May 12, Interpretation of Statement 87 for Cash Balance Pension Plans

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1 Interpretation of Statement 87 for Cash Balance Pension Plans Purpose of Today s Meeting At today s meeting the Board will discuss the following issues: a. Consider expanding the scope of the project to include FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans. b. Consider several implementation questions; and c. Reconsider the transition guidance for back-loaded cash balance plans. Expand the scope of the project The staff will ask the Board to consider expanding the scope of the project to include a plan s accounting, which would necessitate an amendment to Statement 35. If the Board agrees to expand the scope of the project the staff will recommend that the decision 1 reached in measuring the pension obligation for cash balance plans with a variable interest crediting rate plan be expanded to measure the accumulated plan benefits for those types of plans. The staff will ask the Board to consider an effective date for plan years beginning after December 15, Plan sponsors would perform a measurement of accumulated plan benefits pursuant to the amended measurement guidance as of its previous benefit information date. The difference between the accumulated plan benefit amount measured upon initial application of this Interpretation and 1 The accrued benefit costs and pension obligations for variable interest or investment crediting rate plans shall be measured by reference to the aggregate of vested and expected-to-vest plan participants notional account balances rather than a projection based on those notional account balances and assumed future interest or investment credits both discounted at a rate based on the yield of a portfolio of high quality fixed income investments. The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

2 that previously measured would be presented consistent with the guidance in paragraphs 25 and 26 of Statement 35. Implementation Questions The staff will ask the Board to consider and make decisions on the following questions: 1. How should the service cost and interest cost components of pension cost be determined? 2. If interest cost is determined by interest credits, should the interest credits be based upon actual interest credits or assumed interest credits? 3. What is the appropriate assumed discount rate to be disclosed? 4. For pension plans that provide employees with the greater of a cash balance benefit formula and a traditional defined benefit formula, how should the pension obligation be determined? Transition The Board will reconsider the transition guidance previously decided 2 upon to address scenarios in which the projected benefit obligation decreases or increases, and the minimum pension liability increases. 2 At the March 31, 2004 Board meeting the Board decided that the difference in measurement of the projected benefit obligation resulting from the adoption of the interpretation shall be fully recognized in the income statement similar to a cumulative effect of a change in accounting principle.

3 Resolution of Statement 133 Implementation Guidance regarding Hedging the Variable Interest Payments in a Group of Prime-Rate- Based Interest-Bearing Loans The Board will continue its discussion of alternatives for resolving Statement 133 Implementation Issue No. G25, Hedging the Variable Interest Payments in a Group of Prime-Rate-Based Interest-Bearing Loans. The Board will consider revisions to Implementation Issue G25 proposed by the staff in response to suggestions made by Board members at the meeting on May 5, The objective of this meeting is for the Board to decide whether it should clear the proposed Implementation Issue G25 that permits a broadened application of the first-payments-received technique in identifying the hedged forecasted transactions in a cash flow hedging relationship even though the hedged risk is the risk of overall changes in the hedged cash flows. Background At the May 5, 2004 Board meeting, the Board discussed possible revisions to Implementation Issue G25 that would allow entities to use the first-interestpayments-received technique (described in Question 2 of that Implementation Issue) under certain circumstances. The Board directed that the staff analyze the ramifications of those possible revisions and determine the most effective way for Board-directed guidance to be communicated. After analyzing the ramifications of the possible revisions, the staff proposes that if the hedged variable interest payments for an interest-bearing financial asset are based on the same rate or index as the underlying for the hedging instrument, the hedging entity may (as an exception) use the first-payments-received technique in identifying the hedged forecasted transactions in a cash flow hedging relationship even though the hedged risk is the risk of overall changes in the hedged cash flows. Furthermore, the hedging entity may also use the first-payments-received The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

4 technique in identifying the hedged forecasted transactions if the hedged variable interest payments for an interest-bearing financial asset are based on (a) a financial institution s prime interest rate, (b) the prime rate published in The Wall Street Journal; or (c) the interest rate for bank prime loan in the Federal Reserve Statistical Release H-15, Selected Interest Rates, provided that the underlying for the hedging instrument is also based on one of the aforementioned prime interest rates (even though it is not exactly the same prime interest rate on which the financial asset is based). Question for Board Members Do the Board members object to the staff s posting of Implementation Issue G25 (incorporating the staff s proposed revisions) on the FASB website as cleared guidance? The staff recommends that the Board members agree to post Implementation Issue G25 (incorporating the staff s proposed revisions) on the FASB website as cleared guidance at this time.

5 Agenda Decision: Request to Amend Statement 133 The Board will continue its discussion of requests from constituents to amend FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit (a) hedging entities to designate the risk of changes in only certain aspects of a nonfinancial asset s fair value as the hedged risk in a fair value hedge and (b) a similar bifurcation of risks for cash flow hedge accounting related to nonfinancial assets. At the May 5, 2004 Board meeting, the Board directed the staff to obtain more information from the constituents who had requested the amendment. Question for Board Members Do the Board members agree with the staff s recommendation not to add a project to the Board s technical agenda to permit (a) hedging entities to designate the risk of changes in only certain aspects of a nonfinancial asset s fair value as the hedged risk in a fair value hedge and (b) a similar bifurcation of risks for cash flow hedge accounting related to nonfinancial assets? The staff recommends that the Board members decide not to undertake a new project to amend Statement 133 to permit the bifurcation of risks for both fair value and cash flow hedge accounting related to nonfinancial assets. The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.