1. PENSIONS AND OTHER POSTRETIREMENT BENEFITS
CHAPTER 14
PENSIONS AND OTHER POSTRETIREMENT BENEFITS

2. Accounting for the Cost of Pension Plans
Types of plans
Defined contribution
Defined benefit
Actuarial funding methods for defined benefit plans
Cost approach
Benefit approach
Accumulated benefits approach
Benefits/years of service approach

3. Historical Perspective
ARB No. 47
APB Opinion No. 8
Measuring total cost
Allocating cost to proper accounting period
Providing cash to fund the pension plan
Disclosure
Accounting Research Study No. 8

4. APB Opinion No. 8 Issues Normal cost Past service cost
Prior service cost
Actuarial gains and losses

5. Accounting Method Under APB No. 8
Minimum
Normal cost
Interest on unfunded prior or post service cost
A provision for any vested benefit
Maximum
10% of past and prior service cost
Interest equivalent

6. Reasons for APB’S Inability to Reach A Conclusion
Two views of pensions
A means of promoting efficiency
therefore, pension costs are associated with the plan and not specific individuals
A form of supplemental benefits
therefore, they are related to specific employees

7. The Pension Liability Issue
Issues involved in preliminary views
Period 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

8. The Pension Liability Issue
Position taken was that liability should be recognized on the balance sheet
Pension benefit obligation
Actuarial present value of accumulated benefits with salary progression
Less pension assets
Plus or minus valuation allowance
Opposition by AICPA
Balance Sheet

9. SFAS No. 87 Pension information Changes from APB Opinion No 8:
should be prepared on the accrual basis
while retaining three fundamental aspects of previous requirements
Delayed recognition of certain events
Reporting net cost
Offsetting assets and liabilities
Changes from APB Opinion No 8:
Standardized method of measuring pension cost
Immediate recognition of a pension liability when the accumulated benefit obligation exceeds the fair value of plan assets
Expanded disclosure requirements

10. Pension Cost Components: Minimum liability recognition 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 recognition
When accumulated benefit obligation exceeds plan assets

11. 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.

12. SFAS No. 87 Theoretical Issues
Projected benefits approach
The settlement rate
Return on plan assets
Reporting the minimum liability

13. 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

14. The Employee Retirement Income Security Act (ERISA)
Goals
create standards for the operation of pension funds
correct abuses in the handling of pension funds
Concerned only with funding policies
Does not impact on the determination of periodic pension expense

15. 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 plans
should be accounted for as such over the working life of employees
Prior treatment was pay-as-you-go
Economic consequences arguments of SFAS No. 106

16. Accounting Treatment Required By SFAS No. 106
Service cost
Interest
Amortization of prior service costs
Amortization of transition amount
Disclosure

17. SFAS No. 132 New requirements including:
Standardization of the disclosure requirements for pensions and other postretirement benefits
Requiring the disclosure of additional information on changes in the benefit obligation and fair value of plan assets
Eliminates some other disclosure requirements
The benefit to financial statement users includes disaggregated information on the six components of pension cost

18. 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 City
has a defined benefit pension plan
does not offer other postretirement benefits.

19. International Accounting Standards
The IASC has issued two standards affecting accounting for retirement benefits
A revised IAS No. 19, “Retirement Costs and Expenses”
IAS No. 26, “Accounting and Reporting by Retirement Benefit Plans”

20. IAS No. 19 Retirement Costs and Expenses
Major provisions are:
For defined contribution plans:
periodic contributions are recognized as expenses
For defined benefit plans:
Current service cost should be recognized as an expense
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.
Preferred method is the accrued benefit valuation method but projected benefit valuation method is acceptable

21. 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.

22. 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
Objectives
provide information about the plan and the performance of investments
Defined Contribution
provide information that is useful in assessing the relationship between plan resources and future benefits
Defined Benefit

23. Prepared by Richard Schroeder, DBA Kathryn Yarbrough, MBA
End of Chapter 14
Prepared by Richard Schroeder, DBA Kathryn Yarbrough, MBA
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