Proposed FASB Statement on Employers Accounting for Defined Benefit Pension and Other Postretirement Plans

Transcription

1 Financial Reporting Presents: Proposed FASB Statement on Employers Accounting for Defined Benefit Pension and Other Postretirement Plans May 18, 2006

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3 Agenda Analysis of the Exposure Draft Jim Kroeker and Dawn Trapani Potential Implementation Challenges Robert Rietz The FASB Project Phases I and II Peter Proestakes, FASB Project Manager Questions and Answers

4 Keep in Mind This webcast does not provide official Deloitte & Touche interpretive accounting guidance. Check with a qualified advisor before taking any action. See later slides for information on obtaining written summaries of issues discussed today.

5 Learning Objective To enhance participants understanding of the requirements of the Proposed FASB Statement, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, as well as the FASB s plans for Phase II of the postretirement benefits project

6 Overview of Current Accounting Requirements and the Proposed FASB Statement, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans 1.1

7 History of Pension Accounting FASB Statements No. 87 and 106 Issued December 1985 and December 1990, respectively Controversial projects Retained three fundamental aspects of past pension accounting Delayed recognition of certain events Reporting net costs Offsetting liabilities and assets 1.2

8 Current Accounting Requirements Delayed recognition of certain events Allows smoothing retirement benefit costs Changes in assumptions Plan amendments Transition obligation Asset or liability recognized generally does not reflect the funded status of the plan Net reporting Balance Sheet Net position recorded Income Statement - Combines service costs (compensation), interest costs (financing), and return on assets (investing) Measurement date up to three months prior to year-end Greater focus on disclosures 1.3

9 Impact of the Corridor Corridor: Net actuarial gain/loss must be less than 10% of the greater of the fair value of plan assets or PBO, otherwise amortize into periodic pension cost Actuarial Loss 20% 10% 0-10% 20X0 20X1 20X2 20X3 20X4 20X5 Actuarial Gain -20% Net Actuarial Gain/Loss % Periodic Pension Cost 1.4

10 Current Accounting Company Disclosures and Balances 12/31/05 Fair Value of Plan Assets Projected Benefit Obligation Funded Status of Plan Prior Service Cost* Net Actuarial Loss* Net Transition Obligation (Amortized $10/year)* Accrued Pension Liability Total Shareholders Equity Annual Projected Net Periodic Pension Cost *Amounts not yet recognized as a pension expense or part of the net liability $9,000 12,000 $(3,000) 100 1, $(1,450) $(50,000) $150 Notice the impact of pension smoothing 1.5

11 Polling Question Does your company currently offer benefits under a defined benefit pension or other postretirement plan? Yes No Don t know/not applicable

12 Phase I - Recognition of the Funded Status Recognize a plan s overfunded or underfunded status as an asset or liability Difference between the fair value of a plan s assets and the benefit obligation Recognize all prior service costs and credits and net actuarial gains and losses in other comprehensive income No change in how amounts are recognized in the income statement! Recognize all net transition assets and obligations as an adjustment to beginning retained earnings No longer included as a component of net periodic benefit cost 1.6

13 Impact on the Pension Liability Company Disclosures and Balances Funded Status of Plan (PBO less FV of Plan Assets) Prior Service Cost and Net Actuarial Loss* Net Transition Obligation (Amortized $10/year)* Accrued Pension Liability Total Shareholders Equity Annual Projected Net Periodic Pension Cost 12/31/05 $(3,000) 1, $(1,450) $(50,000) $150 *Amounts not yet recognized as a component of net periodic pension cost Account Recorded Under Existing GAAP Under Proposed Accounting Standard Increase / (Decrease) Accrued Pension Liability $1,450 $3,000 $1,

14 Impact on Shareholders Equity Company Disclosures and Balances Funded Status of Plan (PBO less FV of Plan Assets) Prior Service Cost and Net Actuarial Loss* Net Transition Obligation (Amortized $10/year)* Accrued Pension Liability Shareholders Equity Annual Projected Net Periodic Pension Cost 12/31/05 $(3,000) 1, $(1,450) $(50,000) $150 *Amounts not yet recognized as a component of net periodic pension cost Account Recorded Under Existing GAAP Under Proposed Accounting Standard Increase / (Decrease) Deferred Tax Assets $0 $620 [$1,550 x 40%] $620 Shareholders Equity $50,000 $49,070 [$50,000 ($1,550 x (1-40%))] $(930) 1.8

15 Impact on the Income Statement Company Disclosures and Balances Funded Status of Plan (PBO less FV of Plan Assets) Prior Service Cost and Net Actuarial Loss* Net Transition Obligation (Amortized $10/year)* Accrued Pension Liability Shareholders Equity Annual Projected Net Periodic Pension Cost 12/31/05 $(3,000) 1, $(1,450) $(50,000) $150 *Amounts not yet recognized as a component of net periodic pension cost Account Recorded Under Existing GAAP Under Proposed Accounting Standard Increase / (Decrease) Annual Projected Net Periodic Pension Cost $150 $140 [$150 $10] $(10) 1.9

16 Financial Statement Presentation Plan A Overfunded Plan B Overfunded All overfunded plans are aggregated and a single asset is recognized Plan C Underfunded Plan D Underfunded Plan E Underfunded All underfunded plans are aggregated and a single liability is recognized If a classified balance sheet is presented, show current and non-current portions 1.10

17 Effective Date and Transition Recognize the funded status in fiscal years ending after December 15, 2006 Retrospective Application Footnotes Unrecognized Prior Service Cost and Credit Unrecognized Actuarial Gain and Loss Unrecognized Transition Obligation and Asset Balance Sheet Accumulated Other Comprehensive Income Retained Earnings Income Statement Net Periodic Postretirement Benefit Cost 1.11

18 Polling Question Does your company anticipate having to modify existing arrangements (e.g. debt covenants, compensation arrangements indexed to return on net assets or return on equity) as a result of recognizing the underfunded and/or overfunded statuses of its defined benefit postretirement plans? Yes No Don t know/not applicable

19 Eliminating the Choice in Measurement Date Requires plan assets and benefit obligations be measured as of the annual balance sheet date Effective Date Public companies, the requirement shall be applied for fiscal years beginning after December 15, 2006 For non-public companies and not-for-profit organizations that are non-public, the requirement shall be applied for fiscal years beginning after December 15, 2007 Net periodic benefit cost shall be measured for the upcoming fiscal year as of the beginning of the fiscal year the requirement is applied 1.12

20 Disclosures Disclose separately The amount of prior service cost and credit and net actuarial gain and loss recognized in OCI, and cumulatively in accumulated OCI Amounts subsequently reclassified into earnings The portion of prior service cost and credit and net actuarial gain and loss that will be reclassified into earnings in the upcoming fiscal year 1.13

21 Potential Implementation Challenges 2.1

22 Polling Question Which statement best describes your measurement date and how it might be impacted by the FASB Exposure Draft? MD is FYE and we easily meet reporting deadlines MD is FYE and reporting deadlines are difficult to meet MD precedes FYE but we would easily meet reporting deadlines if MD was FYE MD precedes FYE but we would have trouble meeting reporting deadlines if MD was FYE Don t know/not applicable

23 Implementation Challenges Support for discount rate Availability of published yield curves Availability of proprietary yield curves Availability of customized hypothetical bond portfolios Support required for each pension and retiree medical plan End of fiscal year measurement date Roughly half of employers have a calendar fiscal year Could December 31 become a choke-point for all of this activity? 2.2

24 Implementation Challenges Development of proprietary yield curves and hypothetical bond portfolios Screen bond universe Quality, size, capacity, call feature, outliers, and thinly traded bonds Graduation techniques for yield curves Fit v. smoothness v. data significance v. previous curves Assumptions for discounting cash flows beyond 30 years Combination of art and science Proprietary yield curves and hypothetical bond portfolios are usually not available until almost three weeks after month-end 2.3

25 Implementation Challenges Asset values and reports can be delayed Multiple asset managers Non-publicly traded assets Fiscal year end might not match asset statement or plan year reporting cycle Foreign plan information might not be automated Decreased time for Plan sponsors and actuaries to prepare reports Auditors to review information and resolve any questions and issues Allow discount rates to be determined one month earlier? 2.4

26 Implementation Challenges New Paragraph 44A indicates that employers should use a yield curve or hypothetical bond portfolio to select discount rates Many employers have continued to use indices as a computational shortcut, with some adjustment, to select discount rate Issues with indices May not reflect duration of employer s plans Composition may change over time May contain callable bonds May not satisfy capacity requirement 2.5

27 Implementation Challenges These employers will need to change their approach supporting the selection of discount rate External and internal costs of education and development of new method of support Costs to reconcile approach used in prior periods 2.6

28 The FASB Project Phases I and II The views expressed in this portion of the presentation are those of Peter Proestakes, FASB Project Manager, and do not represent positions of the Financial Accounting Standards Board. Official positions of the FASB are established only after extensive deliberation and due process. 3.1

29 Why Address Postretirement Benefits? Statement 87 compromises Criticisms of current accounting SEC off-balance sheet report FASB Advisory Councils In summary, postretirement benefits information contained in financial statements is: Not complete or transparent Overly complex 3.2

30 Size of Plans S&P 500 Pension and OPEB Plans 2005 $ in Billions Pension OPEB Total FV of Plan Assets $1,343 $ 92 $1,435 PBO 1, ,907 Funded Status $ (145) $(327) $(472) Asset (Liability) Recognized $ 121 $(212) $(91) Source Credit Suisse First Boston, The Hit to Equity; Bringing Pension and OPEB Funded Status on Balance Sheet (May 5, 2006) 3.3

31 Project Objectives Improve reporting of pensions and other postretirement benefit plans in the employer s financial statements Make information more complete, useful, understandable, and transparent for investors, creditors, employees, retirees, donors, and others Develop Standard that is convergent internationally 3.4

32 Phase One Recognize net overfunded or underfunded status Not change how plan assets and benefit obligations are measured Not change basic approach for measuring net periodic benefit cost Not broadly reconsider footnote disclosures 3.5

33 Phase One - Timetable Exposure Draft March 31, 2006 Comment period ends May 31, 2006 Request to participate in public roundtable meeting May 16, 2006 Public roundtable meeting June 27, 2006 Final Statement Fall

34 Phase Two Key Issues Delayed recognition Expected long-term return on plan assets Actuarial gains/losses amortized subject to 10% threshold Market-related value of assets for expected ROA &10% corridor Prior service costs amortized over active service period Benefit cost reporting Combining service cost, interest cost, and investment returns Reporting of costs in earnings, OCI, or otherwise Liability measurement PBO, ABO, cash balance plans, multiemployer plans, discount rate (credit quality, fair value) Consolidation of plan assets apart from obligations Footnote disclosures 3.7

35 Phase Two - Timetable Begin Phase Two in 2006 Develop project scope & priorities Establish working relationship with IASB Estimated completion of Phase Two between 2009 and 2010 IASB conducting preliminary planning 3.8

36 Polling Question Which of the following issues do you believe should be the FASB s top priority in Phase II of its project on defined benefit postretirement plans? Use of PBO vs. ABO Other guidance on measuring the benefit obligation (e.g., guidance on the various assumptions) Timing of expense recognition (e.g., smoothing ) Consolidation of the postretirement benefit trust by the plan sponsor Don t know/not applicable

37 Contact Information Jim Johnson Jim Kroeker Dawn Trapani Robert Rietz

38 Other Resources FASB Exposure Draft on Postretirement Benefits FASB Examples on Application by Not-for- Profit Organizations Deloitte Heads Up on Postretirement Benefits Exposure Draft Subscription to DART Subscriptions to Deloitte Publications ion&postretirement_plans.pdf ions_addendum_for_nfps.pdf c/content/us_assur_heads%20up %20Volume%2013%2C%20Issue %203.pdf iptions

39 Questions