Pension Accounting (Portfolio 340)

Tax Management Portfolio, Pension Accounting, No. 340-2nd, comprehensively analyzes various authoritative pronouncements on accounting by pension plans for their holdings, and on employers accounting for pensions and other postretirement benefits. To view this Portfolio, visit Bloomberg Tax for a free trial.

 

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Description

Tax Management Portfolio, Pension Accounting, No. 340-2nd, comprehensively analyzes various authoritative pronouncements on accounting by pension plans for their holdings, and on employers accounting for pensions and other postretirement benefits. Although accounting requirements for pensions and other postretirement benefits parallel one another, important distinctions exist. The Portfolio identifies significant points on which the parallel rules diverge.

The Portfolio focuses on the recognition, measurement, and disclosure of defined benefit pension and other postretirement benefit plans for publicly traded corporations. Related topics, such as accounting for pension plans of non-profit organizations, are examined in other Portfolios.

This Portfolio explains how U.S. tax laws regarding pension and other postretirement benefits influence and intersect with U.S. GAAP. The passage of the Employee Retirement Income Security Act of 1974 (ERISA) prompted the Financial Accounting Standards Board (FASB) to re-examine then-current reporting practices for pensions and other postretirement benefit plans. The discussion in the Portfolio focuses on the standards designed to better align U.S. GAAP with federal regulations and to improve the financial reporting of pensions and other postretirement benefits. The Portfolio explains how financial analysts assess the implication of a firm's pension-related obligations on profitability, risk, and cash flow.

This Portfolio may be cited as Williams, Cairns and Bowers, 340-2nd T.M., Pension Accounting.

Authors

Patricia A. Williams, MA, MBA, DBA

Patricia A. Williams, MA, Middlebury College, MBA (Accounting and Finance), Southern Methodist University; DBA (Accounting), Boston University, joined Fordham University in 1992. Currently, a tenured Associate Professor in accounting, Dr. Williams teaches financial and managerial courses at the undergraduate and graduate levels. She has also taught in the Fordham MBA program in Beijing, China. Dr. Williams received the Dean's Award for Teaching Excellence Among Full Time Faculty, and has published articles in many academic journals including The Accounting Review and The International Journal of Accounting.

David Cairns, OBE, MSc, FCA

David Cairns provides consulting and training services on International Financial Reporting Standards (IFRS) and has authored several authoritative texts on IFRS. He was the secretary-general of the International Accounting Standards Committee (IASC) from 1985 to 1994 and is a member of the IASB's Working Group on Accounting Standards for Small and Medium-sized Entities. He is a member of the UK's Financial Reporting Review Panel and is Visiting Professor in Accounting at the London School of Economics and Political Science.

Christine B. Bowers, Esq., LLM

Christine B. Bowers, Esq., LL.M. (Taxation), New York University School of Law, J.D., University of Pittsburgh, School of Law, B.A., Boston University. Ms. Bowers in an associate in the ERISA & Employee Benefits Section of Buchanan Ingersoll & Rooney, P.C. in Pittsburgh. She focuses her practice on all aspects of employee benefits law relating to tax-qualified retirement plans, non-qualified deferred compensation plans, health and welfare plans and executive compensation, and is a monthly contributing author to the BNA Tax Management Compensation Planning Journal.


Table of Contents

Detailed Analysis
I. Objectives and Scope of Portfolio
A. Objectives
B. Scope
II. Federal Regulations and Reporting Requirements
Introductory Material
A. History of ERISA
1. Pre-ERISA Legislation
2. Administration of ERISA
a. Department of Labor (DOL)
b. Internal Revenue Service (IRS)
c. The Pension Benefit Guaranty Corporation (PBGC)
3. Actuaries
B. Federal Filing Requirements Under ERISA
1. Form 5500
2. ERISA Compliance Quick Checklist
3. Relationship to Financial Analysis
III. General Background on Pension Accounting
A. Overview
B. Historical Perspective
1. Pre-FASB
2. FASB
C. Types of Pension Plans
1. Defined Contribution Pension Plan
2. Defined Benefit Pension Plan
a. Pension Benefit Formulas
(1) Flat-Benefit Formula
(2) Career-Average Formulas
(3) Final-Pay Formulas
b. Reducing the Pension Obligation
3. Cash-Balance Pension Plan
D. Establishing a Defined Benefit Plan
1. Single-Employer, Multiemployer, and Multiple-Employer Plans
a. Single-Employer Plans
b. Multiemployer Plans
c. Multiple-Employer Plans
2. Minimum Vesting Standards
IV. Accounting and Reporting by Defined Benefit Pension Plans
Introductory Material
A. Scope
B. Background
C. Items That Must Be Reported
1. Net Assets Available for Benefits
2. Changes in Net Assets Available for Benefits
3. Actuarial Present Value of Accumulated Plan Benefits
4. Statement of Changes in Accumulated Benefits
5. Additional Financial Statement Disclosures
D. Primary Objective of Plan Financial Statements
V. Employers’ Accounting for Pensions
Introductory Material
A. Background
B. Scope
C. Features Retained
1. Delayed Recognition
2. Net Cost
3. Offsetting Liabilities and Assets
D. Fundamental Changes
1. Overview
2. Attribution Methods
a. “Benefit/Years of Service” Approach
b. Commitment to Future Increased Benefits
c. Delayed Vesting of Benefits
3. Assumptions and Estimates
E. Measurement Issues
1. Measuring the Pension Obligation
2. Determining the Discount Rate
3. Measurement of Plan Assets
4. Measurement Date
F. The Pension Benefit Obligation (PBO) and Plan Assets
1. Perspective
2. Transactions Affecting the PBO
3. Transactions Affecting Plan Assets
G. Net Periodic Pension Cost
1. Perspective
2. Basic Elements of Net Periodic Pension Cost
a. Service Cost
b. Interest Cost
c. Expected Return on Plan Assets
H. Additional Components of Net Periodic Pension Cost
1. Overview
2. Transition Assets and Liabilities
3. Prior Service Costs (PSC)
4. Unrecognized Actuarial Losses and Gains
I. Reconciliation of the Funded Status of the Plan: Pre-FAS 158 Computations
J. Minimum Pension Liability: Pre-FAS 158 Computations
K. Additional Issues
1. Business Combinations
2. Non-U.S. Pension Plans
3. Pension Accounting for Smaller Employees
4. Accounting for Pension Benefits Paid by Employers after Insurance Companies Fail to Provide Annuity Benefits
5. Defined Contribution Plans
6. Multiemployer and Multiple-Employer Plans
VI. Settlements, Curtailments, and Terminations of Defined Benefit Pension Plans
Introductory Material
A. Background
B. Settlements
C. Curtailments
D. Relationship Among Settlements, Curtailments and Other Events
E. Accounting for Plan Settlements and Curtailments
F. Termination Benefits
G. Asset Reversion
VII. Employers’ Accounting for Postretirement Benefits Other than Pensions
Introductory Material
A. Background
B. Comparison of Accounting for Pensions and Accounting for Other Postretirement Benefits
C. Basic Elements of Accounting for Postretirement Benefits Other Than Pensions
1. Postretirement Benefit Obligation
2. Plan Assets
3. Net Periodic Postretirement Benefit Cost
a. Service Cost
b. Interest Cost
c. Return on Plan Assets
d. Amortization of Unrecognized Prior Service Cost (PSC)
e. Amortization of Unrecognized Gains and Losses
f. Amortization of the Unrecognized Transition Obligation or Asset
D. Accounting for Transitions
E. Transition Asset or Liability
F. Comprehensive Example
G. Accounting for Settlement, Curtailment and Termination Benefits for a Postretirement Benefit Plan
1. Settlements
2. Plan Curtailment
3. Termination Benefits
H. Additional Issues
1. Rate-Regulated Enterprises
2. Plan Assets Under ASC 715-60
3. Transfer of Excess Pension Assets to a Retiree Health Care Benefits Account
4. Multiemployer and Multiple-Employer Plans
5. Business Combinations
6. Defined Contribution Plans
VIII. Employers’ Accounting for Postemployment Benefits
Introductory Material
A. Scope
B. Accounting for Postemployment Benefits
IX. Employers' Disclosures about Pensions and Other Postretirement Benefits
A. Background
B. The Disclosure Rules and the Conceptual Framework
C. Disclosure Requirements Under ASC 715-20
1. Plan Assets
2. Benefit Obligation
3. Net Periodic Benefit Cost
4. Assumptions
5. Benefits and Contributions
6. Other Postretirement Benefits
D. Required Disclosure in the Annual Reporting of Pension and Other Postretirement Benefits
E. Interim-Period Disclosures for a Publicly Traded Entity
X. Trends and Open Issues
Introductory Material
A. Trends
1. Plan Types
2. Changes in Retirees Health Care Benefits
B. Issues
1. Estimates and Assumptions
2. Investing Plan Assets
3. Pension Disclosures
4. Compensated Absences
XI. IFRS and Pension Costs
A. Scope of Section
B. International Financial Reporting Standards
1. Categories of Standards
2. Nature of IFRS
3. Objectives of IFRS
C. Historical Perspective on IFRS Concerning Employee Benefits
1. IAS 19 Employee Benefits
2. IAS 26 Accounting and Reporting by Retirement Benefit Plans
D. Types Of Postemployment Benefit Plans
XII. Accounting and Reporting by Retirement Benefit Plans Under International Accounting Standards
A. Scope
B. Financial Statements of a Retirement Benefit Plan In General
1. Defined Contribution Plans
2. Defined Benefit Plans
C. Statement of Net Assets Available for Benefits
D. Actuarial Present Value of Promised Retirement Benefits
E. Statement of the Net Assets Available For Benefits, the Actuarial Present Value of Promised Retirement Benefits and the Resulting Excess or Deficit
F. Statement of Changes in Net Assets Available for Benefits
G. Other Disclosures
XIII. Employers Accounting for Pensions Under International Financial Reporting Standards
A. Scope
B. Post-employment Benefits
1. Definition
2. Types of Arrangements Covered
C. Overview of IAS 19 Principles
D. Defined Contribution Plans
1. Measuring the Pension Obligation
2. Disclosure
E. Defined Benefit Plans
1. Main Features of IAS 19 Approach
2. The Simple Case
3. The Complexities
a. Funded Defined Benefit Plans
b. Unfunded Defined Benefit Plans
4. Measuring the Defined Benefit Obligation
5. Measuring the Present Value of the Defined Benefit Obligation
6. Plan Assets
7. Returns on Plan Assets
8. Asset Ceiling
9. Minimum Liability
10. Measurement Date
11. Current Service Cost
12. Past Service Cost
a. In General
b. Curtailments and Settlements
13. Actuarial Gains and Losses
14. Transitional Provisions
15. Presentation
16. Disclosure
a. Characteristics of Defined Benefit Plans and Risks Associated with Them
b. Explanation of Amounts in the Financial Statements
i. Reconciliations from the Opening Balance to the Closing Balance
ii. Classification of Plan Assets
iii. Significant Actuarial Assumptions Used to Determine the Present Value of the Defined Benefit Obligation
c. Amount, Timing and Uncertainty of Future Cash Flows
d. Multiemployer Plans
e. Defined Benefit Plans that Share Risks Between Entities Under Common Control
f. Disclosure Requirements in Other IFRSs
F. Application of IAS 19 to Different Types of Plans
1. Multiemployer Plans
2. Group Administration Plans
3. State Plans
4. Insured Plans

Working Papers

TABLE OF WORKSHEETS
Worksheet 1 ABBREVIATIONS
Worksheet 2 Legislation Prior to the Passage of ERISA
Worksheet 3 ERISA Compliance Quick Checklist
Worksheet 4 Example Statement of Net Assets Available for Benefits
Worksheet 5 Example Statement of Changes in Net Assets Available for Benefits
Worksheet 6 Example Statement of the Actuarial Present Value of Accumulated Plan Benefits
Worksheet 7 Example Statement of Changes in Accumulated Benefits
Worksheet 8 A Basic Pension Worksheet: The Belmont Company
Worksheet 9 Determining the Average Remaining Service Life of Employees Covered by a Pension Plan
Worksheet 10 Computation of Amortization Charge (Corridor Test)
Worksheet 11 Recognition of Accrued/Prepaid Pension Cost at Transition
Worksheet 12 Reconciliation Schedule: Four Scenarios
Worksheet 13 Comprehensive Pension Worksheet
Worksheet 14 Accounting for Plan Settlements and Curtailments
Worksheet 15 Comprehensive Worksheet for Postretirement Benefits Other Than Pensions
Worksheet 16 Annual Disclosure Requirements Under ASC 715-20
Worksheet 17 Interim Period Disclosures
Worksheet 18 Defined Contribution Plan or Defined Benefit Plan (IFRS): Statement of Net Assets Available for Benefit
Worksheet 19 Defined Benefit Plan (IFRS): Statement of Net Assets Available for Benefits, Actuarial Present Value of Promised Retirement Benefits and Excess or Deficit
Worksheet 20 Defined Contribution Plan or Defined Benefit Plan (IFRS): Statement of Changes in Net Assets Available for Benefits