Accounting for Pensions and other Post-Retirement Benefits

Abstract
This paper will be based research, compare and contrast the early historical accounting for Postretirement Health Care and Life Insurance Benefits with the guidance / rules in place today with the Financial Accounting Standards Board (FASB) recently issued Statement of Financial Accounting Standards No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans; changes to the guidance and rules that would improve the financial accounting and reporting of the benefits. Predict the significant manner in which the future of accounting for these benefits could change, based on potential changes in the business and political climate; scenario in Postretirement Health Care and Life Insurance Benefits change that predict the potential impact of these changes on financial accounting and reporting practices.

Postretirement Health Care and Life Insurance Benefits
Early historical accounting for Postretirement Health care and Life Insurance Benefits, employers offering pension plans must disclosure the plans and their general features in a document. For defined Postretirement Health Care and Life Insurance Benefits plans, the employer must disclosure; if any, in the current year and pension expense equals Postretirement Health Care and Life Insurance Benefits. For as defined benefit plans, extensive disclosures of assumptions, components of pension expense, activity in the pension asset and pension obligation accounts and net funding status must be disclosed.

In addition, the net pension asset/liability must be booked as an asset/liability and the change in pension assets and pension liabilities that are not booked into income must be booked into other comprehensive income. For pensions, the retirement benefits are fixed in the amount by the terms of a contract and only the term is unknown. The benefits for health care plans are more difficult to estimate since not only is the term unknown, but also the benefits are dependent upon health care costs at the time care is provided. (www.fasb.org) SFAS No.87

Employers’ Accounting for Pensions Companies disclose market values of pension plan assets and the projected benefit obligations of plans, but do not recognize them on their balance sheets. Unrecognized transition assets and obligations from the initial adoption of the pronouncement, unrecognized prior service costs, and deferred gains and losses from actuarial experiences and plan asset performance both equal the funded status of the pension plan. Information is suppressed about volatility, which can come from two sources: (1) Significant changes in the net pension liability when actuarial assumptions are changed and when experience in a particular period is different from the expectations encompassed in the assumptions. (2) Volatility from changes in the market valuations of plan assets”. (www.fasb.org) SFAS No. 106

Accounting for Stock Based Compensation Allows adopters to choose between financial statement recognition and footnote disclosure of a new method of accounting for the cost of employee stock options. Requires companies to use accrual accounting and expense the cost of these benefits as they are earned by employees. Granted firms a choice of adoption alternatives regarding how to account for the previously unreported accrued cost for benefits earned by employees up to the adoption date. Companies were required to choose between two adoption alternatives: One-time charge: Recognize the entire amount of the liability on the balance sheet in the adoption year, with an offsetting charge to net income as a cumulative effect of a change in accounting principle. Deferred recognition: Amortize the transition obligation to compensation expense over future periods, and record a portion of the liability each year over the same time period. (www.fasb.org)

Improve the Financial Accounting and Reporting of the Benefits FASB has issued Statement no. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, to reform accounting for pension and other postretirement benefit plans. The new changes required that employers offering defined benefit plans and post-retirement benefit plans report the funding status excess of pension assets over pension obligations overfunded or the excess of pension obligations over pension assets underfunded. Also, the net over or under funded amount must be booked as an asset overfunded or liability underfunded on the book of the employer offering the benefits. The new standard required that the employer recognize gains, losses and prior service costs that are not recognized in pension expense be recorded in other comprehensive income.

Amendments for pensions are amortized over the remaining service life of the employees, while for Other Postemployment Benefits amendments are amortized over the period of time until full eligibility, a much shorter time span. Pension accounting requires the recording of an additional liability, when the accumulated benefit obligation exceeds the fair value of the plan assets. (www.fasb.org) Predict future of accounting and political climate

I believe predict the potential impact of future changes on financial accounting and political climate, future changes the of Postretirement Health Care and Life Insurance Benefits representational faithfulness because the prepaid overfunded or unfunded obligations are reported which more faithfully represents transactions that have occurred work completed that entitles workforce to future cash flows. The Postretirement Health Care and Life Insurance Benefits changes do not improve verifiability. The Postretirement Health Care and Life Insurance Benefits estimated long term returns and estimated future service lives of workforce used to book amounts into other Income. Political climate change, Political philosophy say that it would not increase or decrease. Political philosophy think that when you are not sure, select the option that minimizes profits and assets.

This would have been more conservative if only underfunded plans were book to liabilities and overfunded plans were just reported in documents but no asset booked. Given the extensive assumptions, the certainty of future benefits is not very high. Overfunded plans can turn too underfunded with one deep plunge of the stock market, as happened in fall 2008. According to www.nrln.org an good example, General Motors used pension assets to pay for nearly $3 billion in lump sum severance payouts during 2008 and ended up with such a dangerous degree of under-funding that in early 2009 the Treasury Department restricted the practice as a condition of the federal bailout loan package. In 2012 it terminated its plan for management and salaried retirees entirely. (www.nrln.org) Postretirement Health Care and Life Insurance Benefits

Scenario Postretirement Health Care and Life Insurance Benefits change like fall 2008, the potential impact of these changes on financial accounting and reporting practices. “The 2006 Pension Protection Act tightened up on this practice somewhat by requiring companies to pre-fund a plan amendment that increases benefit liabilities to the extent the plan’s funding level would fall below 80% (after taking account of the new benefit liability). However, as the 2008 market meltdown demonstrated, a plan that is only 80% funded during a bull market can easily end up below 60% funded in a bear market and in default with the Pension Benefit Guaranty Corporation (PBGC) if the plan sponsor declares bankruptcy.” (www.nrln.org) I believe these changes have improved the transparency and completeness of reporting future obligations stemming from pension promises and postretirement promises of employers.

Prior to this standard, the pension obligations may be greatly in excess of pension assets and this large drain on future cash was not reported or not reported in an obvious way liability booked on the balance sheet. This means that only the most employers had a chance of figuring out that there were substantial unfunded liabilities that will drain cash in future years. By the same token, those employers that have full or over funded their pension and post-retirement benefits can show this over-funding as a future benefit because future obligations have been prepaid by overfunding them currently.

I am not sure I think the requirement to book some of the gains and losses into other comprehensive income is an improvement. This seems to book long term averages and there is no precedent for this for other long term assets and liabilities. Of course, reporting the different between actual and estimated returns and smoothing prior service costs by including in Other Comprehensive Income is typical for changes in market value of balance sheet items. I think this is probably not an improvement or worsening of understandability of pension events. (www.fasb.org) Chief Financial Officer

As a Chief Financial Officer I would ask for full disclosure, this argument would support plans, the future obligations, the potential drains on long term cash flows and the assumptions used. I cannot tell you if the changes improved the transparency, the predictive value or feedback value for employee. The employer themselves would be the best source to find this out. I think the standard-setters probably believed it would help them predict future cash flows. The firm does not have legal time to the pension assets and does not control their utilization. The pension asset therefore is not really a hard asset but a potential asset if the assumptions turn out to be true. As such, I think this aspects has been a bit compromised.

References

Back Door Reversions: Limiting the Use of Pension Assets for Severance and Encouraging Plan Contributions Will Strengthen Defined Benefit Retirement Security; Retrieved December 7, 2014; http://www.nrln.org/flyin%20whtpprs/Whitepaper%20Back%20Door%20Reversions%20JAN.2013.pdf Controversies in Accounting for Post-Retirement Benefits; Retrieved December 7, 2014 http://www.cluteinstitute.com/ojs/index.php/JBER/article/viewFile/2466/2512