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SFAS 158 What has FASB Wrought

May 31, 2007. 2007 CCA/SOA Employee Benefits Spring Meeting . 2. SFAS 158 - Topics. ExpenseFootnote disclosuresMeasurement datesRemeasurements and rollforwardsReconciliations of OCI and funded statusInterim reportingInternational issuesCase studyQ

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SFAS 158 What has FASB Wrought

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

    2. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 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

    3. May 31, 2007 2007 CCA/SOA Employee 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

    4. May 31, 2007 2007 CCA/SOA Employee 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)

    5. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 5 No fundamental new measurements

    6. May 31, 2007 2007 CCA/SOA Employee 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)

    7. May 31, 2007 2007 CCA/SOA Employee 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?

    8. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 8 Aggregation of plans: Company A .

    9. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 9 Aggregation of plans: Company A .

    10. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 10 Aggregation of plans: Company A .

    11. May 31, 2007 2007 CCA/SOA Employee 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

    12. May 31, 2007 2007 CCA/SOA Employee 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.

    13. May 31, 2007 2007 CCA/SOA Employee 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.

    14. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 14 Additional permanent disclosure 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

    15. May 31, 2007 2007 CCA/SOA Employee 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

    16. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 16 Additional Transitional Disclosure 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)

    17. May 31, 2007 2007 CCA/SOA Employee 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

    18. May 31, 2007 2007 CCA/SOA Employee 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

    19. May 31, 2007 2007 CCA/SOA Employee 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

    20. May 31, 2007 2007 CCA/SOA Employee 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?

    21. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 21 Remeasurement example December 31, 20X6 $200 $40 (est.)

    22. May 31, 2007 2007 CCA/SOA Employee 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

    23. May 31, 2007 2007 CCA/SOA Employee 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

    24. May 31, 2007 2007 CCA/SOA Employee 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

    25. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 25 Reconciliations of OCI and 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

    26. May 31, 2007 2007 CCA/SOA Employee 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

    27. May 31, 2007 2007 CCA/SOA Employee 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)

    28. May 31, 2007 2007 CCA/SOA Employee 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

    29. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 29

    30. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 30

    31. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 31

    32. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 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

    33. May 31, 2007 2007 CCA/SOA Employee 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

    34. May 31, 2007 2007 CCA/SOA Employee 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

    35. May 31, 2007 2007 CCA/SOA Employee 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 ŕ la SFAS 158 2007 interim reporting and preparation for year-end 2007

    36. May 31, 2007 2007 CCA/SOA Employee Benefits Spring Meeting 36 Q&A

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