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Current accounting issues concerning employee benefits
October 13, 2008
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IFRS– retirement plans
Some matters for consideration……
► Multi-employer plans
► Lump sum payments
► Gain / loss recognition
► Overfunded plans
Our perspective
U.S. actuaries not prepared to produce IFRS valuation reports
HR may not understand financial / tax implications well enough to request and provide appropriate data.
Multi-functional (HR, tax, legal, financial reporting, accounting, payroll) administrative process documentation and modification due to IFRS standards.
Third party administration challenges.
3
IFRS– compensation programs
Some matters for consideration……
► Pay and performance alignment
► Pro-rata vesting
► Deferred taxes and chargeback agreements
► Recognition of employment tax costs
Our perspective
Process and plan redesign considerations surrounding performance metrics.
Multi-functional (HR, tax, legal, financial reporting, accounting, payroll) administrative process documentation and modification due to IFRS standards.
Data and analysis challenges of financial modeling for share-based compensation arrangements.
Third party administration challenges.
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Diagnostic activities
Workstream Activities
Accounting and reporting
► Assess universe of retirement plans and compensation programs
► Document non-U.S. retirement plans and related IFRS positions already taken, if any
► Identify the major GAAP differences for retirement plans and compensation programs and provide an assessment of where the Company’s current Financial Reporting will be affected by IFRS
► Identify accounting areas requiring further investigation and evaluation that could be addressed in the next phase of the project
► Review financial documentation produced by actuaries, identify areas for further study
5
Diagnostic activities
Workstream Activities
Tax ► Coordinate accounting, reporting and tax workstream associated with compensation programs and retirement plans
► Identify the nature of potential effects of IFRS conversion on existing and future tax positions
► Evaluate impact of IFRS on compensation related chargeback agreements
► Identify potential conversion considerations in connection with third party administrator reporting packages and administrative processes
► Identify matters requiring further investigation and evaluation
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Diagnostic activities
Workstream Activities
Business processes and systems
► Assess data challenges for share-based compensation arrangements
► Evaluate ability of current third party administrator's to provide required reporting data for compensation programs and retirement plans
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Diagnostic activities
Workstream Activities
Regulatory and industry
► Understand the company's regulatory reporting requirements in each jurisdictions and assess IFRS impact
► Evaluate impact of regulatory rules on required transitional elections
► Evaluate impact of IFRS on compensation and retirement plan reporting
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Diagnostic activities
Workstream Activities
Change management, communication and training
► Raise awareness of the IFRS issues within the company and give momentum to the IFRS conversion project
► Understand the company's organizational structure and knowledge management approach
► Develop and execute communication protocols► Recommend an overall training roadmap to
embed IFRS knowledge in the organization► Clarify roles and responsibilities
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Issues or opportunities?
►What is our long-term pension funding strategy?
►How can we maximize our tax deductions?
►What is the impact on company cash flow?
►Do these changes impact our loan covenants and financing strategies?
►What is the effect under FAS109?
10
Pension Protection Act (PPA)
► Pension Protection Act signed into law in August 2006
► Generally effective for plan years beginning on or after 1 January 2008
► Requires higher funding levels to maintain qualified plan status
► Deduction limits
► Maximum deductible amount had increased from 100% to 150% of the current plan liabilities
► Increases allowable deductions for an employer that maintains both a defined benefit and defined contribution plan
11
FAS 158
► FASB issued statement 158 on September 29, 2006
► Generally effective for company fiscal years ending after December 15, 2006
► Amends FASB Statements No. 87, 88, 106, and 132(R)
► Requires balance sheet recognition of an asset for a plan’s overfunded status or a liability for a plan’s underfunded status
► Requires fiscal year-end measurement date for all employers
► Balance sheet changes flow through other comprehensive income (net of tax), not P&L
► Immediate recognition of gains, losses, plan amendments, etc.
12
FAS 158
PPA
►Modifications to funding, investment, and benefit policies
►Budgeting & disclosure implications due to fiscal year-end measurement date requirement
►Implications for unfunded obligations on loan covenants and financing strategies
►Determination and segregation of current and non current amounts pursuant to FAS 109
Coordinating FAS 158 and PPA
► Tax deductible contribution increases
► Assess whether plan is at-risk or subject to benefit restrictions
► Long-tem funding strategy opportunities
► Increased reporting and disclosure requirements
► Impact on design, communication and operation of pension plans
13
Executive compensation-Code Section 162(m)
►Annual $1 million deduction limit applies to:
►Compensation other than “performance-based compensation”
►“Covered employees” of public companies
►Performance-based compensation
►Compensation paid solely upon attainment of one or more pre-established, objective performance goals set up by a compensation committee of outside directors
►Shareholder approval of the goal and compensation committee certification that the goal is met
14
Executive compensation-Code Section 162(m)►PLR 200804004-reversed previous IRS position
►Compensation is not “performance based” if payments are made upon involuntary termination without regard to performance goal
► Revenue Rule 2008-13- confirms the IRS’s new position
►Provides a prospective effective date if either:
►The performance period begins on or before January 1, 2009
►The compensation is paid pursuant to contract in effect on February 21, 2008 (without renewals or extensions)
► Level of authority for claiming a deduction could have significant impact on Financial statement and tax return
15
Executive compensation-Code Section 162(m)
►FAS 109/FIN 48 support
► Assess documentary compliance
► Assess operational compliance
►Develop processes and controls
► Composition of Compensation Committee
► Timing of shareholder approval
► Timing of goal-setting and goal-attainment certification
► Structure in place to ensure performance goals are objective
16
Executive compensation- equity/incentives
► Assess global equity tax deductions
► U.S. deduction is not available for foreign awards
► Availability of deduction in a particular country
► Country specific requirements for securing a deduction (corporate chargeback arrangements, etc.)
► Does the plan meet tax favored status in foreign country?
17
Executive compensation-Code Section 280G
►Code Section 280G Mitigation Strategies
► Shareholder vote for privately held corporations
► Demonstrate with “clear and convincing evidence” that potential parachute payments constitute reasonable compensation for
► Pre-change in control services
► Post-change in control services
► Abiding by a non-compete
18
Executive compensation-Code Section 280G
► FAS 109/FIN 48 support
► Review Code Section 280G calculations
► Assess risk associated with Section 280G tax positions
► Assess operational and documentary compliance with Section 280G where relevant – e.g., shareholder approval requirements
► Code Section 280G gross-ups require proxy disclosure statements under new SEC proxy disclosure rules.
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Employee benefits
► Generally exempt from income taxes therefore few issues that may trigger the application of FIN 48
► The existence of the Employee Plans Compliance Resolution System could meet the conditions of an administrative practice or precedent
► Few exceptions to the general rule include:
► Plan invested in UBIT triggering investments
► Application of 409(p) to ESOPs
20
Health and welfare plans
►General IBNR ( claims incurred but not reported)
► Amount of deduction
► §461 all events test
►Pre-funding through VEBA to accelerate deductions for:
► Claims incurred but not reported
► Retiree medical
► Severance
► Disability
► Others
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Health and welfare plans
►Determination of UBIT Liability
► Structure of trust and treatment of income
► Calculation of trust income used to pay administrative expenses
► Distributions or items other than administrative expense?
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Health and welfare plans
►Accelerated Severance Plan Funding
► Amount available for accelerated deduction
► Segregated funds or not segregated funds
►Retiree Medical Plans – Self Funding FAS 106 Liabilities
► Segregation of FAS 106 asset
► Ruling in Wells Fargo case
►Qualified SUB payments
► How were pre-funding and deduction determined?
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Other Areas to Consider
► 401(k) acceleration
► Compensation earned based on 404(a)(6) or Notice 2002-48 special exceptions
► 404(k) deduction
► Statutory requirements- amount of deduction
► Structure of the funding arrangement
► Fringe benefits and perquisites
► Corporate aircraft – consider valuation aspects, and interplay of income and deduction
► Country Club memberships, tickets, suites, and corporate apartments
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Employee benefit accounting
► FAS 132(R)-a Employers’ Disclosures about Postretirement Benefit Plan Assets (proposed FSP)
► Application of FAS 157
► Proposed effective date
► Management responsible for fair valuation
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IRS large plan audit initiative
► The IRS has instituted changes in targeting and performing standard audits of qualified plans. The new philosophy emphasizes:
► Risk-based targeting of plans chosen
► A limited and focused audit methodology that expands only if noncompliance is identified
► If the initial review does not yield problems and appropriate controls exist, the agent will close the audit