Pension Accounting (Portfolio 5108)

Portfolio 5108-2nd, Pension Accounting (Accounting Policy and Practice Series), comprehensively analyzes various authoritative pronouncements on accounting by pension plans for their holdings, and on employers accounting for pensions and other postretirement benefits.

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Portfolio 5108-2nd, Pension Accounting (Accounting Policy and Practice Series), 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 BNA Tax and Accounting Portfolio 5108-2nd, Williams, Cairns and Bowers, Pension Accounting (Accounting Policy and Practice Series).

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, Multi-Employer, and Multiple-Employer Plans

a. Single-Employer Plans

b. Multi-Employer Plans

c. Multiple-Employer Plans

2. Minimum Vesting Standards

IV. Accounting and Reporting by Defined Benefit Pension Plans (FAS 35)

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. FAS 87: 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. Illustrations

J. Reconciliation of the Funded Status of the Plan

K. Comprehensive Pension Worksheet

L. Minimum Pension Liability

M. 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 (FAS 88)

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 (FAS 106)

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 FASB Statement No. 106

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 (FAS 112)

Introductory Material

A. Scope

B. Accounting for Postemployment Benefits

IX. Employers' Disclosures about Pensions and other Postretirement Benefits: FAS 132

A. Background

B. FAS 132(R) and the Conceptual Framework

C. Disclosure Requirements Under FAS 132(R)

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. General Motors' Pension Footnote as Presented in the Company's Annual Report for 2004

A. Contributions to Pension Plans

B. Reconciliation of the Pension Obligation and Plan Assets

C. The Accumulated Benefit Obligation

D. The Components of Pension and Other Postretirement Expenses

E. Estimates and Assumptions

F. Classification of Pension Plan Investments

G. Estimated Future Benefit Payments

XI. Pension Accounting and Quality of Earnings

Introductory Material

A. Conservatism and Choice of Accounting Method

B. Earnings Management-Estimates and Assumptions

C. Permanent Earnings and Income from Continuing Operations

D. Transparency and Disclosure

E. Analytical Tools for Evaluating Companies with Defined Benefit Plans

1. Ratio Analysis

a. Plan Assets/Projected Benefit Obligation

b. Pension Cost/Operating Income

c. Funded Status/EBITDA

d. Funded Status/Market Capitalization

e. Pension Plan Assets/Firm Enterprise Value

2. Assessing Earnings Management

XII. 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

XIII. 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 Post-Employment Benefit Plans

XIV. 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

XV. Employers Accounting for Pensions Under International Financial Reporting Standards

A. Scope

B. Convergence With US GAAP

C. Post-Employment Benefits

1. Definition

2. Types of Arrangements Covered

D. Overview of IAS 19 Principles

E. Defined Contribution Plans

1. Measuring the Pension Obligation

2. Disclosure

F. 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

13. Actuarial Gains and Losses

14. Curtailments and Settlements

15. Transitional Provisions

16. Presentation

17. Disclosure

a. Accounting Policies

b. Present Value of Defined Benefit Obligation

c. Plan Assets

d. Amounts Not Recognized on Balance Sheet

e. Income Statement

f. Statement of Recognized Income and Expense

g. Historical Amounts

G. Application of IAS 19 to Different Types of Plans

1. Multi-Employer Plans

2. Group Administration Plans

3. State Plans

4. Insured Plans

Working Papers

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 ABBREVIATIONS

Worksheet 2 Legislation Prior to the Passage of ERISA

Worksheet 3 Albertsons' Salaried Employees Pension Plan: Form 5500 Schedule B - Actuarial Information for Plan Year 2001

Worksheet 4 Albertsons' Salaried Employees Pension Plan: Form 5500 Schedule H - Financial Information for Plan Year 2001

Worksheet 5 ERISA Compliance Quick Checklist

Worksheet 6 Example Statement of Net Assets Available for Benefits

Worksheet 7 Example Statement of Changes in Net Assets Available for Benefits

Worksheet 8 Example Statement of the Actuarial Present Value of Accumulated Plan Benefits

Worksheet 9 Example Statement of Changes in Accumulated Benefits

Worksheet 10 A Basic Pension Worksheet: The Belmont Company

Worksheet 11 Determining the Average Remaining Service Life of Employees Covered by a Pension Plan

Worksheet 12 Computation of Amortization Charge (Corridor Test) for 2003

Worksheet 13 Recognition of Accrued/Prepaid Pension Cost at Transition

Worksheet 14 Reconciliation Schedule as of Date of Adoption of FAS 87 (Past Contributions Equal to Net Pension Cost)

Worksheet 15 Reconciliation Schedule as of Date of Adoption of FAS 87 (Past Contributions Lower Than Net Pension Cost)

Worksheet 16 Reconciliation Schedule as of Date of Adoption of FAS 87 (Past Contributions Greater Than Net Pension Cost)

Worksheet 17 Reconciliation Schedule: Four Scenarios

Worksheet 18 A Comprehensive Pension Worksheet

Worksheet 19 Accounting for Plan Settlements and Curtailments

Worksheet 20 Comprehensive Worksheet for Postretirement Benefits Other Than Pensions

Worksheet 21 Annual Disclosure Requirements Under FAS 132 (Revised)

Worksheet 22 Interim Period Disclosures FAS 132 (R)

Worksheet 23 General Motors Corporation Pension Note

Worksheet 24 Defined Contribution Plan or Defined Benefit Plan Under IAS 26: Statement of Net Assets Available for Benefits

Worksheet 25 Defined Benefit Plan Under IAS 26: Statement of Net Assets Available for Benefits, Actuarial Present Value of Promised Retirement Benefits and Excess or Deficit

Worksheet 26 Defined Contribution Plan or Defined Benefit Plan Under IAS 26: Statement of Changes in Net Assets Available for Benefits

Worksheet 27 Form 20F Disclosures: Reconciliations from IFRS to US GAAP for Defined Benefit Plans

Worksheet 28 A Basic Pension Worksheet

Worksheet 29 Comprehensive Pension Worksheet for a Funded Defined Benefit Plan (IFRS)

Worksheet 30 Comprehensive Pension Worksheet for an Unfunded Defined Benefit Plan

Worksheet 31 Alternative Approaches to the Recognition of Actuarial Gains and Losses Under IFRS

Worksheet 32 IAS 19 Employee Benefits Disclosure and Presentation

Worksheet 33 Pensions: Sample Disclosures by International Companies

Worksheet 34 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL AUTHORITIES

FASB Financial Accounting Standards

Emerging Issues Task Force

Accounting Interpretations

Other Accounting Literature

Federal Regulations

IRS Publications

UNOFFICIAL AUTHORITIES

Accounting Treatises and Handbooks

Annual Reports

Articles

Referenced Websites