OVERVIEW INDEX. Our PwC specialists from the National Office and the Human Resource Services (HRS) practice discuss the following topics:

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1 OVERVIEW This recorded webcast provides a basic overview of pension accounting and discusses current developments, proposed new guidance, and challenges in applying the standard. Our specialists from the National Office and the Human Resource Services (HRS) practice discuss the following topics: Alternative approaches for applying discount rates to measure benefit cost Proposed new guidance on pension cost presentation and disclosures Significant events (settlements, curtailments, and plan amendments) Considerations in a business combination or disposition INDEX Overview of pension accounting Slide 7 Significant events Slide 10 Business combinations and dispositions Slide 18 Alternative approaches to applying discount rates Slide 22 Upcoming changes Slide 27

2 GLOSSARY OF KEY TERMS Curtailment A change that significantly reduces the expected years of future service of active plan participants (e.g., reduction in workforce); or eliminates the accrual of defined benefits for all or some of the future service for a significant number of active plan participants (e.g., plan freezes, suspensions or terminations). Interest Cost The interest expense which accrues each year on the projected benefit obligation. Plan Amendment A change in the terms of an existing plan or the initiation of a new plan that may increase or decrease benefits. Service Cost The expense caused by the increase in pension benefits payable (the projected benefit obligation) to employees because of their services rendered during the current year. Settlement An irrevocable action that relieves the employer (or plan) of primary responsibility of a pension or postretirement benefit obligation; it eliminates significant risk related to the obligation and to the assets used to effect the settlement.

3 Hot topics in pension accounting Presentation will begin in a few moments Download today s slides through the link provided in the Resource List

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5 CPE credit In order to receive 1.5 CPE credits for this program, you must: Stay on for the entire 90 minute program Respond to 6 polling questions You will be prompted to do so Complete the course evaluation at the end of the program Click the CPE icon at the conclusion of the webcast Button is at bottom of your screen, then follow the subsequent prompts to submit and download the certificate. The certificate will open as a PDF file in Adobe Acrobat and can be saved to your computer 3

6 Today s presenters Jay Seliber Partner, National Professional Services Group jay.seliber@pwc.com Nicole Berman Director, National Professional Services Group nicole.s.berman@pwc.com Gina Klein Director, Human Resource Services gina.m.klein@pwc.com 4

7 Agenda Overview of pension accounting Significant events Business combinations and dispositions Alternative approaches to applying discount rates Upcoming changes 5

8 Polling question #1 Which of the following best describes your role within your organization? a. CFO or Controller/Assistant Controller b. Financial Reporting Director/Manager c. Benefits Manager/Specialist d. Accounting Manager e. Other or staff 6

9 Overview Applicable Accounting Literature ASC Defined benefit pension plans ASC Other postretirement benefit plans ASC Defined contribution plans ASC Multi-employer plans 7

10 Overview Three fundamental principles to accounting for defined benefit plans: Offsetting Plan assets and obligations are reported net on the balance sheet Net Cost Events and transactions impacting plan obligations and assets are reported as a single, net amount in the income statement (for now!) Delayed Recognition Not all changes in obligations and assets are recognized in the income statement as they occur. Recognized systematically and gradually over time 8

11 Overview Benefit obligation Balance Sheet Plan assets Income Statement Net periodic benefit cost Service cost + + Interest cost + + Expected return on plan assets + - Company contributions + Benefit payments - - OCI / AOCI New gains/losses +/- +/- +/- Amortization of gains/losses +/- +/- New plan amendments +/- +/- Amortization of prior service cost +/- +/- Curtailments +/- +/- +/- Settlements - - +/- +/- Acquisitions/dispositions +/- +/- 9

12 REVIEW QUESTIONS 1. Which of the following statements is not correct, regarding accounting for defined benefit plans? a. Plan assets and obligations are reported separately on the balance sheet. b. Events and transactions impacting plan obligations and assets are reported as a single, net amount in the income statement. c. Not all changes in obligations and assets are recognized in the income statement as they occur. 2. All of the following would impact other comprehensive income (OCI), except: a. New plan amendments. b. Curtailments. c. Company contributions.

13 REVIEW QUESTION ANSWERS 1. Which of the following statements is not correct, regarding accounting for defined benefit plans? a. Plan assets and obligations are reported separately on the balance sheet. b. Events and transactions impacting plan obligations and assets are reported as a single, net amount in the income statement. c. Not all changes in obligations and assets are recognized in the income statement as they occur. a. Correct. Plan assets and obligations are reported net on the balance sheet. b. Incorrect. Events and transactions impacting plan obligations and assets are reported as a single, net amount in the income statement; however, income statement presentation will change under future guidance. c. Incorrect. Not all changes in obligations and assets are recognized in the income statement as they occur; some are recognized systematically and gradually over time. 2. All of the following would impact other comprehensive income (OCI), except: a. New plan amendments. b. Curtailments. c. Company contributions. a. Incorrect. Prior service cost, which could be positive or negative, is recognized as component of OCI. b. Incorrect. The recognition of the gain or loss from a curtailment consists of two elements and is recognized as component of OCI. c. Correct. Company contributions impact the plan assets, but do not affect OCI.

14 Significant events Plan amendments A change in the terms of an existing plan or the initiation of a new plan that may increase or decrease benefits Curtailments Significantly reduces the expected years of future service of active plan participants (e.g., reduction in workforce); or Eliminates the accrual of defined benefits for all or some of the future service for a significant number of active plan participants (e.g., plan freezes, suspensions or terminations) Settlements Irrevocable action Relieves the employer (or plan) of primary responsibility of a pension or postretirement benefit obligation Eliminates significant risk related to the obligation and to the assets used to effect the settlement 10

15 Polling question #2 Has your company had a significant event recently, or are you planning one? a. Yes, a plan amendment b. Yes, a curtailment c. Yes, a settlement of the plan d. No, we are leaving our plan as is for now e. N/A or staff 11

16 Significant events Plan amendments Recognition: Prior service cost (PSC) cost of retroactive benefits o Could be positive or negative Recognize as a component of OCI Amortize out of AOCI in future periods as a component of net periodic benefit cost Generally amortize over the remaining average service period of active employees 12

17 Polling question #3 What method is prohibited for recognizing the impact of prior service costs upon a plan amendment? a. Amortize over the remaining life expectancy of plan participants b. Immediate recognition c. Amortize over the average remaining service period of active employees 13

18 Significant events Curtailments Recognition - Calculation of gain/loss: Two elements: Pro rata recognition of unamortized PSC or negative PSC in existence prior to curtailment The increase (loss) or decrease (gain) in the obligation (PBO/APBO) due to the curtailment, net of any unamortized gains or losses within AOCI 14

19 Significant events Curtailments Timing and measurement: Elimination of Benefits Upon amendment of the plan Terminations Gain or loss Gain Loss Timing and measurement Measurement and recognition would be deferred until terminations take place Measurement and recognition should occur when curtailment is probable of occurring and effects are reasonably estimable (often precedes termination date) 15

20 Significant events Settlements Recognition: Step 1 Remeasure entire obligation and fair value of plan assets at the date of settlement to get new gain/loss Step 2 Add the result of Step 1 to the unamortized net gain or loss, including any unamortized transition asset Step 3 The result of Step 1 and Step 2 is the maximum gain or loss subject to pro rata recognition based on the proportion of obligation settled Timing: When it happens! 16

21 Polling question #4 A purchase of a participating annuity contract by the employer to settle their pension obligation will result in a settlement? a. True b. False c. It depends 17

22 REVIEW QUESTIONS 1. Which of the following statements is not correct, regarding significant events? a. A curtailment significantly reduces the expected years of future service of active plan participants or eliminates the accrual of defined benefits for all or some of the future service for a significant number of active plan participants. b. A settlement relieves the employer of primary responsibility of a pension or postretirement benefit obligation. c. A plan amendment is a change that increases benefits. 2. Which of the following statements is correct, regarding plan amendments? a. The cost of retroactive benefits is recognized in current net periodic benefit cost. b. The costs are amortized out of accumulated other comprehensive income (AOCI) in future periods. c. The costs are amortized over a period of 10 years.

23 REVIEW QUESTION ANSWERS 1. Which of the following statements is not correct, regarding significant events? a. A curtailment significantly reduces the expected years of future service of active plan participants or eliminates the accrual of defined benefits for all or some of the future service for a significant number of active plan participants. b. A settlement relieves the employer of primary responsibility of a pension or postretirement benefit obligation. c. A plan amendment is a change that increases benefits. a. Incorrect. A curtailment significantly reduces the expected years of future service of active plan participants (e.g., reduction in workforce); or eliminates the accrual of defined benefits for all or some of the future service for a significant number of active plan participants (e.g., plan freezes, suspensions or terminations). b. Incorrect. A settlement relieves the employer (or plan) of primary responsibility of a pension or postretirement benefit obligation. c. Correct. A plan amendment is a change in the terms of an existing plan or the initiation of a new plan that may increase or decrease benefits. 2. Which of the following statements is correct, regarding plan amendments? a. The cost of retroactive benefits is recognized in current net periodic benefit cost. b. The costs are amortized out of accumulated other comprehensive income (AOCI) in future periods. c. The costs are amortized over a period of 10 years. a. Incorrect. The cost of retroactive benefits is recognized as a component of other comprehensive income (OCI). b. Correct. The costs are amortized out of accumulated other comprehensive income (AOCI) in future periods as a component of net periodic benefit cost. c. Incorrect. The costs are generally amortized over the remaining average service period of active employees.

24 Business combinations/dispositions Acquisitions Remeasure acquired obligation at acquisition date Remeasure fair value of plan assets at acquisition date Record the difference as the net liability or asset in purchase accounting Not permitted to adjust obligation for expected plan amendments, curtailments or plan terminations 18

25 Business combinations/dispositions Dispositions Will portion of obligation be transferred? Settlement accounting generally required Recognize pro rata portion of deferred gain/loss from AOCI into income Will significant number of participants stop accruing benefits? Since employees will go with sale, curtailment is common unless plan is already frozen Curtailment accounting generally required even if impact is not significant to plan 19

26 Business combinations/dispositions Dispositions When are amounts recognized? Settlement or curtailment gain/loss may be reflected in different periods Curtailment loss is recognized when probable/estimable Curtailment gain recognized at date of sale Settlement gain/loss recognized when settled Where are amounts recognized? Include as part of gain/loss on disposal Include in discontinued operations if applicable 20

27 Polling question #5 Upon acquisition, which of the following is not recorded by the acquirer for a defined benefit plan? a. Pension liability if PBO > FV of plan assets b. Pension asset if FV of plan assets > PBO c. Prior service cost from acquired company 21

28 Discount rates Traditional approach Single weighted-average rate is developed from calculation of the PBO and used to measure the interest cost and service cost for the period Alternative approach Separate discount rates for each future projected benefit payment based on time until payment For example, the discount rates may be the spot rates associated with each benefit payments individual present values in the calculation of the benefit obligation or service cost 22

29 Discount rates Alternative approach illustration Traditional approach Year Total Cash flow of benefit payments 8,000 9,000 10,000 10,000 10,000 8,000 6,000 4,000 2,000 1,000 Interest rate 0.65% 1.04% 1.57% 1.97% 2.25% 2.52% 2.71% 2.85% 3.01% 3.16% PV of benefit payments 7,948 8,816 9,543 9,249 8,947 6,890 4,976 3,195 1, ,829 Backsolved constant IRR (a single rate which, if applied to all of the above cash flows, equates to the same PV) 2.24% Interest cost 1,385 Note: Assumes a peaking, then declining pool of benefit payments, together with some degree of service benefits earned. Yield curve is actual Citigroup pension curve as of 12/31/14 Calculation of interest cost Alternative spot rate approach (using current period spot rates for each year's benefit payment) Year Total PV of benefit payments 7,948 8,816 9,543 9,249 8,947 6,890 4,976 3,195 1, x interest rate 0.65% 1.04% 1.57% 1.97% 2.25% 2.52% 2.71% 2.85% 3.01% 3.16% = interest cost ,145 23

30 Discount rates Alternative approach illustration Traditional approach Alternative spot rate approach opening PBO 61,829 61,829 - payments (8,000) (8,000) + service cost interest cost 1,385 1,145 accreted value 56,127 55,858 ending PBO 56,429 56,429 implied (gain)/loss

31 Discount rates Accounting and reporting implications Is the change acceptable? Impact on disclosures? Must service and interest cost be changed together? When to make the change? What is the type of change? 25

32 Polling question #6 Is your company considering applying the alternative approach for discount rates? a. Yes b. No c. Not sure d. N/A or staff 26

33 Upcoming changes Presentation of net periodic benefit cost Only present the service cost component as part of operating expenses Remaining components presented separately in non-operating expenses Only the service cost component is eligible for capitalization into inventory or other assets Transition Retrospective for the presentation in the income statement Prospective for the service cost component capitalized in assets Effective date not yet determined 27

34 Upcoming changes Disclosures Part of FASB's broader project on disclosure Will align benefit plan disclosures around certain broad objectives Planning to add and remove certain specific disclosure requirements 28

35 Polling question #7 How will the limitation on what can be capitalized impact your gross margin? a. It will impact margin significantly b. It will impact margin, but it will not be significant c. It will not impact margin d. Don t know e. N/A or staff 29

36 REVIEW QUESTION 1. With regard to a disposition, a curtailment loss is recognized: a. When it is probable and estimable. b. At the date of sale. c. When settled.

37 REVIEW QUESTION ANSWERS 1. With regard to a disposition, a curtailment loss is recognized: a. When it is probable and estimable. b. At the date of sale. c. When settled. a. Correct. A curtailment loss is recognized when it is probable and estimable. b. Incorrect. A curtailment gain is recognized at the date of sale. c. Incorrect. A settlement gain/loss is recognized when settled.

38 Q&A? 30

39 Upcoming webcasts Dec 1 & 2 - SEC comment letter trends webcasts: Commercial and industrial companies (Dec. 1, 2015) or Financial services (Dec. 2, 2015) Dec 2 The Latest in Compensation and Benefits Accounting - Advanced Earnings Per Share (EPS) for equity awards Beyond stock options webcast Dec 3 - Revenue Recognition: Technical update and readiness considerations for the communications industry webcast Dec 3 - Revenue Recognition: Technical update and readiness considerations for entertainment and media industries webcast Dec 16 - Q4 Current accounting and reporting developments webcast For a full list of upcoming webcasts, please visit CFODirect 31

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