SFAS 158 What has FASB Wrought?

1. SFAS 158What has FASB Wrought? John Stokesbury Josh Bank CCA/SOA EB Spring Meeting May 31, 2007

2. SFAS 158 - Topics • Expense • Footnote disclosures • Measurement dates • Remeasurements and rollforwards • Reconciliations of OCI and funded status • Interim reporting • International issues • Case study • Q&A 2007 CCA/SOAEmployee Benefits Spring Meeting

3. Expense • On the surface, SFAS 158 does not change calculation of net periodic benefit cost (expense) • One possible exception is how companies with foreign plans might account for foreign currency translation of unrecognized gains/losses, prior service costs and transition amount when they are amortized into expense • this issue will be discussed in the International Issues section 2007 CCA/SOAEmployee Benefits Spring Meeting

4. Footnote disclosures • No major (fundamental) new measurements • Balance sheet disclosure of funded status • Aggregation of plans • Current vs. non-current assets & liabilities • Elimination (redefinition) of accrued/(prepaid) pension cost • Transitional disclosures and bookkeeping • Permanent changes to disclosures • Adjustment to retained earnings upon change in measurement date (next section) 2007 CCA/SOAEmployee Benefits Spring Meeting

5. No fundamental new measurements • Fundamental elements of footnote information are basically the same • Displayed differently and in different places (and with some different names) • Accrued/(Prepaid) Pension Cost no longer shown… they’ve been replaced by funded status (current+noncurrent liability or noncurrent asset) • It’s a little harder (and easier) to confirm that the footnote “balances”. • Pre-158 recursion formula was (roughly) • ABL/(PBC)0+NPPC-Contrib+ΔAML=ABL/(PBC)1 2007 CCA/SOAEmployee Benefits Spring Meeting

6. Disclosure of funded status • Balance sheet disclosure of funded status • Essentially, an adjustment to equity equal (in many cases) to unrecognized amortization balances • In other cases, the hit to equity is just the excess of PBO over ABO • Also may lose an intangible asset, but who ever missed an intangible asset? • Four elemental balance sheet components are eliminated, and three new ones are introduced (one has the same name but is redefined) 2007 CCA/SOAEmployee Benefits Spring Meeting

7. Aggregation of plans • Pension and OPEB numbers must be shown separately. Otherwise numbers can be aggregated or disaggregated at will (within reason) • However, always need to disclose, either explicitly or through the way you aggregate: • ABO and assets for ABO-unfunded plans • PBO and assets for PBO-unfunded plans • Old habits may die hard, or not at all • US vs. non-US plans • Qualified vs. non-qualified plans • What do your clients’ disclosures look like? 2007 CCA/SOAEmployee Benefits Spring Meeting

8. Aggregation of plans: Company A • . 2007 CCA/SOAEmployee Benefits Spring Meeting

9. Aggregation of plans: Company A • . 2007 CCA/SOAEmployee Benefits Spring Meeting

10. Aggregation of plans: Company A • . 2007 CCA/SOAEmployee Benefits Spring Meeting

11. Current and noncurrent liabilities, (Current?) and noncurrent assets • Surplus (=Asset on Balance Sheet) • Always Noncurrent? • A few large employers have chosen to interpret Paragraph 8(o) – Expected reversion during upcoming 12 months – as current asset • Deficit (=Liability on Balance Sheet) • Current liability: Excess (if any) of the present value of expected benefit payments in following 12 months over assets (note that this is a rolling 12 months) • Non-qualified (and qualified unfunded non-US) pension plans and OPEB plans • Unfunded OPEB plans • The rest of the deficit is Noncurrent liability 2007 CCA/SOAEmployee Benefits Spring Meeting

12. Current vs noncurrent assets/liabilities • Example 1 • Benefit Obligation: ($300) • Assets: $100 • Funded Status: ($200) • Expected Benefit Payments: $50 • The company classifies the entire $200 liability as a noncurrent liability since the fair value of the plan’s assets is sufficient to cover the present value of expected benefit payments over the next 12 months. 2007 CCA/SOAEmployee Benefits Spring Meeting

13. Current vs noncurrent assets/liabilities • Example 2 • Benefit Obligation: ($240) • Assets: $40 • Funded Status: ($200) • Expected Benefit Payments: $50 • The company should record a current liability of $10 and a noncurrent liability of $190. 2007 CCA/SOAEmployee Benefits Spring Meeting

14. Additional permanentdisclosure requirements • Amount of net gain or loss and prior service cost or credit recognized in OCI, separated into two categories: • Amounts arising during the period • Amounts subsequently recognized as components of net periodic benefit cost • Amount of any transition asset or obligation recognized as a component of net periodic benefit cost 2007 CCA/SOAEmployee Benefits Spring Meeting

15. Additional permanent disclosure requirements • Amount of unrecognized transition obligation/asset included in accumulated OCI • Estimated portion of each unrecognized item that will be recognized in expense for the next fiscal year • Amount and timing of any plan assets expected to be returned to the entity during the next fiscal year 2007 CCA/SOAEmployee Benefits Spring Meeting

16. Additional TransitionalDisclosure Requirements • Incremental effect of applying FAS 158 on individual line items in year-end balance sheet (only required in initial year of adoption of FAS 158) • Adjustments to retained earnings and accumulated OCI for change in measurement date (only required in initial year of aligning measurement date with fiscal year-end) 2007 CCA/SOAEmployee Benefits Spring Meeting

17. Measurement dates • Must now coincide with sponsor’s year-end • Details of early adoption are evolving • May need to act in Q1 of transition year • Transition for change in measurement date • Remeasurement method • “15-month” method • Significant events during “gap” period 2007 CCA/SOAEmployee Benefits Spring Meeting

18. Measurement date transition • Two alternatives • Dual Measurement: Calculate expense for period between old measurement date and fiscal year-end (adjustment to retained earnings) and then remeasure again at year-end to calculate annual expense • “15-month” Alternative (e.g. calendar fiscal and Sept 30 measurements): Use results at old measurement date to determine net periodic benefit cost for next 15 months. Three-fifteenths of this is adjustment to retained earnings and twelve-fifteenths is net periodic benefit cost 2007 CCA/SOAEmployee Benefits Spring Meeting

19. Measurement date transition • Curtailments and Settlements • If occur between measurement date and fiscal year-end, effects are recognized in earnings when incurred and not in adjustment to retained earnings • Might trigger additional measurement dates prior to alignment • If transition at December 31, 2008, then 2008 would capture 15 months of special events 2007 CCA/SOAEmployee Benefits Spring Meeting

20. New data remeasurements • Yearend measurements based on beginning of year data • Following year expense based on new census data • What assumptions are used in updated measurements? • What expense is recorded prior to updated results? • How does OCI reflect updated results? 2007 CCA/SOAEmployee Benefits Spring Meeting

21. December 31, 20X6 $200 $40 (est.) Remeasurement example January 1, 20X7 $205 $44 • Benefit Obligation • 20X7 NPPC 2007 CCA/SOAEmployee Benefits Spring Meeting

22. Remeasurement example (cont’d) • January 1, 20X7 • Benefit Obligation increases by 5 (about 2.5% difference – attributable to demographic experience) • Service Cost and Interest Cost change • Unrecognized Loss increases by 5 • Corridor and Amortization Amount change • Charge to Other Comprehensive Income increases by 5 (Equity reduced by 5) • May be a significant change in Equity 2007 CCA/SOAEmployee Benefits Spring Meeting

23. Remeasurement example (cont’d) • 20X7 NPPC • 1Q and 2Q expensed 25% of 40, • Updated results in early 3Q • YTD Accrual is 20 • YTD Accrual should be 21 • How to reflect difference? • 3Q and 4Q will each expense 25% of 44 2007 CCA/SOAEmployee Benefits Spring Meeting

24. Amendments to SFAS 87 / 106 • Basis for Discount Rate • Added paragraph 44A (and 31A, SFAS 106), retained paragraph 44 (and 31, SFAS 106) • Implementation Guides (FSP 158-1) • Incorporated into “A” level guidance • Amendments to conform to SFAS 158 2007 CCA/SOAEmployee Benefits Spring Meeting

25. Reconciliations of OCIand funded status • From accrued/prepaid pension cost to prepaid benefit cost/accrued benefit liability to funded status • Reconciliation of OCI • Reconciliation of funded status • Interplay between expense, funded status and OCI • Formal disclosure requirements vs. internal checking mechanisms 2007 CCA/SOAEmployee Benefits Spring Meeting

26. Reconciliations of funded status • Fundamental (direct) method: (FS1) = (FS0) + • (Service cost) • (Interest cost) • Expected return on assets • Contributions • (Losses)/gains on obligations and assets • Other events that affect benefit obligation • If no gains/losses or significant events this is just a standard rollforward of assets and obligations 2007 CCA/SOAEmployee Benefits Spring Meeting

27. Reconciliations of funded status • “Accrued/prepaid” method: (FS1) = (FS0) + • (NPPC) • Contributions. Done… except that… • You then have to back out certain elements that don’t affect funded status, and add in others that do • This can be somewhat opaque, but the elegance and compactness can be worth it • Let’s compare/contrast the old accrued/prepaid recursion formula with the funded status reconciliation (see following slides and/or Excel illustration) 2007 CCA/SOAEmployee Benefits Spring Meeting

28. Reconciliations of funded status • The first slide shows all of the details of this “accrued/prepaid method” funded status reconciliation in one continuous mess • In the second slide we eliminate certain individual items that are both added and subtracted in the from the reconciliation, leaving, in effect, the “fundamental method” funded status reconciliation • The third slide shows how we recast the reconciliation, breaking it into two pieces, one of which comes right out of the FAS 158 sample disclosure 2007 CCA/SOAEmployee Benefits Spring Meeting

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30. 2007 CCA/SOAEmployee Benefits Spring Meeting

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32. Interim reporting • Additional interim reporting requirements under SFAS 158 (some are subtle) • Reconciliation of OCI and funded status – a second look • Reconciliation of current / non-current assets / liabilities • Trend toward more rigorous interim reporting and recording processes • Logistics: multi-plan and multi-country FAS coordination 2007 CCA/SOAEmployee Benefits Spring Meeting

33. International issues • Getting the word out • To local management • To local actuaries • Local vs. corporate GAAP and bookkeeping • Foreign currency translation in general • Foreign currency translation of AOCI reclassification into earnings • Other international issues 2007 CCA/SOAEmployee Benefits Spring Meeting

34. Case study - international • Major multinational company with >100 plans in >35 countries • Non-US fiscal year is 11/30/06, US fiscal year is 12/31/06 • Required to adopt SFAS 158 for US plans • What about the foreign (11/30/06) plans? • Major communications and education campaign (actuaries, local finance) • Development of consistent reporting vehicle for a dozen actuarial firms 2007 CCA/SOAEmployee Benefits Spring Meeting

35. Case study - international • Year-end processes and timeline • Oversight and direction • Sample valuation report • Intermediate consolidation reports • Consolidated draft footnote • Final product: 10-K à la SFAS 158 • 2007 interim reporting and preparation for year-end 2007 2007 CCA/SOAEmployee Benefits Spring Meeting

36. Q&A 2007 CCA/SOAEmployee Benefits Spring Meeting