approaches Before FASB 87 & 88: FASB 87 & 88 FASB 158
4/5/2017
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 14 14

7. Measures of Pension Liability
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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
Benefits for
vested
employees
at current
salaries
Accumulated
Benefit
Obligation
Projected
Benefit
Obligation
Vested
Benefit
Obligation
Vested Benefit Obligation (VBO)
The actuarial present value, using current salary levels, of vested benefits only.
Accumulated Benefit Obligation (ABO)
The actuarial present value of benefits, vested and non-vested, attributed to the pension formula to employee service rendered to a particular date.
Calculations are done without
assumptions about future changes
in the level of compensation.
Projected Benefit Obligation (PBO)
The actuarial present value of vested and non-vested benefits attributed to the plan through the pension benefit formula for service rendered to that date based on employees’ future salary levels
Future years of service are not forecasted in computing either PBO or ABO
PBO assumes future pay increases, ABO does not
PBO = ABO: Flat benefit or non-pay-related benefit formulas
PBO <> ABO: Final pay or career average pay benefit formulas
(GAAP)
PV of Expected
Cash Flows 9

8. Interest/return rates
4/5/2017
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. Components of Pension Expense
4/5/2017
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

10. Valuation on Balance Sheet
4/5/2017
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

11. Impact on the Statement of Comprehensive Income
4/5/2017
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

12. Net Periodic Pension Cost
4/5/2017
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 7 15 16 16 16

13. Pension Definitions Prior Service Cost (PSC)
4/5/2017
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
Prior Service Cost (PSC)
Arises from amendments to the plan that grants increased benefits to employees based on services already rendered. 5 11 12 12 12

14. Actuarial Gains and Losses
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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
Reasons for G/L
Gains and losses may arise from variations in assumed and actual asset rates of return and asset values themselves.
Gains and losses may arise from changes in the assumed variables used to determine the PBO required balance.
Amortization is required as a component of pension expense if, at the beginning of the year, the absolute value of the net unrecognized gain or loss exceeds 10% of the greater of:
The PBO or
The plan assets This 10% is referred to as the “corridor”:
If accumulated gains and losses are not greater than 10%, do not include their amortization in current pension cost.
Amortized gains reduce pension cost; losses increase it. 14 24 28 28 25

15. 10% Corridor Amortization
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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.
May use any amortization method that
equals or exceeds straight-line amortization over remaining expected service years of covered employees, and
is consistently applied 18

16. Kieso, Weygandt & Warfield 11th ed. Illustration 20-14, page 1034
4/5/2017
Kieso, Weygandt & Warfield 11th ed. Illustration 20-14, page 1034
Note that we’re dealing with “absolute values” here – rather than worrying that PBO is negative on our work sheet while PLAN ASSETS is positive. Just take 10% and if the absolute value of the accumulated gain/loss exceeds absolute value of the larger of PBO and Plan Assets, the EXCESS amount is amortized
The amount amortized can be HIGHER but this is the minimum and the way we’ll always do it for purpose of working problems – and we’ll always use SL method – just be aware that there are acceptable alternatives you might encounter in the work place

17. Working paper approach
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Working paper approach
This is similar to workpaper approach used in Kieso Intermediate

18. A working paper for pensions
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A working paper for pensions

19. Working Paper – Pension Expense
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Working Paper – Pension Expense

20. A working paper for pensions
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A working paper for pensions
Interest cost = discount rate * beginning balance in PBO
Expected return = expected return rate * beginning balance in Plan Assets
NOTE: the statement of comprehensive income reports the CHANGES in AOCI but AOCI itself is on the balance sheet as part of owners equity.

21. A working paper for pensions
4/5/2017
A working paper for pensions
NOTE: the TOP and very BOTTOM rows do NOT add across to zero. Instead, PBO + plan assets MUST add to funded status column. If it does not, something is wrong on the workpaper

22. A working paper for pensions
4/5/2017
A working paper for pensions

23. Self-checking features
4/5/2017
Funded status must equal PBO + Plan Assets
Each blue row must add across to ZERO
Balance forwards
Plug to balance JE {row=0}
Balance forwards

24. Settlements & Curtailments
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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)
Settlement
An irrevocable transaction that relieves the employer of the PBO and eliminates the risk of that obligation.
Plan assets are used to satisfy the settlement (e.g., lump-sum payments to employees)
Plan termination:
Not required for a settlement.
They usually involve asset reversions to the employer and a recognition of a gain to the employer.
Curtailment
A transaction or event the significantly reduces the expected years of service of active employees or eliminates the accrual of benefits for future work of a significant number of active employees. For example, a plant closing.
Curtailment gains and losses are accounted for as contingencies (if probable and can be reasonably estimated). 17 30 34 34 31

25. Pension Disclosures [FAS 132(R)]
4/5/2017
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 33 36 36

26. Pension Disclosures [FAS 132(R)]
4/5/2017
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 33 36 36

27. Pension Disclosures: Reconciliations
4/5/2017
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 year BoY = beginning of year 18 33 37 37 34

28. “Roll-forward” Displays – ASC 715-20-55-17

29. Pension Disclosures Employers with multiple plans
4/5/2017
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

30. Current portion of liability
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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

31. Newer disclosures (FSP FAS132R-1 Issued Dec 08)
4/5/2017
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

32. 4/5/2017
ASC

33. .]
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
4/5/2017
ASC

34. 4/5/2017
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

35. Other Postretirement Benefits
4/5/2017
Other Postretirement Benefits
Mostly in ASC 715 Appendix Material in KWW text

36. Other Post-retirement Benefits
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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).

37. Kieso, Weygandt & Warfield 11th ed. Illustration 20A-3, page 1056
4/5/2017
Kieso, Weygandt & Warfield 11th ed. Illustration 20A-3, page 1056
Even MORE assumptions necessary:
the time value of money (discount rates); participation rates (for contributory plans);
retirement age;
factors affecting the amount and timing of future benefit payments, which for postretirement health care benefits consider past and present per capita claims cost by age,
health care cost trend rates,
Medicare reimbursement rates, and so forth;
salary progression (for pay-related plans);
the probability of payment (turnover, dependency status, mortality, and so forth).

38. 4/5/2017
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
The accumulated postretirement benefit obligation (APBO) makes assumptions about future pay increases (if relevant) and it thus comparable to the projected benefit obligation (rather than the accumulated benefit obligation) in pension accounting.
We use APBO (not EPBO) on our postretirement benefit worksheet

39. Kieso, Weygandt & Warfield 11th ed. Illustration 20A-2, page 1056
4/5/2017
Kieso, Weygandt & Warfield 11th ed. Illustration 20A-2, page 1056
Cost attributed to period from hire to eligibility (vesting)
Attribution
FAS106 – (apparently not changed by FAS158)
43. An equal amount of the expected postretirement benefit obligation for an employee generally shall be attributed to each year of service in the attribution period (a benefit/years-of-service approach). However, some plans may have benefit formulas that attribute a disproportionate share of the expected postretirement benefit obligation to employees' early years of service. For that type of plan, the expected postretirement benefit obligation shall be attributed in accordance with the plan's benefit formula.
44. The beginning of the attribution period generally shall be the date of hire. However, if the plan's benefit formula grants credit only for service from a later date and that credited service period is not nominal in relation to employees' total years of service prior to their full eligibility dates, the expected postretirement benefit obligation shall be attributed from the beginning of that credited service period. In all cases, the end of the attribution period shall be the full eligibility date. (Paragraphs illustrate the attribution provisions of this Statement.)

40. Postretirement Benefit Worksheet
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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.

41. 4/5/2017
Working paper for FAS106

42. Net periodic postretirement benefit cost.
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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)
AMORTIZATIONS INCLUDE
Transition obligation MANY COMPANIES ELECTED TO TAKE A ONE-TIME HIT WHEN FASB 106 CAME OUT AND WON’T HAVE THIS ITEM
Unrecognized prior service cost
Unrecognized gain or loss in excess of 10% corridor

43. Comparing Pension & OPEB
4/5/2017
Comparing Pension & OPEB
Note that because post-retirement benefit plans other than pensions are generally UNFUNDED (there are no assets), it will almost always be necessary to prorate the liability between current and noncurrent sections of the balance sheet