1. Pensions & Other Post Employment Benefits – after SFAS No. 158
8/2/2018
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
Major Categories of Pension Plans
Government plans, primarily social security – for FICA both the employer and employee contribute
Employer plans
Individual plans, such as individual retirement accounts (IRAs)

2. The good news Pension expense is computed exactly the same way:
8/2/2018
The good news
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
FASB 87 Paragraph 16 as amended
Net periodic pension cost has often been viewed as a single homogeneous amount, but in fact it is made up of several components that reflect different aspects of the employer’s financial arrangements as well as the cost of benefits earned by employees. The cost of a benefit can be determined without regard to how the employer decides to finance the plan. The service cost component of net periodic pension cost is the actuarial present value of benefits attributed by the plan’s benefit formula to services rendered by employees during the period. The service cost component is conceptually the same for an unfunded plan, a plan with minimal funding, and a well-funded plan. The other components of net periodic pension cost are interest cost (interest on the projected benefit obligation, which is a discounted amount), actual return on plan assets, amortization of any prior service cost or credit included in accumulated other comprehensive income, and gain or loss, which includes, to the extent recognized, amortization of the net gain or loss included in accumulated other comprehensive income. Both the return on plan assets and interest cost components are in substance financial items rather than employee compensation costs.

3. Big Change = Valuation on BS
8/2/2018
Big Change = Valuation on BS
We are now reporting the net of PBO and Plan Assets on the balance sheet.
If Plan Assets > PBO, reported net 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
For other (non-pension) benefits, we use Accumulated postretirement benefit obligation (APBO) instead of PBO
FAS158 para 4.
A business entity that sponsors one or more single-employer defined benefit plans shall:
Recognize the funded status of a benefit plan—measured as the difference between the fair value of plan assets2 and the benefit obligation—in its statement of financial position. For a pension plan, the benefit obligation shall be the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation shall be the accumulated postretirement benefit obligation.
b. Aggregate the statuses of all overfunded plans and recognize that amount as an asset in its statement of financial position. It also shall aggregate the statuses of all underfunded plans and recognize that amount as a liability in its statement of financial position. A business entity that presents a classified statement of financial position shall classify the liability for an underfunded plan as a current liability, a noncurrent liability, or a combination of both. The current portion (determined on a plan-by-plan basis) is the amount by which the actuarial present value of benefits included in the benefit obligation payable in the next 12 months, or operating cycle if longer, exceeds the fair value of plan assets. The asset for an overfunded plan shall be classified as a noncurrent asset in a classified statement of financial position

4. Impacts the Statement of Comprehensive Income
8/2/2018
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

5. The new rules primarily apply to defined benefit plans
8/2/2018
A Bit of Review
The new rules primarily apply to defined benefit plans

6. Defined contribution plans
8/2/2018
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

7. 8/2/2018
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
Benefit formula. The basis for determining payments to which participants may be entitled under a pension plan. Pension benefit formulas usually refer to the employee's service or compensation or both.
Final-pay formula (Final-pay plan). A benefit formula that bases benefits on the employee's compensation over a specified number of years near the end of the employee's service period or on the employee's highest compensation periods. For example, a plan might provide annual pension benefits equal to 1 percent of the employee's average salary for the last five years (or the highest consecutive five years) for each year of service.
Flat-benefit formula (Flat-benefit plan). A benefit formula that bases benefits on a fixed amount per year of service, such as $20 of monthly retirement income for each year of credited service. 7 7 7

8. Chart from UK but trend is probably same in US
8/2/2018
Chart from UK but trend is probably same in US
From speech made by U.S. Secretary of Labor Elaine L. Chao on January 10, 2005
Just consider the estimated total value of our nation's pension assets—a staggering $12 trillion dollars.
About $4.3 trillion of these assets reside in retirement plans provided by private sector employers. Some of these assets are in 401(k)s—an increasingly popular retirement instrument. Some are in Individual Retirement Accounts, known as IRAs. And $1.8 trillion are in traditional defined benefit plans. Today, I want to talk about the President's proposals to strengthen this last type of plan—the single-employer, private defined benefit pension plans that cover 20% of the nation's workforce, or about 34 million people.
Historically, defined benefit plans were the favored retirement plans of the Ozzie and Harriet generation, when workers stayed with one company for most of their working lives. But the workplace has undergone revolutionary changes and so have pension plans. Today, workers change jobs more often—an average of 9 times by the time he or she is 34 years old! So the demand for more portable pension plans has skyrocketed. That's why in recent years, 401(k)-type plans have become the primary source of retirement income for workers.
But defined benefit plans remain prevalent in older industries, such as automobile manufacturing, steel and the airlines. Today, as recent news stories have pointed out, an increasing number of these defined benefit pension plans are significantly underfunded. They have been battered by a perfect storm of declining equity markets, which didn't begin to recover until 2003, and low interest rates. In addition, the concentration of defined benefit plans in older industries under transition has made the situation worse.
But that's only part of the reason for the shortfalls in these pension plans. Outdated and ineffective pension rules allow employers and unions to underestimate future pension liabilities and make promises they cannot keep. In fact, current estimates place the total amount of underfunding in private, defined benefit pension plans at $450 billion.

9. Defined Benefit Pension Plan
8/2/2018
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).
**We will not be studying the books of and entries for the trust itself – there are separate rules that govern accounting for the pension trust fund
Retired Employees
Defined Benefits

10. Pension Approaches Before FASB 87 & 88: FASB 87 & 88 FASB 158
8/2/2018
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
Area of great activity and concern.
Active on FASB agenda many years – and STILL on agenda after FASB 158!
FASB #87, #88 supersede APB #8, FASB # 36, and FASB interpretation #3.
FASB 132 expanded disclosures (twice since it was revised once before FASB 158)
With FASB 158 – the disclosures are modified by the big thing is the recognition of the full unfunded obligation (or excess of assets) on the employer’s balance sheet
Remaining issues include measurement and what amount should be reported on balance sheet.
Statements were a long time in development
Conflict still continues.
FASB has determined that accrual accounting is to be followed.
Pension cost of the period should not depend on the amount of funding. 14 14

11. Measures of Pension Liability
8/2/2018
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
Go back to PV example and have students compute ABO instead of the PBO
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
To do the PVs: Discount rate is the rate required to currently settle benefits and generally based on rates published by the Pension Benefit Guarantee Corp (PBGC).
(GAAP)
PV of Expected
Cash Flows 9

12. Interest/return rates
8/2/2018
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
Added by FAS158
Pursuant to paragraph 44, an employer may look to rates of return on high-quality fixed-income investments in determining assumed discount rates. The objective of selecting assumed discount rates using that method is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the pension benefits when due. Notionally, that single amount, the projected benefit obligation, would equal the current market value of a portfolio of high-quality zero coupon bonds whose maturity dates and amounts would be the same as the timing and amount of the expected future benefit payments. Because cash inflows would equal cash outflows in timing and amount, there would be no reinvestment risk in the yields to maturity of the portfolio. However, in other than a zero coupon portfolio, such as a portfolio of long-term debt instruments that pay semiannual interest payments or whose maturities do not extend far enough into the future to meet
expected benefit payments, the assumed discount rates (the yield to maturity) need to incorporate expected reinvestment rates available in the future. Those rates shall be extrapolated from the existing yield curve at the measurement date. The determination of the assumed discount rate is separate from the determination of the expected rate of return on plan assets whenever the
actual portfolio differs from the hypothetical portfolio above. Assumed discount rates shall be reevaluated at each measurement date. If the general level of interest rates rises or declines, the assumed discount rates shall change in a similar manner.
FAS 87 para 30. The expected return on plan assets shall be determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. The market-related value of plan assets shall be either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. Different ways of calculating market-related value may be used for different classes of assets (for example, an employer might use fair value for bonds and a five-year-moving-average value for equities), but the manner of determining market-related value shall be applied consistently from year to year for each asset class.

13. Net Periodic Pension Cost
8/2/2018
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
FAS87 Paragraph 20: - as amended by FAS158
The following components shall be included in the net pension cost recognized for a period by an employer sponsoring a defined benefit pension plan:
a. Service cost
b. Interest cost
c. Actual return on plan assets, if any [expected return here makes computations easier]
d. Amortization of any prior service cost or credit included in accumulated other comprehensive income.
e. Gain or loss (including the effects of changes in assumptions) to the extent recognized (paragraph 34) – [includes difference between expected and actual return if you do it this way]
f. Amortization of any net transition asset or obligation existing at the date of initial application of this FAS87 and remaining in accumulated other comprehensive income (paragraph 77). 7 15 16 16 16

14. Pension Definitions Prior Service Cost (PSC)
8/2/2018
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.
From FAS87 para 25 as amended
A plan amendment that retroactively increases benefits (including benefits that are granted to retirees) increases the projected benefit obligation. The cost of the benefit improvement shall be recognized as a charge to other comprehensive income at the date of the amendment. Except as specified in paragraphs 26 and 27, that prior service cost shall be amortized as a component of net periodic pension cost by assigning an equal amount to each future period of service of each employee active at the date of the amendment who is expected to receive benefits under the plan. If all or almost all of a plan’s participants are inactive, the cost of retroactive plan amendments affecting benefits of inactive participants shall be amortized based on the remaining life expectancy of those participants instead of based on the remaining service period. Other comprehensive income is adjusted each period as prior service cost is amortized.
Paragraph 26 as amended
To reduce the complexity and detail of the computations required, consistent use of an alternative approach that more rapidly amortizes the cost of retroactive amendments is acceptable. For example, a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan is acceptable. The alternative method used shall be disclosed. 5 11 12 12 12

15. Actuarial Gains and Losses
8/2/2018
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.
We’ll return to the details after we learn how to use the workpaper 14 24 28 28 25

16. 10% Corridor Amortization
8/2/2018
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

17. Kieso, Weygandt & Warfield 11th ed. Illustration 20-14, page 1034
8/2/2018
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
Can be more 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

18. Modifying the Workpaper
8/2/2018
Modifying the Workpaper
This is similar to workpaper approach I used to use and that used in Kieso Intermediate

19. A working paper for pensions
8/2/2018
A working paper for pensions

20. Working Paper – Pension Expense
8/2/2018
Working Paper – Pension Expense
We’ll learn the various components of pension expense as we work through the examples

21. A working paper for pensions
8/2/2018
A working paper for pensions
Interest cost = discount rate * beginning balance in PBO
Expected return = expected return rate * beginning balance in Plan Assets
Important to remind students that the statement of comprehensive income reports the CHANGES in AOCI but AOCI itself it on the balance sheet as part of owners equity.
Remind student of other OCI covered in intermediate accounting – unrealized gains and losses available for sale securities
In this case, I have the balance forwards at the BOTTOM of the workpaper because what we need for the journal entry is the changes in the AOCI accounts because that is what is reported on stmt of comprehensive invome.
So might take awhile to get used to putting some balance forwards at the top (last three columns) but putting the AOCI balance forwards at bottom. It also means that adding across on the next to bottom row does NOT provide a check figure (does not add to zero or anything).

22. A working paper for pensions
8/2/2018
A working paper for pensions
This is another place to remind students that 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

23. A working paper for pensions
8/2/2018
A working paper for pensions
Show them that we put balance forwards from AOCI at bottom and then add beginning to change to get ending AOCI
From here we go to the EXCEL example
We’ll come back and review the cross-checking features of workpaper after doing several examples

24. Self-checking features
8/2/2018
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

25. Settlements & Curtailments
8/2/2018
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

26. Pension Disclosures [FAS 132(R)]
8/2/2018
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

27. Pension Disclosures [FAS 132(R)]
8/2/2018
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
FASB 132 revised expanded the pension disclosures required – add summary statement here? 33 36 36

28. Pension Disclosures: Reconciliations
8/2/2018
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!
The fair value of plan assets (EOY reconciled to BOY)
Show effects of actual return, foreign currency exchange rate changes, contributions by employer, benefits paid, and so forth
PBO Obligation (EOY reconciled to BOY)
Show effect of service cost, interest cost, contributions by plan participants, actuarial gain/loss, foreign currency exchange rate changes, benefits paid, plan amendments, and so forth.
INCLUDES Funded status of plans and amounts not yet recognized
The amount of unrecognized PSC.
The amount of unrecognized gain and loss.
The amount of any remaining unrecognized transition amount
The prepaid asset or accrued liability recognized in the financial statements.
The amount of additional liability recognized and related intangible asset or other comprehensive income recognized.
EoY = end of year BoY = beginning of year 18 33 37 37 34

29. Pension Disclosures Employers with multiple plans
8/2/2018
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
FAS 87 Paragraph 36 as amended
The employer shall aggregate the statuses of all overfunded plans and recognize that amount as an asset in its statement of financial position. It also shall aggregate the statuses of all underfunded plans and recognize that amount as a liability in its statement of financial position. An employer that
presents a classified statement of financial position shall classify the liability for an underfunded plan as a current liability, a noncurrent liability, or a combination of both. The current portion (determined on a plan-by-plan basis) is the amount by which the actuarial present value of benefits included in the benefit obligation payable in the next 12 months, or operating cycle if longer, exceeds the fair value of plan assets. The asset for an overfunded plan shall be classified as a noncurrent asset in a classified statement of financial position.

30. Current portion of liability
8/2/2018
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
FAS 87 Paragraph 36 as amended
The employer shall aggregate the statuses of all overfunded plans and recognize that amount as an asset in its statement of financial position. It also shall aggregate the statuses of all underfunded plans and recognize that amount as a liability in its statement of financial position. An employer that presents a classified statement of financial position shall classify the liability for an underfunded plan as a current liability, a noncurrent liability, or a combination of both. The current portion (determined on a plan-by-plan basis) is the amount by which the actuarial present value of benefits included in the benefit obligation payable in the next 12 months, or operating cycle if longer, exceeds the fair value of plan assets. The asset for an overfunded plan shall be classified as a noncurrent asset in a classified statement of financial position.

31. FSP FAS132R-1 Issued Dec 08 A lot more disclosures are now required
8/2/2018
FSP FAS132R-1 Issued Dec 08
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

32. 8/2/2018
Example from FSP

33. 8/2/2018
Example from FSP

34. 8/2/2018
Example from FSP

35. 8/2/2018
FSP FAS132R-1 Issued Dec 08
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!

36. Other Postretirement Benefits
8/2/2018
Other Postretirement Benefits
FASB Appendix Material in KWW text
Also changed by FASB No. 158
Postretirement Benefits Other Than Pensions
FASB 106 provides accounting standards for employers' accounting for postretirement benefits other than pensions (hereinafter referred to as postretirement benefits).
Although it applies to all forms of postretirement benefits, this section focuses principally on postretirement health care benefits.
Accrual of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents is required during the years that the employee renders the necessary service.
The existence of a plan will be inferred from past and present practices of providing benefits to retirees, even if there is nothing in writing.

37. Other Post-retirement Benefits
8/2/2018
Other Post-retirement Benefits
The accounting is similar to pension accounting EXCEPT that
the terminology is slightly different
EPBO
APBO
Expected postretirement benefit obligation (EPBO).
The actuarial present value as of a particular date of the postretirement benefits expected to be paid by the employer's plan to or for the employee, the employee's beneficiaries, and any covered dependents pursuant to the terms of the plan.
Accumulated postretirement benefit obligation (APBO).
The actuarial present value of all future benefits attributed to an employee's service rendered to that date assuming the plan continues in effect and that all assumptions about future events are fulfilled.

38. Kieso, Weygandt & Warfield 11th ed. Illustration 20A-3, page 1056
8/2/2018
Kieso, Weygandt & Warfield 11th ed. Illustration 20A-3, page 1056
Even MORE assumptions necessary:
FASB 106 para 30. The service cost component of postretirement benefit cost, any prior service cost, and the accumulated postretirement benefit obligation are measured using actuarial assumptions and present value techniques to calculate the actuarial present value of the expected future benefits attributed to periods of employee service. Each assumption used shall reflect the best estimate solely with respect to that individual assumption. All assumptions shall presume that the plan will continue in effect in the absence of evidence that it will not continue. Principal actuarial assumptions include 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); and the probability of payment (turnover, dependency status, mortality, and so forth).

39. 8/2/2018
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

40. Kieso, Weygandt & Warfield 11th ed. Illustration 20A-2, page 1056
8/2/2018
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.)

41. Postretirement Benefit Worksheet
8/2/2018
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.

42. 8/2/2018
Working paper for FAS106

43. Net periodic postretirement benefit cost.
8/2/2018
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)
AMORTIZATIONS INCLUDE
Transition obligation BUT EXPLAIN THAT 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
Amortization is included as a component of postretirement benefit cost for material gains or losses.
The amortization period is the average remaining service life of active plan participants.
To determine whether recognition is required, a corridor test is used:
Amortize the portion of the gain or loss at the beginning of the year that exceeds 10% of the beginning of the year balance of (the greater of)
the accumulated postretirement benefit obligation or
market-related value of plan assets
The portion in excess of corridor is amortized
(faster amortization is also permitted) 

44. 8/2/2018
Comparing FASB 87 & 106
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