Defined Benefit Plans: Pension, ASC 715

Standards before U.S. GAAP Codification
SFAS 87, December 1985
–> Employers’ Accounting for Pensions
SFAS 88, December 1985
–> Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits

SFAS 87 was amended by:
SFAS 106, December 1990
–> Employers’ Accounting for Postretirement Benefits Other Than Pensions
SFAS 132, February 1998
–> Employers’ Disclosures about Pensions and Other Postretirement Benefits
SFAS 132(R), December 2003,
–> Employers’ Disclosures about Pensions and Other Postretirement Benefits
SFAS 158, December 2006
–> Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans�an amendment of FASB Statements No. 87, 88, 106, and 132(R)

Key Topics of Employers’ Accounting for Pensions
1. Basic elements of pension accounting
2. Recognition: Net periodic pension cost
3. Recognition: Liabilities and assets
4. Measurement: Costs and obligations
5. Measurement: Plan assets
6. Multiemployer plans

Projected Benefit Obligation (PBO)
–> Actuarial present value of benefits,
–> based on future compensation levels

 Accumulated Benefit Obligation (ABO)
–> Actuarial present value of benefits,
–> based on current and past compensation levels

 Vested Benefit Obligation
–> Vested portion of accumulated benefit obligation

Components of Net Periodic Pension Cost
1. Service cost
2. Interest cost
3. Actual return on plan assets
4. Gain or loss
5. Amortization of prior service cost or credit
6. Amortization of net transition asset or obligation

Service Cost
–> Actuarial present value of benefits
–> attributed to
–> employee service
–> during the period

Interest Cost
–> Increase in the Projected Benefit Obligation
–> due to the passage of time

Interest cost is accrued
–> at the assumed discount rates

Actual Return on Plan Assets
The difference between (1) and (2)
–> as adjusted for (3)
(1) Fair value of plan assets at the beginning of the period
(2) Fair value of plan assets at the end of the period
(3) Contributions and Benefit Payments

Prior Service Cost
Retroactive benefits due to plan amendments are
1. charged to Other Comprehensive Income (OCI)
–> at the date of amendment

2. Amortized over future period of service
–> of each employee active at the date of amendment
–> equal amount to each period

3. Amortized amount is
–> a component of net periodic pension cost

Gains and Losses
1. Unexpected changes in the amount of
–> Plan Assets or Projected Benefit Obligation (PBO)

2. Unexpected changes
–> Assets: Actual return – Expected return
–> PBO: Forecast errors on actuarial assumptions

Unrecognized Gains and Losses
1. Gains and losses are
–> not required to be recognized
–> in net periodic pension cost
–> when they occur

2. Unrecognized gains and losses are
–> accumulated in Other Comprehensive Income (OCI)

Corridor Approach
1. If unrecognized gains and losses accumulated in OCI
–> does not exceed 10% of (A)
–> no amortization

(A) the greater of (B) and (C)
(B) Market-related value of plan assets
(C) Projected Benefit Obligation

2. If unrecognized gains and losses accumulated in OCI
–> exceeds 10% of (A)
–> the excess is amortized
–> amortization is included in net periodic pension cost

Minimum amount of amortization
1. The excess is divided by
–> the average remaining service period of
–> active employees
–> expected to receive benefits

2. If all or almost all participants are inactive
–> the average remaining life expectancy of
–> inactive participants
–> is used

Market-related value of plan assets
1. Market-related Value is either (a) or (b)
(a) Fair Value
(b) Calculated Value

2. Calculated value is the amount
–> that recognizes changes in fair value
–> in a systematic and rational manner
–> over NOT more than 5 years

Unfunded PBO
(1) Fair Value of Plan Assets
(2) Projected Benefit Obligation (PBO)

If (1) < (2)
–> recognize Unfunded PBO as a liability

If (1) > (2)
–> recognized Overfunded PBO as an asset

 

© AccountingInfo.com