Employee Future Benefits

The Changing Landscape of Pension Accounting

An extraordinary amount of attention has been focused on private pension plans in recent years. Many observers are concerned about the impact weak investment returns and low interest rates may be having on private pension plan finances. And it is a concern that touches many people – including retirees and workers anxious about benefit security, plan administrators making funding and investment decisions, and company shareholders focused on cost of their plans.

Today, investors have increased expectations for transparency in financial matters, effective corporate governance, and accountability.

In recent years, many shareholders had serious concerns with the current accounting related to pensions. Some of these concerns have been that:

• Important information about the financial status of a company's post-retirement benefit plans was reported in the notes to the financial statements and not in the balance sheet.
• Organizations (i.e., plan sponsors) were not required to faithfully report the current economic status of a defined benefit post-retirement plan in the balance sheet.
• Presenting important information only in the notes to the financial statements made it difficult to assess a plan sponsor’s financial position and ability to satisfy plan obligations.

Reporting standards did not provide for complete recognition in comprehensive income of events occurring during the period, and may have caused incomplete reporting of the plan sponsor’s condition and results of operations, which may have lead to inefficient allocation of resources in the capital markets.

New U.S. reporting rules

New standards finalized by the FASB call for significant changes in accounting for pension and other post-retirement plans. Statement of Financial Accounting Standards No. 158 (FAS 158), released in September 2006, requires most public companies to fully recognize an asset or liability for the overfunded or underfunded status of benefit plans in financial statements for years ending after December 15, 2006.

The postretirement asset or liability equals the difference between the fair value of the plan’s assets and its benefit obligations.

FAS 158 measures the benefit obligation as the projected benefit obligation for pension plans and as the accumulated postretirement benefit obligation for other postretirement benefit plans. FAS 158 does not affect how an entity computes the benefit expense recognized in its income statement.

The portion of the funded status not yet recognized as benefit costs will be included in Other Comprehensive Income, a separate component of equity.

Other significant provisions are:

• transition to the recognition provision is on a prospective basis
• the requirement that the measurement date for plan assets and liabilities coincide with the sponsor’s year end is postponed until 2008.

Canadian reporting rules

Similar concerns about pension plan accounting have been expressed in Canada, and the AcSB's project will address these concerns.

In October 2006, the CICA approved a project to maintain its substantial harmonization with US GAAP in the area of accounting for employee future benefits.

The CICA expects to publish an exposure draft for public comment in the first quarter of 2007, with an expectation that the final standard will be effective for fiscal years ending on or after December 31, 2007. This timing would allow entities time to assess the effects on financial metrics referred to in contractual arrangements, including debt covenants.

Ultimately, the responsibility for the oversight of the plan administrator's duties generally rests with the board of directors of the plan sponsor. When a plan gets into difficulty, it is important to remember that there is a fiduciary responsibility to all plan members and beneficiaries, not just current employees.
Deloitte reminds audit committees and others to address the changes in pension accounting through several steps:

• Become educated - Use internal and external resources to understand retiree benefit accounting.
• Understand the funded status of the plans - Understand the current funded status of the company’s retiree benefit plans.
• Assess total costs - Understand the real costs of these benefits now, in the near term, and over the long term.
• Dissect FAS 158 - Companies that have generous unfunded retiree medical benefit plans may be significantly affected by the new statement.
• Avoid unreasonable assumptions - The assumptions that are the basis for benefit accounting can be highly subjective.