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Pensions (FAS 87); Post Retirement Benefits (FAS 106); Post Employment Benefits (FAS 112); Disclosure about Pensions, etc. (FAS 132 [R]) – amendment of FAS 87,88,106

Dr. Heidemarie Lundblad

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•Pension:

Regular payments made to employees after retirement. Covered under ERISA (Employee retirement income security act, 1974) Protected by PBGC (Pension benefit guarantee corporation)

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Type of Pension Plans:

Defined Benefit Plan Defined Contribution Plan Cash Balance Plan

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Defined Contribution Plan

Amount of contribution is predetermined (may be adjusted periodically). Amount of future benefit varies, depends on variety of factors. Employees bear risk..

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Defined Benefit Plan

Amount of future benefit predetermined on the basis of some type of actuarial model. Contribution depends (may vary) on a variety of factors. Company bears risk.

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Cash Balance Plan

A controversial hybrid between defined contribution and defined benefit plan.

“Portable” but lower benefits for older employees

Employer bears risk. For accounting purposes is treated like defined benefit plan

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Type of Benefit Obligation

Projected Benefit Obligation PV of pensions earned by employees in

previous periods, vested or non vested (based on expected future salary levels)

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Type of Benefit Obligation

Vested Benefit Obligation Only vested obligations, based on

current salary levels (amount payable to employees if plan is

terminated now)

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Type of Benefit Obligation

Accumulated Benefit Obligation Vested or non-vested obligations, based

on current salary levels (amount payable to employee if s/he

quits now) To vest requires five years of service

under ERISA

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Type of Benefit Obligation

Unfunded Accumulated Benefit Obligation Minimum Liability to be disclosed

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Type of Service Cost

Current Service costAccumulated prior service costs

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Type of Service Cost

Current Service cost PV of pensions earned by employees in

the current period

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Type of Service Cost

Accumulated Prior Service cost PV of pensions awarded to employees for work

in periods prior to adoption of pension plan or as a result of retroactive changes in the plan.

(Amount not yet taken into income) NOTE: Companies are not required to

immediately recognize the expense. Since employees are still working, this cost may be amortized over the remaining service life.

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Elements of Plan Assets, Pension Expense and Liability Service Cost (current and prior)Plan Assets Interest costPension ExpenseFirm’s Total ObligationUnfunded (Accrued) Pension Liability or Prepaid Pension CostAmortization of Prior Service CostsMinimum Pension Liability

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Elements of Plan Assets, Pension Expense and Liability

Plan Assets Σ of prior contributions +/- Σ of income (loss) in prior periods +/- income (loss) in current period - Σ payments made to retirees + current contribution

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Elements of Plan Assets, Pension Expense and Liability

Interest cost Beginning projected benefit obligation X

discount rate

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Elements of Plan Assets, Pension Expense and Liability Pension Expense

Current service cost + interest cost - expected return on plan assets + amortization of unfunded prior service cost +/- loss (gain) due to difference between expected and

actual return on plan assets +/- loss (gain) due to difference between expected and

actual value of plan assetsRecognized to the extent that gain (loss) exceeds

10% of the greater of obligations or fair value of plan assets

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Elements of Plan Assets, Pension Expense and Liability

Firms total Obligation Projected Benefit obligation + Accumulated prior service costs + accrued interest =/- changes in plan adopted retroactively + Current service cost - payments made to retirees

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Elements of Plan Assets, Pension Expense and Liability

Unfunded (Accrued) Pension Liability or Prepaid Pension Cost Difference between Pension Expense

and Funding

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Elements of Plan Assets, Pension Expense and Liability Amortization of Prior Service Costs

1. Straight line method: Cost / Average remaining service life of employees

2. Years of future service method: Cost X # of employees working / Σ of expected years of future service

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Elements of Plan Assets, Pension Expense and Liability Pension Liability

Fair Value of Plan Assets minus Projected Benefit Obligation1. If unfunded pension liability < pension

liability --> recognize difference in current period and

2. debit Accumulated other comprehensive income (AOCI)