FSP FAS 158-1
FASB STAFF POSITION
No. FAS 158-1
Title: Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and
No. 106 and to the Related Staff Implementation Guides
Date Posted: February 21, 2007
Introduction
1.
This FASB Staff Position (FSP) updates the illustrations contained in Appendix B of FASB
Statement No. 87, Employers’ Accounting for Pensions, Appendix B of FASB Statement No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits, and Appendix C of FASB Statement No. 106, Employers’ Accounting
for Postretirement Benefits Other Than Pensions, to reflect the provisions of FASB Statement
No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.
This FSP also amends the questions and answers contained in FASB Special Reports, A Guide to
Implementation of Statement 87 on Employers’ Accounting for Pensions, A Guide to
Implementation of Statement 88 on Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits, and A Guide to Implementation of
Statement 106 on Employers’ Accounting for Postretirement Benefits Other Than Pensions, and
incorporates them into Statements 87, 88, and 106 as Appendixes E, C, and F, respectively. This
FSP supersedes those FASB Special Reports. Finally, this FSP makes conforming changes to
other guidance and technical corrections to Statement 158.
2.
This FSP does not provide additional implementation guidance for Statement 158 beyond
the conforming changes, nor does it change any of the provisions of Statement 158.
Background
FSP on Statement 158 (FSP FAS 158-1)
1
FSP FAS 158-1
3.
Statement 158 amended the recognition provisions of Statements 87, 88, and 106 to require
recognition of the funded status of defined benefit postretirement plans in an employer’s
statement of financial position.
However, Statement 158 did not amend the illustrations
contained in Appendix B of Statement 87, Appendix B of Statement 88, and Appendix C of
Statement 106. The Board decided to update those illustrations that have continuing relevance
following the issuance of Statement 158.
Additionally, Statement 158 did not amend the
questions and answers contained in FASB Special Reports related to Statements 87, 88, and 106.
The Board decided to update those questions and answers that have continuing relevance
following the issuance of Statement 158.
FASB Staff Position
This FASB Staff Position is organized as follows:
Amendments to the Illustrations in Appendix B of Statement 87
3
Amendments to the Illustrations in Appendix B Statement 88
36
Amendments to the Illustrations in Appendix C Statement 106
59
Amendments to the Questions and Answers Issued for Statement 87
125
Amendments to the Questions and Answers Issued for Statement 88
173
Amendments to the Questions and Answers Issued for Statement 106
223
Other Amendments and Technical Corrections
256
Effective Date and Transition
4.
The conforming amendments made by this FSP are effective as of the effective dates of
Statement 158. The unaffected guidance that this FSP codifies into Statements 87, 88, and 106
does not contain new requirements, and therefore, does not require a separate effective date or
transition method.
FSP on Statement 158 (FSP FAS 158-1)
2
FSP FAS 158-1
Amendments to the Illustrations in Appendix B of Statement 87
5.
Appendix B of Statement 87 is amended as follows: [Added text is underlined and deleted
text is struck out.]
Appendix B
ILLUSTRATIONS
261. This appendix contains illustrations of the following requirements of this Statement:
1.
2.
3.
4.
5.
6.
7.
Delayed recognition and reconciliation of funded status [Deleted]
Transition [Deleted]
Amortization of unrecognized prior service cost as a component of net periodic pension
cost
Delayed recognition in net periodic pension cost of gains or lossesAccounting for gain or
loss and timing of measurements
Recognition of pension liabilities, including minimum liability [Deleted]
Disclosure requirements [Deleted]
Accounting for a business combination [Deleted].
Illustration 1—Delayed Recognition and Reconciliation of Funded Status
[This illustration has been deleted. See Status page.]
This Statement provides for delayed recognition of the effects of a number of types of
events that change the measures of the projected benefit obligation and the fair value of plan
assets. Those events include retroactive plan amendments and gains and losses. Gains and
losses as defined in this Statement include the effects of changes in assumptions.
This Statement also requires disclosure of a reconciliation of the funded status of a plan to
the net pension liability or asset recognized in the employers’ financial statements. This
illustration shows how that reconciliation provides information about items that have not been
recognized due to delayed recognition. The illustration starts with an assumed funded status at
the date of initial application of this Statement and shows how a series of events that change the
obligation or the plan assets are reflected in the reconciliation. (Throughout this illustration the
fair value of plan assets exceeds the accumulated benefit obligation and, therefore, no
recognition of an additional minimum liability is required.)
FSP on Statement 158 (FSP FAS 158-1)
3
FSP FAS 158-1
Case 1—Company T at Transition
The reconciliation as of the date of initial application of this Statement is as follows:
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
$(10,000)
6,500
(3,500)
0
0
$
3,500
0
The unrecognized net gain or loss and the unrecognized prior service cost are both initially
zero by definition. The unrecognized net obligation or asset at transition is defined in paragraph
77 as the difference between the funded status and the accrued or prepaid pension cost already
recognized. If, as in this case, the past contributions were equal to amounts recognized as net
pension cost in past periods, there is no recognized accrued or prepaid pension cost in the
statement of financial position and, therefore, the unrecognized net obligation or asset at
transition is equal to the funded status.
Case 2—Past Contributions Lower by $400
If Company T had not made a contribution of $400 for the last year before the date of
initial application but had recognized the same net periodic pension cost as in Case 1, the
situation would be as follows:
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
$(10,000)
6,100
(3,900)
0
0
3,500
$ (400)
The unrecognized net obligation at transition is unchanged. It is the amount of the
projected benefit obligation not yet recognized in net periodic pension cost and is not directly
affected by funding decisions.
FSP on Statement 158 (FSP FAS 158-1)
4
FSP FAS 158-1
Case 3—Past Contributions Greater by $800
If, instead, the employer had made a contribution in excess of net periodic pension cost of
$800, but the company had recognized the same net periodic pension cost as in Case 1, the
reconciliation would be as follows:
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
$(10,000)
7,300
(2,700)
0
0
$
3,500
800
After Initial Application
At any date after initial application, any change in the projected benefit obligation or the
plan assets (other than contributions and benefit payments) either is unrecognized or has been
included in net pension cost for some period. Contributions decrease the accrued pension cost or
increase the prepaid pension cost, and benefit payments reduce the obligation and the plan assets
equally. Thus, all changes in either the obligation or the assets are reflected in the reconciliation.
Using Case 1 above as the starting point, the following reconciliations illustrate the effect of
various events that change either the projected benefit obligation or the plan assets.
FSP on Statement 158 (FSP FAS 158-1)
5
FSP FAS 158-1
Case 4—Fair Value of Assets Increases by $400
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
Before
After
$(10,000)
6,500
(3,500)
0
0
$(10,000)
6,900
(3,100)
(400)
0
3,500
$
0
3,500
$
0
Case 5—Increase in Discount Rate Reduces Obligation by $900
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
Before
After
$(10,000)
6,500
(3,500)
0
0
$(9,100)
6,500
(2,600)
(900)
0
$
3,500
0
$
3,500
0
Case 6—Plan Amendment Increases the Obligation by $1,500
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
FSP on Statement 158 (FSP FAS 158-1)
Before
After
$(10,000)
6,500
(3,500)
0
0
$(11,500)
6,500
(5,000)
0
1,500
$
3,500
0
$
3,500
0
6
FSP FAS 158-1
Case 7—Employer Accrues Net Pension Cost
Net pension cost includes:
Service cost
Interest cost
Amortization of initial unrecognized net obligation
Return on assets
$ 600
1,000
233
(650)
$1,183
No contribution is made.
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net (gain) or loss
Unrecognized prior service cost
Unrecognized net obligation or (net asset) at date
of initial application
(Accrued)/prepaid pension cost
FSP on Statement 158 (FSP FAS 158-1)
Before
After
$(10,000)
6,500
(3,500)
0
0
$(11,600)
7,150
(4,450)
0
0
$
3,500
0
3,267
$ (1,183)
7
FSP FAS 158-1
Illustration 2—Transition
[This illustration has been deleted. See Status page.]
Case 1
As of December 31, 1985, the projected benefit obligation and plan assets of a
noncontributory defined benefit plan sponsored by Company A were:
Projected benefit obligation
Plan assets at fair value
Initial unfunded obligation
$(1,500,000)
1,200,000
$ (300,000)
Company A elected to apply the provisions of this Statement for its financial statements for
the year ending December 31, 1986. At December 31, 1985, no prepaid or accrued pension cost
had been recognized in Company A’s statement of financial position (that is, all amounts accrued
as net periodic pension cost had been contributed to the plan). The average remaining service
period of active plan participants expected to receive benefits was estimated to be 16 years at the
date of transition. In this situation, the initial unrecognized net obligation (and loss or cost) of
$300,000 is to be amortized (recognized as a component of net periodic pension cost) on a
straight-line basis over the average remaining service period of 16 years (paragraph 77) as
follows:
Year
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Beginningof-Year Balance
300,000
281,250
262,500
243,750
225,000
206,250
187,500
168,750
150,000
131,250
112,500
93,750
75,000
56,250
37,500
18,750
Amortizationa
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
18,750
Endof-Year Balance
281,250
262,500
243,750
225,000
206,250
187,500
168,750
150,000
131,250
112,500
93,750
75,000
56,250
37,500
18,750
0
_______________
a300,000 ÷ 16 = 18,750.
FSP on Statement 158 (FSP FAS 158-1)
8
FSP FAS 158-1
Case 2
As of December 31, 1985, the projected benefit obligation and plan assets of a
noncontributory defined benefit plan sponsored by Company B were:
Projected benefit obligation
Plan assets at fair value
Initial overfunded obligation
$(1,400,000)
1,600,000
$ 200,000
Company B elected to apply the provisions of this Statement for its financial statements for
the year ending December 31, 1986. In previous periods, Company B’s plan was deemed to be
fully funded for tax purposes, and the company decided not to make contributions that would not
have been currently tax deductible. As a result, contributions were less than net pension cost for
those periods, and the company had recognized unfunded accrued pension cost (a liability) of
$150,000 at December 31, 1985.
The unrecognized net asset at transition defined in paragraph 77 consists of amounts
previously charged to net pension cost in excess of the projected benefit obligation. Amounts
charged to net pension cost in past periods include amounts contributed (plan assets) and
amounts unfunded. In this case, at December 31, 1985 those amounts were:
Plan assets in excess of obligation
Unfunded accrued pension cost
Unrecognized net asset
$200,000
150,000
$350,000
The average remaining service period of active plan participants expected to receive
benefits was estimated to be 10 years at the date of transition. In this situation, the initial
unrecognized net asset of $350,000 may be amortized on a straight-line basis over either 10 years
or 15 years (paragraph 77). That amortization will result in an annual credit to net periodic
pension cost of either $35,000 or $23,333.
FSP on Statement 158 (FSP FAS 158-1)
9
FSP FAS 158-1
Illustration 3—Amortization of Unrecognized Prior Service Cost as a Component of Net
Periodic Pension Cost
Case 1—Assigning Equal Amounts to Future Years of Service
Determination of expected future years of service
The amortization of unrecognized prior service cost as a component of net periodic pension
cost (defined in paragraph 25) is based on the expected future years of service of participants
active at the date of the amendment who are expected to receive benefits under the plan.
Calculation of the expected future years of service considers population decrements based on the
actuarial assumptions and is not weighted for benefits or compensation. Each expected future
service year is assigned an equal share of the initially determined prior service cost. The portion
of prior service cost to be recognized in net periodic pension cost in each of the future years is
determined by the service years rendered in that year.
The following chart illustrates the calculation of the expected future years of service for the
defined benefit plan of Company E. At the date of the amendment (January 1, 198720X0), the
company has 100 employees who are expected to receive benefits under the plan. Five percent
of that group (5 employees) are expected to leave (either retire or quit) in each of the next 20
years. Employees hired after that date do not affect the amortization. Initial estimates of
expected future years of service related to each amendment are subsequently adjusted only for a
curtailment.
FSP on Statement 158 (FSP FAS 158-1)
10
FSP FAS 158-1
Determination of Expected Years of Service
Service Years Rendered in Each Year
Individuals
A1–A5
B1–B5
C1–C5
D1–D5
E1–E5
F1–F5
G1–G5
H1–H5
I1–I5
J1–J5
K1–K5
L1–L5
M1–M5
N1–N5
O1–O5
P1–P5
Q1–Q5
R1–R5
S1–S5
T1–T5
Future
Service Years
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
1,050
Service Years Rendered
Amortization Fraction
1
2
3
4
5
6
7
8
9
Year
10
11
12
13
14
15
16
17
18
19
20
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050 1,050
FSP on Statement 158 (FSP FAS 158-1)
11
FSP FAS 158-1
Amortization of unrecognized prior service cost
On January 1, 198720X0, Company E granted grants retroactive credit for prior service
pursuant to a plan amendment. This The amendment generated generates unrecognized prior
service cost of $750,000 that is recognized as an increase in the pension liability and a
corresponding charge to other comprehensive income. The amortization of the unrecognized
prior service cost resulting from the plan amendment is subsequently amortized as a component
of net periodic pension cost based on the expected future years of service of active participants as
discussed in the previous paragraph. Other comprehensive income is adjusted each period as
prior service cost is amortized.
Amortization of Unrecognized Prior Service Cost
Year
198720X0
198820X1
198920X2
199020X3
199120X4
199220X5
199320X6
199420X7
199520X8
199620X9
199720Y0
199820Y1
199920Y2
200020Y3
200120Y4
200220Y5
200320Y6
200420Y7
200520Y8
200620Y9
Beginningof-Year Balance
750,000
678,571
610,714
546,428
485,714
428,571
375,000
325,000
278,571
235,714
196,428
160,714
128,571
100,000
75,000
53,571
35,714
21,428
10,714
3,571
Amortization
Rate
Amortization
Endof-Year Balance
100/1050
95/1050
90/1050
85/1050
80/1050
75/1050
70/1050
65/1050
60/1050
55/1050
50/1050
45/1050
40/1050
35/1050
30/1050
25/1050
20/1050
15/1050
10/1050
5/1050
71,429
67,857
64,286
60,714
57,143
53,571
50,000
46,429
42,857
39,286
35,714
32,143
28,571
25,000
21,429
17,857
14,286
10,714
7,143
3,571
678,571
610,714
546,428
485,714
428,571
375,000
325,000
278,571
235,714
196,428
160,714
128,571
100,000
75,000
53,571
35,714
21,428
10,714
3,571
0
FSP on Statement 158 (FSP FAS 158-1)
12
FSP FAS 158-1
Case 2—Using Straight-Line Amortization over Average Remaining Service Period
Determination of expected future years of service
To reduce the complexity and detail of the computations shown in Illustration 3, Case 1,
alternative amortization approaches that recognize the cost of retroactive amendments as a
component of net periodic pension cost more quickly may be consistently used (paragraph 26).
For example, a straight-line amortization of the cost over the average remaining service period of
employees expected to receive benefits under the plan is acceptable.
If Company E (Case 1) had elected elects to use straight-line amortization over the average
remaining service period of employees expected to receive benefits (1,050 future service
years/100 employees = 10.5 years), the amortization would have been is as follows:
Amortization of Unrecognized Prior Service Cost
Year
198720X0
198820X1
198920X2
199020X3
199120X4
199220X5
199320X6
199420X7
199520X8
199620X9
199720Y0
Beginningof-Year Balance
750,000
678,571
607,142
535,713
464,284
392,855
321,426
249,997
178,568
107,139
35,710
Amortizationa
71,429
71,429
71,429
71,429
71,429
71,429
71,429
71,429
71,429
71,429
35,710
Endof-Year Balance
678,571
607,142
535,713
464,284
392,855
321,426
249,997
178,568
107,139
35,710
0
_______________
a750,000 ÷ 10.5 = 71,429.
FSP on Statement 158 (FSP FAS 158-1)
13
FSP FAS 158-1
Illustration 4—Delayed Recognition in Net Periodic Pension Cost of Gains or LossesAccounting for Gains and Losses and
Timing of Measurements
This Statement provides for delayed recognition in net periodic pension cost of the effects of a number of types of events that
change the measures of the projected benefit obligation and the fair value of plan assets. Those events include retroactive plan
amendments and gains and losses. Gains and losses as defined in this Statement include the effects of changes in assumptions.
The following examples start with an assumed beginning-of-the-year funded status and show how a series of events change the
projected benefit obligation or the plan assets and how the effects of those events are recognized in the financial statements. Any
change in the projected benefit obligation or the plan assets (other than contributions and benefit payments) either is initially
recognized in other comprehensive income or is included in net periodic pension cost for the period. Employer contributions to a
funded plan decrease a recognized pension liability or increase a recognized pension asset. Benefit payments from a funded plan
reduce the pension obligation and the plan assets equally, with no effect on the employer’s statement of financial position. For
simplicity, all illustrations ignore the effects of income taxes, and all contributions and benefit payments are assumed to occur on the
last day of the year. Also, assumed discount rates and expected long-term rates of return are included for illustrative purposes only
and are not meant to represent assumptions that would be appropriate at any given time.
The following shows the funded status of Company I’s pension plan at December 31, 1986 and its assumptions and expected
components of net periodic pension cost for the following year (all amounts are in thousands):
FSP on Statement 158 (FSP FAS 158-1)
14
FSP FAS 158-1
DECEMBER 1986—INITIAL SITUATION
Assumptions:
Discount rate
Expected long-term rate of return on plan assets
Average remaining service
Actual
12/31/86
Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized net obligation existing
at January 1, 1987
Unrecognized prior service cost
Unrecognized net (gain) or loss
(Accrued)/prepaid
FSP on Statement 158 (FSP FAS 158-1)
$(1,000)
800
(200)
$
200
0
0
0
10.00%
10.00%
10 years
For
1987
Projected
12/31/87
$(1,060)
880
(180)
180
0
0
$
0
15
FSP FAS 158-1
$ 60a
100
(80)
Service cost component
Interest cost component
Expected return on assets
Amortization of:
Unrecognized net obligation existing
at January 1, 1987
Unrecognized prior service cost
Unrecognized net (gain) or loss
Net cost
20
0
0
$100
Contribution
Benefits paid
$100
$100
Company I elected to apply the provisions of this Statement as of January 1, 1987 rather than as of an earlier date. Also, the
company elected to measure pension-related amounts as of year-end. Alternatively, the company could have chosen to make the
measurements as of another date not earlier than September 30. (Throughout this illustration it is assumed that the fair value of plan
assets exceeds the accumulated benefit obligation and, therefore, no recognition of an additional minimum liability is required. For
simplicity, all contributions and benefit payments are assumed to occur on the last day of the year.)
____________________
aThroughout this illustration the service cost component is assumed as an input rather than calculated as part of the illustration.
FSP on Statement 158 (FSP FAS 158-1)
16
FSP FAS 158-1
198720X1—LIABILITY LOSS
When Company I’s plan assets and obligations were measured at December 31, 198720X1, the amount of the projected benefit
obligation was not equal to the expected amount. Because the discount rate had declined to 9 percent and for various other reasons not
specifically identified, the projected benefit obligation was higher than had been projected (a loss had occurred). The results were as
follows:
Actual for 20X1
Assumptions:
Projected for 20X1
and Projected for 20X2
Discount rate
10.00%
9.00%
Expected long-term rate of return on plan assets
10.00%
10.00%
Average remaining service
10 years
10 years
Actual
12/31/86X0
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
Amounts recognized in accumulated
other comprehensive income:
Unrecognized net obligation existing
at January 1, 1987
Transition obligation
Unrecognized pPrior service cost
Unrecognized nNet (gain) or loss
(Accrued)/prepaid)
$(1,000)
800
$ (200)
$(1,060)
880
$ (180)
$
$
$
FSP on Statement 158 (FSP FAS 158-1)
For
Projected
198720X1
12/31/87X1
(Amounts in thousands)
200
0
0
0200
180
0
0
$ 0180
Actual
12/31/87X1
$(1,200)
880
$ (320)
$ 180
0
140
$ 0320
For
198820X2
Projected
12/31/88X2
$(1,266)b
968c
$ (298)
$
160
0
138
$ 0298
17
FSP FAS 158-1
Service cost component
Interest cost component
Expected return on assets
Market-related value of assets
Actual return on assets—(increase)
/decrease
Amortization of:
Unrecognized net obligation
existing at January 1, 1987
Transition obligation
Unrecognized pPrior service cost
Unrecognized nNet (gain) or loss
Net periodic pension cost
Contribution
Benefits paid
FSP on Statement 158 (FSP FAS 158-1)
$ 60a
100
(80)
$
800
$ 72
108
(88)
$
880
(80)
20
0
0d
$100
20
0
2d
$114
$100
$100
$114
$114
18
FSP FAS 158-1
____________________
aThroughout this illustration, the service cost component is assumed as an input rather than calculated as part of the illustration.
b(Actual projected benefit obligation at 12/31/87X1) + (service component) + (interest component) – (benefits paid).
c(Actual plan assets at 12/31/87X1) + (expected return on assets) + (contributions) – (benefits paid).
dParagraph 32 provides that net periodic pension cost may be based on unrecognized net gain or loss as of the beginning of the period. In the year of transition
(1987) the beginning balance of unrecognized net gain or loss is zero by definition. The minimum amortization of the unrecognized net gain or loss included in
beginning accumulated other comprehensive income (paragraph 32) is calculated as follows:
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive incomeat 1/1
Plus asset gain or less asset loss not yet in market-related value of
assets at 1/1—(fair value of plan assets) – (market-related value
of plan assets)
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income subject to amortization
Corridor = 10% of the greater of projected benefit obligation
or market-related value of assets at 1/1
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income outside corridor
× 1/average remaining service
Amortization recognized in net periodic pension cost
FSP on Statement 158 (FSP FAS 158-1)
198720X1
198820X2
$ 0
$140
0
0
0
140
100
120
0
0.10
$ 0
20
0.10
$ 2
19
FSP FAS 158-1
198820X2—ASSET GAIN
When Company I’s plan assets and obligations were measured at December 31, 198820X2, the amount of plan assets was not
equal to the expected amount because of market performance better than the expected or assumed 10 percent. The results were as
follows:
Actual for 20X2
and Projected for 20X3
Assumptions:
Projected for 20X2
Discount rate
9.00%
9.00%
Expected long-term rate of return on plan assets
10.00%
10.00%
Average remaining service
10 years
10 years
Actual
12/31/87X1
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
$(1,200)
880
$ (320)
Amounts recognized in accumulated
other comprehensive income:
Unrecognized net obligation existing at
January 1, 1987
$ 180
Transition obligation
Unrecognized pPrior service cost
0
Unrecognized nNet (gain) or loss
140
$ 0320
(Accrued)/prepaid
FSP on Statement 158 (FSP FAS 158-1)
For
Projected
Actual
198820X2
12/31/88X2
12/31/88X2
(Amounts in thousands)
$(1,266)
968
$ (298)
$
$
160
0
138
0298
For
198920X3
Projected
12/31/89X3
$(1,266)
1,068
$ (198)
$(1,345)
1,167
$ (178)
$ 160
0
38
$ 0198
$ 140
0
38
$ 0178
20
FSP FAS 158-1
Service cost component
Interest cost component
Expected return on assets
Market-related value of assets
Actual return on assets—(increase)
/decrease
Amortization of:
Unrecognized net obligation
existing at January 1, 1987
Transition obligation
Unrecognized pPrior service cost
Unrecognized nNet (gain) or loss
Net periodic pension cost
$ 72
108
(88)
$
$ 76
114
(99)g
880
Contribution
Benefits paid
$
(80)
988h
(188)
20
0
2i
$114
20
0
0i
$111
$114
$114
$111
$111
____________________
gExpected return on plan assets = (expected long-term rate of return on plan assets) × (market-related value of plan assets). If contributions occurred other than
at the end of the year, market-related value would consider those amounts.
hMarket-related asset values may be calculated in a variety of ways. This example uses an approach that adds in 20% of each of the last five years’ gains and
losses. The only objective of the market-related calculation is to reduce the volatility of net periodic pension cost.
Market-related value of assets at 1/1
Expected return on assets
Contributions
Benefits paid
20% of last five years’ asset gains and (losses)
Market-related value of assets at 12/31
FSP on Statement 158 (FSP FAS 158-1)
$ 880
88
114
(114)
20
$ 988
21
FSP FAS 158-1
iThe minimum Aamortization of the unrecognized net gain or loss included in beginning accumulated other comprehensive income (paragraph 32) is calculated
as follows:
198820X2
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive incomeat 1/1
Plus asset gain or less asset loss not yet in market-related value of
assets at 1/1—(fair value of plan assets) – (market-related value
of plan assets)
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income subject to amortization
Corridor = 10% of the greater of projected benefit obligation
or market-related value of assets at 1/1
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income outside corridor
× 1/average remaining service
Amortization recognized in net periodic pension cost
FSP on Statement 158 (FSP FAS 158-1)
198920X3
$140
$ 38
0
80
140
118
120
127
20
0.10
$ 2
0
0.10
$ 0
22
FSP FAS 158-1
198920X3—ASSET LOSS AND LIABILITY GAIN
When Company I’s plan assets and obligations were measured at December 31, 198920X3, both an asset loss and a liability gain
were discovered:
Actual for 20X3
and Projected for 20X4
Assumptions:
Projected for 20X3
Discount rate
9.00%
9.25%
Expected long-term rate of return on plan assets
10.00%
10.00%
Average remaining service
10 years
10 years
Actual
12/31/88X2
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
$(1,266)
1,068
$ (198)
Amounts recognized in accumulated
other comprehensive income:
Unrecognized net obligation existing at
January 1, 1987
Transition obligation
$ 160
0
Unrecognized pPrior service cost
Unrecognized nNet (gain) or loss
38
(Accrued)/prepaid
$ 0198
FSP on Statement 158 (FSP FAS 158-1)
For
Projected
Actual
198920X3
12/31/89X3
12/31/89X3
(Amounts in thousands)
$(1,345)
1,167
$ (178)
$
140
0
38
$ 0178
$(1,320)
1,097
$ (223)
$ 140
0
83
$ 0223
For
199020X4
Projected
12/31/90X4
$(1,409)
1,206
$ (203)
$
120
0
83
$ 0203
23
FSP FAS 158-1
Service cost component
Interest cost component
Expected return on assets
Market-related value of assets
Actual return on assets—(increase)
/decrease
Amortization of:
Unrecognized net obligation
existing at January 1, 1987
Transition obligation
Unrecognized pPrior service cost
Unrecognized nNet (gain) or loss
Net periodic pension cost
Contribution
Benefits paid
$ 76
114
(99)
$
$ 79
122
(109)
988
$
(188)
1,093k
(29)
20
0
0l
$111
20
0
0l
$112
$111
$111
$112
$112
____________________
kMarket-related asset values may be calculated in a variety of ways. This example uses an approach that adds in 20% of each of the last five years’ gains and
losses. The only objective of the market-related calculation is to reduce the volatility of net periodic pension cost.
Market-related value of assets at 1/1
Expected return on assets
Contributions
Benefits paid
20% of last five years’ asset gains and (losses) = .20 (100 – 70)
Market-related value of assets at 12/31
FSP on Statement 158 (FSP FAS 158-1)
$ 988
99
111
(111)
6
$1,093
24
FSP FAS 158-1
lThe minimum Aamortization of the unrecognized net gain or loss included in beginning accumulated other comprehensive income (paragraph 32) is calculated
as follows:
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive incomeat 1/1
Plus asset gain or less asset loss not yet in market-related value of
assets at 1/1—(fair value of plan assets) – (market-related value
of plan assets)
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income subject to amortization
Corridor = 10% of the greater of projected benefit obligation
or market-related value of assets at 1/1
Unrecognized nNet (gain) or loss included in beginning
accumulated other comprehensive income outside corridor
× 1/average remaining service
Amortization recognized in net periodic pension cost
FSP on Statement 158 (FSP FAS 158-1)
198920X3
199020X4
$ 38
$ 83
80
4
118
87
127
132
0
0.10
$ 0
0
0.10
$ 0
25
FSP FAS 158-1
Illustration 5—Recognition of Pension Liability, Including Minimum Liability
[This illustration has been deleted. See Status page.]
Case 1—Minimum Liability Less Than Unrecognized Prior Service Cost
Company K elected to apply the provisions of this Statement, including those requiring
recognition of minimum liability, for its 1986 financial statements. The funded status of its plan
for the years 1988 through 1991 is shown below.
1988
FUNDED STATUS—COMPANY K
Assets and obligations:
Accumulated benefit obligation
Plan assets at fair value
Unfunded accumulated benefits
Overfunded accumulated benefits
Projected benefit obligation
Plan assets at fair value
Items not yet recognized in earnings:
Unrecognized net obligation
(net asset) at January 1, 1986
Unrecognized prior service cost
Unrecognized net gain
(Accrued)/prepaid pension cost
FSP on Statement 158 (FSP FAS 158-1)
$(1,254)
1,165
$ (89)
As of December 31,
1989
1990
(in thousands)
$(1,628)
1,505
$ (123)
$(1,616)
1,622
$
1991
$(1,554)
1,517
$ (37)
6
$(1,879)
1,165
$(2,442)
1,505
$(2,424)
1,622
$(2,331)
1,517
280
715
(251)
$
30
260
1,314
(557)
$ 80
240
1,172
(460)
$ 150
220
1,039
(476)
$ (31)
26
FSP FAS 158-1
DETERMINATION OF AMOUNTS TO BE RECOGNIZED
(Accrued)/prepaid pension cost at
beginning of year
Net periodic pension cost
Contribution
(Accrued)/prepaid pension cost at
end of year
Required minimum liability (unfunded
accumulated benefits)
Adjustment required to reflect
minimum liability:
Additional liabilitya
Intangible asset (not to exceed
unrecognized prior service cost)
Balance of additional liability
Balance of intangible asset
$ 0
(304)
334
$
30
$
30
(335)
385
$
80
$
80
(397)
467
$ 150
(361)
180
$ 150
$ (31)
$ (37)
$ (89)
$ (123)
$
$ (119)
$ (84)
$ 203
$
(6)
$ 119
$
$ (203)
$
6
$
$
$ (6)
$ 6
$ (119)
$ 119
84
$ (203)
$ 203
0
0
0
____________________
aThis amount is equal to unfunded accumulated benefits, plus prepaid (or minus accrued) pension cost, minus the
previous balance.
For financial statement presentation, the additional liability is combined with the
(accrued)/prepaid pension cost.
FSP on Statement 158 (FSP FAS 158-1)
27
FSP FAS 158-1
Journal Entries
The journal entries required to reflect the accounting for the company’s pension plan for
the years 1988 through 1991 are as follows (in thousands):
Year 1988
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
304
304
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
334
334
Journal Entry 3
Intangible asset
119
Additional liability
To record an additional liability to reflect the required
minimum liability (For financial statement presentation,
the additional liability account balance is combined with
the accrued/prepaid pension cost account balance. Since
prepaid pension cost of $30 has been recognized, an
additional liability of $119 is needed to reflect the required
minimum liability of $89 [equal to unfunded accumulated
benefits]. Because the additional liability is less than
unrecognized prior service cost, an intangible asset also is
recognized.) (paragraphs 36 and 37)
119
Year 1989
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
335
335
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
FSP on Statement 158 (FSP FAS 158-1)
385
385
28
FSP FAS 158-1
Journal Entry 3
Intangible asset
Additional liability
To adjust the additional liability to reflect the required
minimum liability (For financial statement presentation,
the additional liability account balance is combined with
the accrued/prepaid pension cost account balance. The
required minimum liability is determined independently of
any prior years’ amounts. Since unfunded accumulated
benefits are $123 and a prepaid pension cost of $80 has
been recognized, the amount of the additional liability is
$203 or an increase of $84 from the previous period.
Because the balance of the additional liability is less
than unrecognized prior service cost, an intangible asset
also is recognized.) (paragraphs 36 and 37)
84
84
Year 1990
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
397
397
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
467
467
Journal Entry 3
Additional liability
Intangible asset
To reverse additional liability no longer required
(Since plan assets exceed accumulated benefits, no
additional liability is necessary.) (paragraph 38)
203
203
Year 1991
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
361
361
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
FSP on Statement 158 (FSP FAS 158-1)
180
180
29
FSP FAS 158-1
Journal Entry 3
Intangible asset
6
Additional liability
To record an additional liability to reflect the required
minimum liability amount (For financial statement presentation,
the additional liability account balance is combined with the
accrued/prepaid pension cost account balance. Since unfunded
accumulated benefits of $37 exceed unfunded accrued pension
cost of $31, recognition of an additional liability of $6 is
necessary. Because the balance of additional liability is less
than unrecognized prior service cost, an intangible asset also
is recognized.) (paragraphs 36 and 37)
FSP on Statement 158 (FSP FAS 158-1)
6
30
FSP FAS 158-1
Case 2—Minimum Liability in Excess of Unrecognized Prior Service Cost
Company L elected to apply the provisions of this Statement, including those requiring
recognition of minimum liability, for its 1986 financial statements. The funded status of its plan
for the years 1988 and 1989 is shown below.
As of December 31,
1989
1988
(in thousands)
FUNDED STATUS—COMPANY L
Assets and obligations:
Accumulated benefit obligation
Plan assets at fair value
Unfunded accumulated benefits
Overfunded accumulated benefits
Projected benefit obligation
Plan assets at fair value
Items not yet recognized in earnings:
Unrecognized prior service cost
Unrecognized net loss
(Accrued)/prepaid pension cost
FSP on Statement 158 (FSP FAS 158-1)
$(1,270)
1,200
$ (70)
$(1,290)
1,304
$
$(1,720)
1,200
$
92
486
58
14
$(1,807)
1,304
$
86
497
80
31
FSP FAS 158-1
DETERMINATION OF AMOUNTS TO BE RECOGNIZED
(Accrued)/prepaid pension cost at beginning of year
Net periodic pension cost
Contribution
(Accrued)/prepaid pension cost at end of year
Required minimum liability (unfunded accumulated
benefits)
Adjustment required to reflect minimum liability:
Additional liabilitya
Intangible asset (not to exceed unrecognized
prior service cost)
Charge to equity (excess of additional pension
liability over unrecognized prior service cost
Balance of additional liability
Balance of intangible asset
Balance of equity account
$ 0
(141)
199
$ 58
$ 58
(144)
166
$ 80
$
$
70
0
$ (128)
$ 128
$
92
$ (92)
$
36
$ (36)
$ (128)
$ 92
$ 36
$
$
$
0
0
0
_______________
aThis amount is equal to unfunded accumulated benefits, plus prepaid (or minus accrued) pension cost, minus the
previous balance.
For financial statement presentation, the additional liability is combined with the
(accrued)/prepaid pension cost.
FSP on Statement 158 (FSP FAS 158-1)
32
FSP FAS 158-1
Journal Entries
The journal entries required to reflect the accounting for the company’s pension plan for
the years 1988 and 1989 are as follows (in thousands):
Year 1988
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
141
141
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
199
199
Journal Entry 3
Excess of additional pension liability over
unrecognized prior service cost
Intangible asset
Additional liability
To record an additional liability to reflect the required
minimum liability (For financial statement presentation,
the additional liability account balance is combined with
the accrued/prepaid pension cost account balance. Since
prepaid pension cost of $58 has been recognized, an
additional liability of $128 is needed to reflect the required
minimum liability of $70 [equal to unfunded accumulated
benefits]. Because the additional liability is greater than
unrecognized prior service cost, an intangible asset is
recognized for the amount of additional liability up to the
amount of unrecognized prior service cost, and equity is
charged for the excess of the additional liability over
unrecognized prior service cost.) (paragraphs 36 and 37)
FSP on Statement 158 (FSP FAS 158-1)
36
92
128
33
FSP FAS 158-1
Year 1989
Journal Entry 1
Net periodic pension cost
Accrued/prepaid pension cost
To record net pension cost for the period (paragraph 35)
144
144
Journal Entry 2
Accrued/prepaid pension cost
Cash
To record contribution (paragraph 35)
166
166
Journal Entry 3
Additional liability
Excess of additional pension liability over
unrecognized prior service cost
Intangible asset
To reverse additional liability no longer required
(Since plan assets exceed accumulated benefits, no
additional liability is necessary.) (paragraph 38)
FSP on Statement 158 (FSP FAS 158-1)
128
36
92
34
FSP FAS 158-1
Illustration 6—Disclosure Requirements
[This illustration has been deleted. See Status page. Refer to the illustrations in paragraphs
C1 through C5 of Statement 132(R).]
Illustration 7—Accounting for a Business Combination
[This illustration has been deleted. See Status page.]
The following example illustrates how the liability (or asset) recognized by the acquiring
firm at the date of a business combination would be reduced in years subsequent to the date of
the business combination.
Company R purchased Company S on January 1, 1987. Company S sponsors a singleemployer defined benefit pension plan. The reconciliation of funded status of the Company S
plan before and after the combination was as follows (in thousands):
Precombination
Pension benefit obligation
Plan assets at fair value
Unrecognized loss
Unrecognized prior service cost
Liability recognized in the
statement of financial position—
unfunded accrued pension cost
Postcombination
$(1,000)
500
200
300
$(1,000)
500
0
0
$
$ (500)
0
In subsequent periods, net periodic pension cost would not include any amortization of
either the unrecognized prior service cost or the unrecognized loss existing at the date of the
combination. However, the funding of the plan is not directly affected by a business
combination. Whatever the basis of funding, it will, over time, reflect the past amendments and
losses that underlie those amounts. As they are reflected in the funding process, contributions
will, in some periods, exceed the net pension cost, and that will reduce the liability (unfunded
accrued pension cost) recognized at the date of acquisition.
FSP on Statement 158 (FSP FAS 158-1)
35
FSP FAS 158-1
Amendments to the Illustrations in Appendix B of Statement 88
6.
Appendix B of Statement 88 is amended as follows: [Added text is underlined and deleted
text is struck out.]
Appendix B
ILLUSTRATIONS
57. This appendix contains separate illustrations of the following requirements of this
Statement:
1.
2.
3.
4.
5.
6.
Accounting for a plan termination without a replacement defined benefit plan
Accounting for the settlement of a pension obligation
Accounting for a plan curtailment
Calculation of unrecognized prior service cost associated with services of terminated
employees
Accounting for a plan curtailment when termination benefits are offered to employees
Transition for an employer that completed an asset reversion prior to the initial application
of Statement 87 [Deleted].
Illustration 1—Accounting for a Plan Termination without a Replacement Defined Benefit
Plan
Company A sponsored a final-pay noncontributory defined benefit plan. On November 16,
198820X0, the employer terminated the plan, settled the accumulated benefit obligation of
$1,500,000 (nonvested benefits became vested upon termination of the plan) by purchasing
nonparticipating annuity contracts, and withdrew excess assets. Defined benefits were not
provided under any successor plan. The plan ceased to exist as an entity.
As a result, Company A recognized a gain of $900,000 in earnings, determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
36
FSP FAS 158-1
Before
Termination
Assets and obligations:
Accumulated benefit obligation
Effects of projected future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
$(1,500)
(400)
(1,900)
2,100
$
200
Company A
(in thousands)
Effect of
Termination
$ 1,500a
400b
1,900
(1,500)a
(600)c
$ (200)
Items not yet recognized in earningsAmounts recognized in accumulated other comprehensive income:
Unrecognized net asset at tTransition assetd,e
$(200)
$200
e
Unrecognized net gain subsequent to transitionNet gain
(300)
300
(Accrued)/prepaid pension cost on the statement of
financial position
$(3500)
$3500
FSP on Statement 158 (FSP FAS 158-1)
After
Termination
$
$
0
0
0
0
0
$0
0
$0
37
FSP FAS 158-1
____________________
a The accumulated benefits of $1,500 were settled by using an equivalent amount of plan assets to purchase nonparticipating annuity contracts.
b The effects of projected future compensation levels ceased to be an obligation of the plan or the employer due to the termination of all plan participants. Under
paragraph 13 of this Statement, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any existing
unrecognized net loss included in accumulated other comprehensive income. Because the previously unrecognized existing amount included in accumulated
other comprehensive income in this case was a gain ($200 unrecognized net asset at transition remaining transition asset plus $300 unrecognized net gain
subsequent to transition), the $400 gain from the curtailment was recognized.
c Plan assets, in excess of the amount used to settle the pension benefits, were withdrawn from the plan.
d An unrecognized net asset at transition A transition asset remaining in accumulated other comprehensive income is treated as an unrecognized a net gain for
purposes of this Statement (paragraph 21).
e A pro rata amount of the maximum gain (paragraph 9), which includes the unrecognized net gain subsequent to transition net gain included in accumulated
other comprehensive income ($300) and the unamortized net asset from transition asset remaining in accumulated other comprehensive income ($200), is
recognized due to the settlement. The projected benefit obligation was reduced from $1,500 to $0 (the curtailment initially reduced the projected benefit
obligation from $1,900 to $1,500 as described in footnote b), a reduction of 100 percent. Accordingly, the entire unrecognized net gain amount included in
accumulated other comprehensive income of $500 ($300 + $200) was recognized in earnings.
The journal entry required to reflect the accounting for the plan termination was:
Cash
600
Accrued/prepaid pension cost
300
Other comprehensive income—transition asset
200
Other comprehensive income—net gain
300
Pension asset
Gain from plan termination
The gain from the plan termination without a replacement defined benefit plan was composed of the following:
Gain from curtailment
$400
Gain from settlement
500
Total gain
$900
FSP on Statement 158 (FSP FAS 158-1)
200
900
38
FSP FAS 158-1
Illustration 2—Accounting for the Settlement of a Pension Obligation
The following examples illustrate the accounting for the settlement of a pension obligation
in three specific situations. The first example (Company B) had an unrecognized net obligation
at the date of transition to Statement 87 a transition obligation remaining in accumulated other
comprehensive income, and the second and third examples (Company C and Company D) each
had unrecognized net assets at the date of transition a transition asset remaining in accumulated
other comprehensive income. Each company settled a portion of the obligation subsequent to
transition to Statement 87. Company B had a retroactive plan amendment after transition;
Company C and Company D did not.
Example 2A—Projected Benefit Obligation Exceeds Plan Assets
Company B sponsors a final-pay noncontributory defined benefit plan. On December 31,
198820X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of nonparticipating annuity contracts.
As a result, Company B recognized a gain of $195,000 in earnings, determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
39
FSP FAS 158-1
Before
Settlement
Assets and obligations:
Vested benefit obligation
$ (1,300)
Nonvested benefits
(200)
Accumulated benefit obligation
(1,500)
Effects of projected
future compensation levels
(500)
Projected benefit obligation
(2,000)
Plan assets at fair value
1,400
Funded status and recognized liability $ (600)
Company B
(in thousands)
Effect of
Settlement
After
Settlement
$ 1,300a
$
0
(200)
(200)
1,300
(500)
(700)
100
$ (600)
1,300
(1,300)a
$
0
Items not yet recognized in earnings
Amounts recognized in accumulated other comprehensive income:
Unrecognized net obligation
at transitionb
Transition obligationb
$ 650
Unrecognized prior service
cost from amendment
subsequent to transition
Prior service cost
150
Unrecognized net gain
subsequent to transitionc
Net gainc
(300)
$
(Accrued)/prepaid pension
cost on the statement of
financial position
$ 500(100)
$
$
650
150
195
195
(105)
$
95695
___________________
aThe vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts.
bAn unrecognized net obligation at transition A transition obligation remaining in accumulated other comprehensive
income is treated as unrecognized prior service cost included in accumulated other comprehensive income and
therefore is not affected by settlement of the obligation (paragraph 21).
cA pro rata portion of the maximum gain (paragraph 9), the unrecognized net gain subsequent to transition net gain
included in accumulated other comprehensive income, is recognized due to the settlement. The projected benefit
obligation was reduced from $2,000 to $700, a reduction of 65 percent. Accordingly, 65 percent of the maximum
gain of $300, a gain of $195, was recognized in earnings. The journal entry required to reflect the accounting for the
plan settlement was:
Accrued/prepaid pension cost
Other comprehensive income—net gain
Gain from settlement
FSP on Statement 158 (FSP FAS 158-1)
195
195
195
40
FSP FAS 158-1
Example 2B—Plan Assets Exceed the Projected Benefit Obligation
Company C sponsors a final-pay noncontributory defined benefit plan. On December 31,
198820X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of nonparticipating annuity contracts.
As a result, Company C recognized a gain of $325,000 in earnings, determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
41
FSP FAS 158-1
Before
Settlement
Assets and obligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effects of projected
future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
$ (1,300)
(200)
(1,500)
(500)
(2,000)
2,100
$
100
Company C
(in thousands)
Effect of
Settlement
$ 1,300a
After
Settlement
1,300
0
(200)
(200)
1,300
(1,300)a
$
0
$
(500)
(700)
800
100
$
(70)
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Unrecognized net asset at transitionb,c
Transition assetb,c
$ (200)
$
Unrecognized net gain
subsequent to transitionc
Net gainc
(300)
(Accrued)/prepaid pension
cost on the statement of
$ (500)(400)
$
financial position
130
$
195
325
(105)
$(75)(175)
___________________
a The vested benefits of $1,300 were settled by using plan assets to purchase nonparticipating annuity contracts.
b An unrecognized net asset at transition A transition asset remaining in accumulated other comprehensive income
is treated as an unrecognized net gain a net gain included in accumulated other comprehensive income for purposes
of this Statement (paragraph 21).
c A pro rata amount of the maximum gain (paragraph 9), which includes the unrecognized net gain subsequent to
transition net gain included in accumulated other comprehensive income ($300) and the unamortized net asset from
transition transition asset remaining in accumulated other comprehensive income ($200), is recognized due to the
settlement. The projected benefit obligation was reduced from $2,000 to $700, a reduction of 65 percent.
Accordingly, 65 percent of the maximum gain of $500 ($300 + $200), a gain of $325, was recognized in earnings.
The journal entry required to reflect the accounting for the plan settlement was:
Accrued/prepaid pension cost
Other comprehensive income—transition asset
Other comprehensive income—net gain
Gain from settlement
FSP on Statement 158 (FSP FAS 158-1)
325
130
195
325
42
FSP FAS 158-1
Example 2C—Plan Assets Exceed the Projected Benefit Obligation and Participating Annuity Contract
Is Purchased to Settle Benefits
Company D sponsors a final-pay noncontributory defined benefit plan. On December 31,
198820X0, the plan settled the vested benefit portion ($1,300,000) of the projected benefit
obligation through the purchase of a participating annuity contract at a cost of $1,430,000. The
plan could have purchased a nonparticipating contract covering the same benefits for $1,300,000.
The participation features of the contract warranted a conclusion that its purchase constituted a
settlement.
As a result, Company D recognized a gain of $240,000 (rounded) in earnings, determined
as follows:
FSP on Statement 158 (FSP FAS 158-1)
43
FSP FAS 158-1
Before
Settlement
Assets and oObligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effects of projected future compensation levels
Projected benefit obligation
$(1,300)
(200)
(1,500)
(500)
(2,000)
$1,300a
_____
1,300
_____
1,300
2,100
2,100
130a
(1,430)a
(1,300)
Plan assets at fair value:
Participation right
Other plan assets
Funded status and recognized asset
Company D
(in thousands)
Effect of
Settlement
$
100
$
0
Items not yet recognized in earningsAmounts recognized in accumulated other comprehensive income:
Unrecognized net asset at transitionb,c
Transition assetb,c
$(200)
$130d
Unrecognized net gain subsequent to transitionc
Net gainc
(300)
110d
(Accrued)/prepaid pension cost on the statement of
financial position
$(500)(400)
$240
FSP on Statement 158 (FSP FAS 158-1)
After
Settlement
$ 0
(200)
(200)
(500)
(700)
130
670
800
$100
$(70)
(190)
$(160)(260)
44
FSP FAS 158-1
____________________
a The vested benefits of $1,300 were settled by using $1,430 of plan assets to purchase a participating annuity contract. However, a nonparticipating contract
covering the same benefits could have been purchased for $1,300. The plan paid the additional $130 to obtain the participation right.
b An unrecognized net asset at transition A transition asset remaining in accumulated other comprehensive income is treated as an unrecognized net gain a net
gain included in accumulated other comprehensive income for purposes of this Statement (paragraph 21).
c A pro rata amount of the maximum gain (paragraph 9), which includes the unrecognized net gain subsequent to transition net gain included in accumulated
other comprehensive income ($300) and the unamortized net asset from transition transition asset remaining in accumulated other comprehensive income ($200),
was recognized due to the settlement. However, any gain on a settlement that uses a participating annuity contract shall be computed by first reducing the
maximum gain by the cost of the participation right [$200 + ($300 – $130) = $370]. The projected benefit obligation was reduced from $2,000 to $700, a
reduction of 65 percent. Accordingly, a gain of $240 (rounded) was recognized (.65 × $370). The journal entry required to reflect the accounting for the plan
settlement was:
Accrued/prepaid pension cost
240
Other comprehensive income—transition asset
130
Other comprehensive income—net gain
110
Gain from plan settlement
240
d The amount of gain from settlement was allocated as follows (rounded):
Unrecognized net asset at transition Transition asset (.65 × $200)
$ 130
Unrecognized net gain subsequent to Net gaintransition [.65 × ($300 – $130)]
110
$ 240
FSP on Statement 158 (FSP FAS 158-1)
45
FSP FAS 158-1
Illustration 3—Accounting for a Plan Curtailment
The following examples illustrate the accounting for a curtailment in two specific
situations. The first example (Company E) had an unrecognized net obligation at the date of
transition to Statement 87 a transition obligation remaining in accumulated other comprehensive
income and a retroactive plan amendment after transition to Statement 87. The second example
(Company F) had an unrecognized net asset at the date of transition a transition asset remaining
in accumulated other comprehensive income. Both companies curtailed their plans subsequent
to transition to Statement 87.
Example 3A—Disposal of a Component—Projected Benefit Obligation Exceeds Plan Assets
Company E sponsors a final-pay noncontributory defined benefit plan. On January 1,
198820X0, (one year after transition) the company had a retroactive plan amendment resulting in
$800,000 of prior service cost. On December 31, 198920X1, the management of Company E
committed itself to a formal plan to dispose of a component of the entity. In connection with the
disposal, the number of employees accumulating benefits under the plan would be reduced
significantly. The portion of the projected benefit obligation based on the expected future
compensation levels of the terminated employees was $90,000, and nonvested benefits of the
terminated employees amounted to $20,000. The plan also had an unrecognized net obligation at
the date of transition to Statement 87 a transition obligation remaining in accumulated other
comprehensive income that is treated as unrecognized prior service cost included in accumulated
other comprehensive income for purposes of applying this Statement. The remaining expected
future years of service associated with those employees present at the date of transition was
reduced by 30 percent due to the termination of employees. Accordingly, 30 percent of the
unrecognized net obligation remaining unamortized transition obligation remaining in
accumulated other comprehensive income at December 31, 198920X1, was a loss which
amounted to $120,000.
The unrecognized prior service cost included in accumulated other comprehensive income
(which relates to the plan amendment of January 1, 198820X0) associated with the previously
expected years of service of the terminated employees that will not be rendered was a loss which
amounted to $160,000.
The sum of the effects resulting from the plan curtailment was a loss of $170,000
recognized in earnings, determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
46
FSP FAS 158-1
Before
Curtailment
Assets and obligations:
Vested benefit obligation
$ (1,300)
Nonvested benefits
(200)
Accumulated benefit obligation
(1,500)
Effects of projected
future compensation levels
(500)
Projected benefit obligation
(2,000)
Plan assets at fair value
1,400
Funded status and recognized liability $ (600)
Company E
(in thousands)
Effect of
Curtailment
$
20
20
90
110a
$
110
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Unrecognized net obligation at transitionb
Transition obligationb
$400
$(120)b
Unrecognized pPrior service
cost resulting from
651
(160)c
plan amendmentc
Unrecognized net gain
subsequent to transition
Net gain
(151)
(Accrued)/prepaid pension
cost on the statement of
financial position
$300900
$(280)(170)
After
Curtailment
$ (1,300)
(180)
(1,480)
(410)
(1,890)
1,400
$ (490)
$280
491
(151)
$130620
___________________
a Under paragraph 13 of this Statement, the gain (that is, the decrease in the projected benefit obligation) resulting
from the curtailment is first offset against any existing unrecognized net loss included in accumulated other
comprehensive income. Because the previously unrecognized amount included in accumulated other comprehensive
income in this case was a gain of ($151 unrecognized net gain subsequent to transition), the $110 gain from the
curtailment was recognized in earnings.
The journal entry required to reflect the recognition of the curtailment gain in earnings was:
Pension liability
110
110
Curtailment gain
b Because the plan had an unrecognized net obligation at the date of transition to Statement 87 a transition
obligation remaining in accumulated other comprehensive income, the unrecognized that amount is treated as prior
service cost included in accumulated other comprehensive income for purposes of applying this Statement. The
remaining expected future years of service associated with those employees present at the date of transition was
reduced by 30 percent due to the termination of employees. Accordingly, 30 percent of the unrecognized net
obligation remaining unamortized transition obligation included in accumulated other comprehensive income at the
date of the curtailment was recognized in earnings which amounted to $120.
The journal entry required to reflect the recognition of the transition obligation in earnings was:
Curtailment loss
120
Other comprehensive income—transition obligation
120
FSP on Statement 158 (FSP FAS 158-1)
47
FSP FAS 158-1
c The unrecognized prior service cost included in accumulated other comprehensive income (which related to the
plan amendment of January 1, 198820X0) associated with the previously expected years of service of the terminated
employees that will not be rendered was $160. That amount was recognized in earnings.
The journal entry required to reflect the recognition of the prior service cost in earnings was:
Curtailment loss
160
Other comprehensive income—prior service cost
160
FSP on Statement 158 (FSP FAS 158-1)
48
FSP FAS 158-1
Example 3B—Plan Assets Exceed the Projected Benefit Obligation
Company F sponsors a final-pay noncontributory defined benefit plan. On July 27,
199020X2, the management of Company F decided to reduce significantly the operations of a
line of business products. Although the that decision did not result in closing down any
facilities, it required the termination of a significant number of employees. The termination of
employees took place on November 1, 199020X2.
The portion of the projected benefit obligation based on expected future compensation
levels of the terminated employees was $90,000, and the portion of nonvested benefits related to
the terminated employees was $20,000.
As a result, Company F recognized a gain of $110,000 on November 1, 199020X2,*
determined as follows:
___________________
* Under paragraph 14 of this Statement, if the sum of the effects resulting from the curtailment is a net loss, it is to
be recognized when it is probable that the curtailment will occur and the effects are reasonably estimable. If the sum
of those effects is a net gain, it is to be recognized when the related employees terminate. Company F estimated at
July 27, 199020X2 that a net curtailment gain would result. Accordingly, the gain was recognized on the date
employees terminated (November 1, 199020X2) and was based on plan assets and obligations measured as of that
date.
FSP on Statement 158 (FSP FAS 158-1)
49
FSP FAS 158-1
Company F
(in thousands)
As of November 1, 199020X2
Before
Realization of
Curtailment
Gain
Assets and obligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effects of projected
future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
$ (1,300)
(300)
(1,600)
(400)
(2,000)
2,100
$ 100
Effect of
Curtailment
$ 20
20
90
110a
$110
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Unrecognized net asset at transitiona
Transition asseta
$(200)
$0a
Unrecognized net loss
subsequent to transition
Net loss
100
0a
(Accrued)/prepaid pension
cost on the statement of
financial position
$(100)0
$1100
After
Realization of
Curtailment
Gain
$(1,300)
(280)
(1,580)
(310)
(1,890)
2,100
$ 210
$(200)
100
$110(100)
___________________
a Under paragraph 13 of this Statement, the curtailment gain (that is, the decrease in the projected benefit obligation)
is first offset against any existing unrecognized net loss included in accumulated other comprehensive income. The
unrecognized net asset from transition transition asset remaining in accumulated other comprehensive income is
treated as an unrecognized net gain a net gain included in accumulated other comprehensive income (paragraph 21).
Thus, the net amount included in accumulated other comprehensive income of previously unrecognized gain or loss
was a gain of $100 (unrecognized net loss included in accumulated other comprehensive income of $100 plus the
remaining unrecognized net asset from transition transition asset remaining in accumulated other comprehensive
income of $200). Because the previously unrecognized net amount included in accumulated other comprehensive
income was a gain, the $110 gain from curtailment was recognized in earnings.
If the previously existing unrecognized net amount included in accumulated other comprehensive income had
been a loss including the unrecognized net asset at transition transition asset remaining in accumulated other
comprehensive income and that loss exceeded the curtailment gain, the curtailment gain would have been offset, and
no gain would have been recognized in earnings.
The journal entry required to reflect the accounting for the plan curtailment was:
Pension assetAccrued/prepaid pension cost
110
Gain from curtailment
110
FSP on Statement 158 (FSP FAS 158-1)
50
FSP FAS 158-1
Illustration 4—Calculation of Unrecognized Prior Service Cost Associated with Services of
Terminated Employees
Company S sponsors a final-pay noncontributory defined benefit plan. On January 1,
198820X0, the company had a retroactive plan amendment resulting in prior service cost of
$800,000.
The unrecognized prior service cost included in accumulated other comprehensive income
that results from the plan amendment is amortized based on the expected future years of service
of participants active as of January 1, 198820X0 who are expected to receive benefits under the
plan.
As of January 1, 198820X0, the company had 100 employees who were expected to
receive benefits under the plan. Based on the assumption that 5 percent of that group (5
employees) leaves (either quits or retires) in each of the next 20 years, the expected future years
of service amounted to 1,050.
The amount of prior service cost associated with each expected future year of service is
$762 ($800,000 ÷ 1,050). Exhibit A illustrates the originally expected expiration of the
anticipated service years.
On December 31, 199020X2, Company S terminated 25 employees active at the date of the
plan amendment. Immediately prior to the curtailment, 765 expected future years of service
remained (1,050 less 285 years of service rendered in the previous 3 years). The curtailment
reduced the total expected future years of service at December 31, 199020X2 from 765 to 555
(210) as illustrated in Exhibit B. Therefore, Company S will recognize $160,020 ($762 × 210)
of prior service cost in earnings in conjunction with the curtailment.
FSP on Statement 158 (FSP FAS 158-1)
51
FSP FAS 158-1
Exhibit A
Determination of Expected Years of Service Rendered in Each Year
Before Curtailment
Individuals
Future
Service Years88X0
A1–A5
5
Year
89X1
90X2
91X3
92X4
93X5
94X6
95X7
96X8
97X9
98Y0
99Y1
00Y2
01Y3
02Y4
03Y5
04Y6
05Y7
06Y8
07Y9
5
B1–B5
10
5
5
C1–C5
15
5
5
D1–D5
20
5
5
5
5
E1–E5
25
5
5
5
5
5
F1–F5
30
5
5
5
5
5
5
G1–G5
35
5
5
5
5
5
5
H1–H5
40
5
5
5
5
5
5
5
5
I1–I5
45
5
5
5
5
5
5
5
5
5
J1–J5
50
5
5
5
5
5
5
5
5
5
K1–K5
55
5
5
5
5
5
5
5
5
5
5
5
L1–L5
60
5
5
5
5
5
5
5
5
5
5
5
5
M1–M5
65
5
5
5
5
5
5
5
5
5
5
5
5
5
N1–N5
70
5
5
5
5
5
5
5
5
5
5
5
5
5
O1–O5
75
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
P1–P5
80
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Q1–Q5
85
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
R1–R5
90
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
S1–S5
95
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
T1–T5
100
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
1,050
Service Years Rendered
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
Amortization Fraction
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
950
855
765
680
600
525
455
390
330
275
225
180
140
105
75
50
30
15
5
0
Expected Future Years
of Service Remaining
at Year-End
Prior Service Cost
$ 800,000
Total Expected Future Years of Service
Amortization Amount per Each Year of Service
FSP on Statement 158 (FSP FAS 158-1)
1,050
$
762
52
FSP FAS 158-1
Exhibit B
Determination of Expected Years of Service Rendered in Each Year
After Curtailment
Year
Individuals
88X0
89X1
90X2
91X3
92X4
93X5
94X6
A1–A5
5
B1–B5
5
C1–C5
D1–D5*
5
5
5
5
5
5
E1–E5
5
5
5
5
5
F1–F5
5
5
5
5
5
5
G1–G5
H1–H5*
5
5
5
5
5
5
5
5
5
5
95X7
96X8
97X9
98Y0
99Y1
00Y2
01Y3
02Y4
03Y5
04Y6
05Y7
06Y8
07Y9
5
I1–I5
5
5
5
5
5
5
5
5
5
J1–J5
5
5
5
5
5
5
5
5
5
5
K1–K5
L1–L5*
5
5
5
5
5
5
5
5
5
5
5
5
5
5
M1–M5
5
5
5
5
5
5
5
5
5
5
5
5
5
N1–N5
O1–O5*
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
P1–P5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
Q1–Q5
R1–R5*
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
S1–S5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
T1–T5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
100
95
90
60
60
55
50
45
45
40
35
30
30
25
20
25
15
10
10
5
100
95
60
60
55
50
45
45
40
35
30
30
25
20
20
15
10
10
5
Service Years Rendered
5
Adjustment for
Termination
Total
Amortization Fraction
210
300
100
95
300
60
60
55
50
45
45
40
35
30
30
25
20
20
15
10
10
5
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
1,050
950
855
555
495
435
380
330
285
240
200
165
135
105
80
60
40
25
15
5
0
Expected Future Years
of Service Remaining
at Year-End
___________________
*Terminated group of employees.
FSP on Statement 158 (FSP FAS 158-1)
53
FSP FAS 158-1
Illustration 5—Accounting for a Plan Curtailment When Termination Benefits Are
Offered to Employees
Company G sponsors a final-pay noncontributory defined benefit plan and has a transition
obligation remaining in accumulated other comprehensive income. The company had an
unrecognized net obligation at the date of transition to Statement 87 and did not have a
retroactive plan amendment after that date. On May 11, 199020X2, the company offered for a
short period of time (until June 30, 199020X2) special benefits to its employees in connection
with their voluntary termination of employment (special termination benefits). The special
termination benefit was a lump-sum payment to be made upon termination, payable in addition
to the employee’s regular plan benefits. The special termination benefit was paid directly from
the employer’s assets rather than from the plan assets.
On June 30, 15 percent of the employees accepted the offer. The amount of the special
termination benefit payment was $125,000.
The portion of the projected benefit obligation based on the expected future compensation
levels of the terminated employees amounted to $100,000, and all the employees terminated
were fully vested in their accumulated benefits. The portion of the unrecognized net obligation
at transition transition obligation remaining in accumulated other comprehensive income
associated with the years of service no longer expected from the terminated employees was
$150,000.
As a result, Company G recognized a loss of $175,000 in earnings that includes the cost of
the special termination benefits and the loss* from the curtailment determined as follows:
*
Under paragraph 14 of this Statement, if the sum of the effects resulting from the curtailment is a net loss, it is to
be recognized in earnings when it is probable that the curtailment will occur and the effects are reasonably
estimable. In this example, the effects resulting from the curtailment were not reasonably estimable until June 30,
199020X2, the acceptance date for the offer of special termination benefits.
FSP on Statement 158 (FSP FAS 158-1)
54
FSP FAS 158-1
Before
Curtailment
Assets and obligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effects of projected future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
$ (1,300)
(200)
(1,500)
(500)
(2,000)
1,400
$ (600)
Company G
(in thousands)
Effect of
Curtailment
$100
100a
$100
Items not yet recognized in earningsAmounts recognized in accumulated other comprehensive income:
Unrecognized net obligation at transitionb
Transition obligationb
$800
$(150)
Unrecognized net gain subsequent to transition
Net gain
(300)
(Accrued)/prepaid pension cost on the statement of
$500(100)
$(150)(50)
financial position
Loss on curtailment
$ 50
Cost of special termination benefits (lump-sum
payments to terminated employees)
125
Total loss recognized in earnings
FSP on Statement 158 (FSP FAS 158-1)
After
Curtailment
$(1,300)
(200)
(1,500)
(400)
(1,900)
1,400
$ (500)
$650
(300)
$(150)350
$175c
55
FSP FAS 158-1
____________________
a Under paragraph 13 of this Statement, the curtailment gain (that is, the decrease in the projected benefit obligation) is first offset against any existing
unrecognized net loss included in accumulated other comprehensive income. Since the previously unrecognized that amount was a gain of ($300 unrecognized
net gain subsequent to transition), the $100 gain from the curtailment was recognized in earnings.
b An unrecognized net obligation at the date of transition to Statement 87 A transition obligation remaining in accumulated other comprehensive income is
treated as unrecognized prior service cost included in accumulated other comprehensive income for purposes of applying this Statement. The portion of
unrecognized prior service cost the transition obligation remaining in accumulated other comprehensive income associated with the years of service no longer
expected from the terminated employees ($150) was recognized in earnings.
c The loss Company G recognized in earnings was $175, which includes the cost of the special termination benefits of $125, the gain related to salary
progression of $100 and the recognition reclassification of prior service cost the transition obligation remaining in accumulated other comprehensive income of
$150. The journal entry required to reflect the accounting for this event was:
Loss on employee terminations
175
100
Pension liability
Accrued/prepaid pension cost
50
Other comprehensive income—transition obligation
150
Liability for termination benefits
125
If the company had paid the termination benefits from the pension plan (by amending the plan and using plan assets), the same loss would have been
recognized, but $125175 would have been credited to the accrued pension cost liability due to the decrease in plan assets, instead of credited to the liability for
termination benefits.
FSP on Statement 158 (FSP FAS 158-1)
56
FSP FAS 158-1
Illustration 6—Transition for an Employer That Completed an Asset Reversion Prior to
the Initial Application of Statement 87
[This illustration has been deleted. See Status page.]
Company H sponsors a final-pay noncontributory defined benefit pension plan. On
September 9, 1981, the company settled a portion of its pension obligation through the purchase
of annuity contracts and withdrew excess assets. The company continued to provide defined
benefits to its employees. No gain was recognized on the transaction, and Company H
recognized a credit in its statement of financial position equal to the amount of cash withdrawn.
For financial reporting purposes, that amount was grouped with accrued or prepaid pension cost.
In subsequent periods the amount of the reversion (a deferred gain) was amortized as a reduction
of net periodic pension cost. The company had no other past differences between net periodic
pension cost and amounts contributed and, therefore, had recognized no other accrued or prepaid
pension cost.
As of January 1, 1985, the time of initial application of Statement 87, the unamortized
amount of the reversion gain was $287,000. Company H’s transition to Statement 87 would be
accomplished as follows:
Company H
Computation of Unrecognized
Net Asset
(in thousands)
Projected benefit obligation
Plan assets at fair value
Accrued pension cost on the statement of
financial position
Unrecognized net asset
FSP on Statement 158 (FSP FAS 158-1)
$ (800)
$ 950
287
1,237
$ 437
57
FSP FAS 158-1
Company H
(in thousands)
Before
Recognition of
Reversion Gain
Assets and obligations:
Projected benefit obligation
Plan assets at fair value
$
Items not yet recognized in earnings:
Unrecognized net asset at transition
(Accrued)/prepaid pension cost on
the statement of financial position
Effect of
Recognition of
Reversion Gain
(800)
950
$ (800)
950
287a
(437)
$
(287)
After
Recognition of
Reversion Gain
$
287a
(150)
$
0
_____________________
aUnder paragraph 20 of this Statement, an employer that completed an asset reversion prior to the effective date of
this Statement should recognize a gain as the cumulative effect of a change in accounting principle at the time of
initial application of Statement 87.
The gain recognized by Company H amounts to $287, which is the lesser of the unamortized amount of the
reversion gain ($287) and the unrecognized net asset from transition ($437). The journal entry required to reflect the
accounting as of January 1, 1985 was:
Accrued/prepaid pension cost
287
Cumulative effect of a change in accounting principle
287
FSP on Statement 158 (FSP FAS 158-1)
58
FSP FAS 158-1
Amendments to the Illustrations in Appendix C of Statement 106
7.
Appendix C of Statement 106 is amended as follows: [Added text is underlined and deleted
text is struck out.]
Appendix C
ILLUSTRATIONS
CONTENTS
Paragraph
Numbers
Introduction
Illustration 1—Illustration of Terms
Case 1A—Expected Postretirement Benefit Obligation
and Accumulated Postretirement Benefit Obligation
Case 1B—Full Eligibility Date
Case 1C—Attribution
Case 1D—Individual Deferred Compensation Contracts
Illustration 2—Delayed Recognition of Net Periodic Postretirement Benefit
Costand Reconciliation of Funded Status
Case 2A—Unrecognized Obligation at Date of Transition [Deleted]
Case 2B—Employer Accrual of Net Periodic
Postretirement Benefit Cost
Case 2C—Plan Amendment That Increases Benefits
Case 2D—Negative Plan Amendment
Case 2E—Change in Assumption
Illustration 3—Transition—Determination of Amount and Timing
of Recognition [Deleted]
Case 3A—Measuring the Transition Obligation and Delayed Recognition
Case 3B—Constraint on Delayed Recognition of Transition Obligation
Case 3C—Limitation on Immediate Recognition of Transition Obligation
Illustration 4—Plan Amendments and Prior Service Cost
Case 4A—Equal Amount Assigned to Each Future Year of
Service to Full Eligibility Date
Case 4B—Straight-Line Amortization over Average
Remaining Years of Service to Full Eligibility Date
Illustration 5—Accounting for Gains and Losses and
Timing of Measurements
Case 5A—Loss on Obligation
Case 5B—Gain on Assets
Case 5C—Loss on Assets and Gain on Obligation
FSP on Statement 158 (FSP FAS 158-1)
391–392
393–416
393–396
397–408
409–412
413–416
417–429
418–420
421–422
423–425
426–428
429
430–448
432–434
435–442
443–448
449–454
451–453
454
455–471
457–461
462–464
465–467
59
FSP FAS 158-1
Supporting Schedules
Illustration 6—Defined-Dollar Capped Plans
Case 6A—Dollar Cap Defined on Individual Coverage
Case 6B—Dollar Cap Defined in the Aggregate for the Retiree Group
Illustration 7—Disclosure Requirements [Deleted]
Illustration 8—Accounting for Settlements
Case 8A—Settlement When an Unrecognized Transition Obligation
Remains in Accumulated Other Comprehensive IncomeExists
Case 8B—Settlement When an Unrecognized Transition Asset Remains
in Accumulated Other Comprehensive IncomeExists
Case 8C—Effect of Mid-Year Settlement on Transition Constraint
Illustration 9—Accounting for Curtailments
Case 9A—Curtailment When an Unrecognized Gain
and an Unrecognized Transition Obligation Remain in Accumulated
Other Comprehensive IncomeExist
Case 9B—Curtailment Related to a Disposal of a Portion
of the Business When aand an Unrecognized Loss and aUnrecognized
Transition Obligation Remain in Accumulated Other Comprehensive
IncomeExist
Illustration 10—Accounting for a Partial Settlement and a
Full Curtailment That Occur as a Direct Result of a Sale of a
Line of Business
Illustration 11—Accounting for the Effects of an Offer of Special
Termination Benefits
FSP on Statement 158 (FSP FAS 158-1)
468–471
472–478
473–475
476–478
484–495
485–486
487–488
489–495
496–501
498–499
500–501
502–506
507–511
60
FSP FAS 158-1
Appendix C
ILLUSTRATIONS
Introduction
391. This appendix provides additional discussion and examples that illustrate the application of
certain requirements of this Statement to specific aspects of employers’ accounting for
postretirement benefits other than pensions. The illustrations are referenced to the applicable
paragraph(s) of the standards section of this Statement where appropriate. Certain illustrations
have been included to facilitate the understanding and application of certain provisions of this
Statement that apply in specific circumstances that may not be encountered frequently by
employers. The fact patterns shown may not be representative of actual situations but are
presented only to illustrate those requirements.
392. Throughout these illustrations the accumulated postretirement benefit obligation and
service cost are assumed as inputs rather than calculated based on some underlying population.
For simplicity, benefit payments are assumed to be made at the end of the year, service cost is
assumed to include interest on the portion of the expected postretirement benefit obligation
attributed to the current year, and interest cost is based on the accumulated postretirement benefit
obligation as of the beginning of the year. For unfunded plans, benefits are assumed to be paid
directly by the employer and are reflected as a reduction in the liability for accrued
postretirement benefits cost. In many of the cases, application of the underlying concepts has
been simplified by focusing on a single employee for purposes of illustration. In practice, the
determination of the full eligibility date and the measurement of postretirement benefit cost and
obligation are based on employee groups and consider various possible retirement dates and the
probabilities associated with retirement at each of those dates.
Illustration 1—Illustration of Terms
Case 1A—Expected Postretirement Benefit Obligation and Accumulated Postretirement Benefit
Obligation
393. This Statement uses two terms to describe certain measures of the obligation to provide
postretirement benefits: expected postretirement benefit obligation and accumulated
postretirement benefit obligation. The expected postretirement benefit obligation for an
employee is the actuarial present value as of a measurement date of the postretirement benefits
expected to be paid to or for the employee, the employee’s beneficiaries, and any covered
dependents. Prior to the date on which an employee attains full eligibility for the benefits that
employee is expected to earn under the terms of the postretirement benefit plan (the full
eligibility date), the accumulated postretirement benefit obligation for an employee is a portion
of the expected postretirement benefit obligation. On and after the full eligibility date, the
accumulated postretirement benefit obligation and the expected postretirement benefit obligation
for an employee are the same. (Refer to paragraphs 20 and 21.) The following example
illustrates the notion of the expected postretirement benefit obligation and the relationship
between that obligation and the accumulated postretirement benefit obligation at various dates.
FSP on Statement 158 (FSP FAS 158-1)
61
FSP FAS 158-1
394. Company A’s plan provides postretirement health care benefits to all employees who
render at least 10 years of service and attain age 55 while in service. A 50-year-old employee,
hired January 1, 20X31973 at age 30 and eligible for benefits upon attaining age 55, is expected
to terminate employment at age 62 and is expected to live to age 77. A discount rate of 8 percent
is assumed.
At December 31, 20Z21992, Company A estimates the expected amount and timing of benefit
payments for that employee as follows:
Age
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
Expected
Future
Claims
$ 2,796
3,093
856
947
1,051
1,161
1,282
1,425
1,577
1,744
1,934
2,137
2,367
2,620
3,899
$28,889
50
Present Value at Age
53
55
$1,028
1,052
270
276
284
291
297
306
313
321
329
337
346
354
488
$6,292
$1,295
1,326
339
348
357
366
374
385
394
404
415
424
435
446
615
$7,923
$1,511
1,547
396
406
417
427
436
449
460
471
484
495
508
520
717
$9,244
395. The expected and accumulated postretirement benefit obligations at December 31,
20Z21992 (age 50) are $6,292 and $5,034 (20/25 of $6,292), respectively. An equal amount of
the expected postretirement benefit obligation is attributed to each year of service from the
employee’s date of hire to the employee’s full eligibility date (age 55) (paragraphs 43 and 44).
Therefore, when the employee is age 50, the accumulated postretirement benefit obligation is
measured as 20/25 of the expected postretirement benefit obligation, as the employee has
rendered 20 years of the 25-year credited service period. Refer to Case 1B (paragraphs 397–408)
for additional illustrations on the full eligibility date and Case 1C (paragraphs 409–412) for
additional illustrations on attribution.
396. Assuming no changes in health care costs or other circumstances, the accumulated
postretirement benefit obligation at December 31, 20Z51995 (age 53) is $7,289 (23/25 of
$7,923). At the end of the employee’s 25th year of service and thereafter, the expected
postretirement benefit obligation and the accumulated postretirement benefit obligation are
equal. In this example, at December 31, 20Z71997, when the employee is 55 and fully eligible
for benefits, the accumulated and expected postretirement benefit obligations are $9,244. At the
FSP on Statement 158 (FSP FAS 158-1)
62
FSP FAS 158-1
end of the 26th year of service (December 31, 20Z81998) when the employee is 56, those
obligations are $9,984 ($9,244 plus interest at 8 percent for 1 year).
Case 1B—Full Eligibility Date
397. The full eligibility date (paragraph 21) is the date at which an employee has rendered all of
the service necessary to have earned the right to receive all of the benefits expected to be
received by that employee under the terms of the postretirement benefit plan. Therefore, the
present value of all of the benefits expected to be received by or on behalf of an employee is
attributed to the employee’s credited service period, which ends at the full eligibility date.
Determination of an employee’s full eligibility date is affected by plan terms that provide
incremental benefits expected to be received by the employee for additional years of service,
unless those incremental benefits are trivial. Determination of the full eligibility date is not
affected by an employee’s current dependency status or by plan terms that define when benefit
payments commence. The following examples (paragraphs 398–408) are presented to assist in
understanding the full eligibility date.
Plans that provide incremental benefits for additional years of service
Graded benefit formula
398. Some plans have benefit formulas that define different benefits for different years of
service. To illustrate, assume a plan in which the percentage of postretirement health care
coverage to be provided by an employer is defined by groups of years of service. The plan
provides 20 percent postretirement health care coverage for 10 years of service after age 35, 50
percent for 20 years of service after age 35, 70 percent for 25 years of service after age 35, and
100 percent for 30 years of service after age 35. The full eligibility date for an employee who
was hired at age 35 and is expected to retire at age 62 is at age 60. At that date the employee has
rendered 25 years of service after age 35 and is eligible to receive a benefit of 70 percent health
care coverage after retirement. The employee receives no additional benefits for the last two
years of service.
Pay-related plans
399. Some plans may base the amount of benefits or level of benefit coverage on employees’
compensation, for example, as a percentage of their final pay. To the extent the plan’s
postretirement benefit formula defines benefits wholly or partially as a function of future
compensation (that is, the plan provides incremental benefits for additional years of service when
it is assumed that final pay will increase), determination of the full eligibility date for an
employee is affected by those additional years of service the employee is expected to render
(paragraph 21). In addition, measurements of the postretirement benefit obligation and service
cost reflect the best estimate of employees’ future compensation levels (paragraph 33).
400. For example, assume a plan provides life insurance benefits to employees who render 20
years of service and attain age 55 while in service; the benefit is equal to 20 percent of final pay.
A 55-year-old employee, who currently earns a salary of $90,000, has worked 22 years for the
company. The employee is expected to retire at age 60 and is expected to be earning $120,000 at
that time. The employee is eligible for life insurance coverage under the plan at age 55, when
FSP on Statement 158 (FSP FAS 158-1)
63
FSP FAS 158-1
the employee has met the age and service requirements. However, because the employee’s
salary continues to increase each year, the employee is not fully eligible for benefits until age 60
when the employee retires because the employee earns an incremental benefit for each additional
year of service beyond age 55. That is, the employee earns an additional benefit equal to 20
percent of the increase in salary each year from age 55 to retirement at age 60 for service during
each of those years.
Spousal coverage
401. Some postretirement benefit plans provide spousal or dependent coverage or both if the
employee works a specified number of years beyond the date at which the employee attains
eligibility for single coverage. For example, a postretirement health care plan provides single
coverage to employees who work 10 years and attain age 50 while in service; the plan provides
coverage for dependents if the employee works 20 years and attains age 60 while in service.
Because the additional 10 years of service may provide an incremental benefit to employees, for
employees expected to satisfy the age and service requirements and to have covered dependents
during the period following the employee’s retirement, their full eligibility date is the date at
which they have both rendered 20 years of service and attained age 60 while in service. For
employees not expected to have covered dependents after their retirement or who are not
expected to render at least 20 years of service or attain age 60 while in service, or both, their full
eligibility date is the date at which they have both rendered 10 years of service and attained age
50 while in service.
Single plan provides health care and life insurance benefits
402. Some postretirement benefit plans may have different eligibility requirements for different
types of benefits. For example, assume a plan provides a postretirement death benefit of
$100,000 to employees who render 20 or more years of service. Fifty percent health care
coverage is provided to eligible employees who render 10 years of service, 70 percent coverage
to those who render 20 years of service, and 100 percent coverage to those who render 30 years
of service. Employees are eligible for the health care and death benefits if they attain age 55
while in service.
403. The full eligibility date for an individual hired at age 30 and expected to terminate
employment at age 62 is the date on which that employee has rendered 30 years of service and
attained age 55 while in service (age 60 in this example). At that date the employee is eligible
for all of the benefits expected to be paid to or on behalf of that employee under the
postretirement benefit plan ($100,000 death benefits and 100 percent health care coverage). The
full eligibility date for an employee hired at age 37 and expected to retire at age 62 is the date on
which that employee has rendered 20 years of service and attained age 55 while in service (age
57 in this example). At that date the employee is eligible for all of the benefits expected to be
paid to or on behalf of that employee under the postretirement benefit plan ($100,000 death
benefits and 70 percent health care coverage).
Plans that provide benefits based on status at date of termination
404. Some postretirement benefit plans provide coverage for the spouse to whom an employee is
married when the employee terminates service; that is, the marital status of an employee upon
FSP on Statement 158 (FSP FAS 158-1)
64
FSP FAS 158-1
termination of employment determines whether single or spousal coverage is to be provided. In
measuring the expected postretirement benefit obligation, consideration is given to factors such
as when benefit coverage will commence, who will receive benefits (employee and any covered
dependents), and the expected need for and utilization of benefit coverage. However,
determination of an employee’s full eligibility date is not affected by plan terms that define when
payments commence or by an employee’s current marital (or dependent) status (paragraph 21).
405. For example, assume a plan provides postretirement health care coverage to employees
who render at least 10 years of service and attain age 55 while in service; health care coverage
also is provided to employees’ spouses at the date of the employees’ retirement. A 55-year-old
employee is single, has worked for the company for 30 years, and is expected to marry at age 59
and to retire at age 62. Although the employee is entitled to spousal coverage only if married at
retirement, at age 55 the employee has earned the right to spousal coverage. The probability that
the employee will be married when the employee retires is included in the actuarial assumptions
developed to measure the expected postretirement benefit obligation for that plan participant.
The full eligibility date (age 55 in this example) is not affected by that measurement assumption.
Postretirement benefits to be received by disabled plan participants
406. Some plans provide postretirement benefits to disabled employees. For example, Company
B provides disability income and health care benefits to employees who become disabled while
in service and have rendered 10 or more years of service. Retiree health care benefits are
provided to employees who render 20 or more years of service and attain age 55 while in service.
Employees receiving disability benefits continue to accrue “credit” toward their eligibility for
retiree health care benefits. Under this plan, an employee hired at age 25, who becomes
permanently disabled at age 40, is entitled to receive retiree health care benefits commencing at
age 55 (in addition to any disability income benefits commencing at age 40) because that
employee worked for Company B for more than 10 years before becoming disabled. Under the
terms of the plan the employee is given credit for working to age 55 even though no actual
service is rendered by the employee after the disabling event occurs.
407. Because the employee is permanently disabled, the full eligibility date is accelerated to
recognize the shorter period of service required to be rendered in exchange for the retiree health
care benefits—in this case the full eligibility date is age 40, the date of the disabling event. For a
similar employee who is temporarily disabled at age 40 but returns to work and attains age 55
while in service, the full eligibility date is age 55. Company B’s expected postretirement benefit
health care obligation for the permanently disabled employee is based on the employee’s
expected health care costs commencing at age 55 and is attributed ratably to that employee’s
active service to age 40.
408. Only some employees become and remain disabled. Therefore, in measuring the expected
postretirement benefit obligation and in determining the attribution period for plan participants
expected to become disabled, the probability and timing of a disabling event is considered in
determining whether employees are likely to become disabled and whether they will be entitled
to receive postretirement benefits.
FSP on Statement 158 (FSP FAS 158-1)
65
FSP FAS 158-1
Case 1C—Attribution
Attribution period
409. Paragraph 44 states that the beginning of the attribution period shall be the date of hire
unless the plan’s benefit formula grants credit only for service from a later date, in which case
benefits generally shall be attributed from the beginning of that credited service period. For
example, for a plan that provides benefit coverage to employees who render 30 or more years of
service or who render at least 10 years of service and attain age 55 while in service, without
specifying when the credited service period begins, the expected postretirement benefit
obligation is attributed to service from the date of hire to the earlier of the date at which a plan
participant has rendered 30 years of service or has rendered 10 years of service and attained age
55 while in service. However, for a plan that provides benefit coverage to employees who render
at least 20 years of service after age 35, the expected postretirement benefit obligation is
attributed to a plan participant’s first 20 years of service after attaining age 35 or after the date of
hire, if later than age 35.
410. For a plan with a benefit formula that attributes benefits to a credited service period that is
nominal in relation to employees’ total years of service prior to their full eligibility dates, an
equal amount of the expected postretirement benefit obligation for an employee is attributed to
each year of that employee’s service from date of hire to date of full eligibility for benefits. For
example, a plan with a benefit formula that defines 100 percent benefit coverage for service for
the year in which employees attain age 60 has a 1-year credited service period. If plan
participants are expected to have rendered an average of 20 years of service at age 60, the
credited service period is nominal in relation to their total years of service prior to their full
eligibility dates. In that case, the service cost is recognized from date of hire to age 60.
Attribution pattern
411. For all plans, except those that “frontload” benefits, the expected postretirement benefit
obligation is attributed ratably to each year of service in the attribution period (paragraph 43).
That is, an equal amount of the expected postretirement benefit obligation is attributed to each
year of service from the employee’s date of hire or beginning of the credited service period, if
later, to the employee’s full eligibility date unless (a) the credited service period is nominal
relative to the total years of service prior to the full eligibility date (paragraph 410) or (b) the
benefit formula frontloads benefits (paragraph 412).
Frontloaded plans
412. Some plans may have a benefit formula that defines benefits in terms of specific periods of
service to be rendered in exchange for those benefits but attributes all or a disproportionate share
of the expected postretirement benefit obligation to employees’ early years of service in the
credited service period. An example would be a life insurance plan that provides postretirement
death benefits of $250,000 for 10 years of service after age 45 and $5,000 of additional death
benefits for each year of service thereafter up to age 65 (maximum benefit of $300,000). For
plans that frontload the benefit, the expected postretirement benefit obligation is attributed to
employee service in accordance with the plan’s benefit formula (paragraph 43). In this example,
FSP on Statement 158 (FSP FAS 158-1)
66
FSP FAS 158-1
the actuarial present value of a $25,000 death benefit is attributed to each of the first 10 years of
service after age 45, and the actuarial present value of an additional $5,000 death benefit is
attributed to each year of service thereafter up to age 65.
Case 1D—Individual Deferred Compensation Contracts
413. An employer may provide postretirement benefits to selected employees under individual
contracts with specific terms determined on an individual-by-individual basis. Paragraph 13 of
this Statement amends APB Opinion No. 12, Omnibus Opinion—1967, to attribute those benefits
to the individual employee’s years of service following the terms of the contract. Paragraphs
414–416 illustrate the application of paragraph 13 for individual deferred compensation
contracts.
Contract provides only prospective benefits
414. A company enters into a deferred compensation contract with an employee at the date of
hire. The contract provides for a payment of $150,000 upon termination of employment
following a minimum 3-year service period. The contract provides for a compensation
adjustment for each year of service after the third year determined by multiplying $150,000 by
the company’s return on equity for the year. Also, each year after the third year of service,
interest at 10 percent per year is credited on the amount due under the contract at the beginning
of that year. Accordingly, a liability of $150,000 is accrued in a systematic and rational manner
over the employee’s first 3 years of service. Following the third year of service, the accrued
liability is adjusted annually for accrued interest and the increased or decreased compensation
based on the company’s return on equity for that year. At the end of the third year and each
subsequent year of the employee’s service, the amount accrued equals the then present value of
the benefit expected to be paid in exchange for the employee’s service rendered to that date.
Contract provides retroactive benefits
415. A company enters into a contract with a 55-year-old employee who has worked 5 years for
the company. The contract states that in exchange for past and future services and for serving as
a consultant for 2 years after the employee retires, the company will pay an annual pension of
$20,000 to the employee, commencing immediately upon the employee’s retirement. It is
expected that the future benefits to the employer from the consulting services will be minimal.
Consequently, the actuarial present value of a lifetime annuity of $20,000 that begins at the
employee’s expected retirement date is accrued at the date the contract is entered into because
the employee is fully eligible for the pension benefit at that date.
416. If the terms of the contract described in paragraph 415 had stated that the employee is
entitled to the pension benefit only if the sum of the employee’s age and years of service equal
70 or more at the date of retirement, the employee would be fully eligible for the pension benefit
at age 60, after rendering 5 more years of service. The actuarial present value of a lifetime
annuity of $20,000 that begins at the expected retirement date would be accrued in a systematic
and rational manner over the 5-year period from the date the contract is entered into to the date
the employee is fully eligible for the pension benefit.
FSP on Statement 158 (FSP FAS 158-1)
67
FSP FAS 158-1
Illustration 2—Delayed Recognition of Net Periodic Postretirement Benefit Costand
Reconciliation of Funded Status
417. Pursuant to the provisions of this Statement, the recognition of certain changes affecting
measurement of the accumulated postretirement benefit obligation or the fair value of plan assets
may be delayed. Those changes include plan amendments (paragraph 51) and gains and losses
due to experience different from that assumed or from changes in assumptions (paragraph 56).
Information about the effect of the changes that have been afforded delayed recognition is
provided through disclosure of the reconciliation of the funded status of a plan to the accrued or
prepaid postretirement benefit cost recognized in the employer’s statement of financial position
(paragraph 5(c) of Statement 132(R)). The following cases (2BA–2E, paragraphs 418421–429)
show how events that change the accumulated postretirement benefit obligation are reflected in
net periodic postretirement benefit cost and other comprehensive incomethat reconciliation.
Case 2A—Unrecognized Obligation at Date of Transition
418. For an unfunded plan with an accumulated postretirement benefit obligation of $600,000 at
the date of transition (January 1, 1993), the reconciliation of the funded status of the plan with
the amount shown in the statement of financial position as of that date is as follows:
Accumulated postretirement benefit obligation
$(600,000)a
Plan assets at fair value
0
(600,000)
Funded status
Transition obligation at January 1, 1993
600,000
(Accrued)/prepaid postretirement benefit cost
$
0
____________________
aThe actuarial present value of the obligation for fully eligible plan participants’ expected postretirement benefits
and the portion of the expected postretirement benefit obligation for other active plan participants attributed to
service to December 31, 1992. For example, assume a plan provides benefits to employees who render at least 20
years of service after age 35. For employees age 45 with 10 years of service at December 31, 1992, the accumulated
postretirement benefit obligation is 50% of the expected postretirement benefit obligation for those employees. For
employees age 55 or older who have rendered 20 or more years of service at December 31, 1992 and retirees
(collectively referred to as fully eligible plan participants), the accumulated postretirement benefit obligation is the
full amount of the expected postretirement benefit obligation for those employees.
419. The transition obligation or asset is the difference between (a) the accumulated
postretirement benefit obligation and (b) the fair value of plan assets plus any recognized accrued
postretirement benefit cost or less any recognized prepaid postretirement benefit cost at the date
of transition (paragraph 110). If, as in this case, advance contributions were not made and
postretirement benefit cost was not accrued in prior periods, there is no accrued or prepaid
postretirement benefit cost recognized in the statement of financial position, and, therefore, the
transition obligation is equal to the unfunded status ($600,000).
FSP on Statement 158 (FSP FAS 158-1)
68
FSP FAS 158-1
Unrecognized amounts after date of transition
420. After the date of transition, aAny change in the accumulated postretirement benefit
obligation or the plan assets (other than contributions and benefit payments) either is
unrecognizedinitially recognized in other comprehensive income, due to the delayed recognition
provisions of this Statement, or is included in net periodic postretirement benefit cost.
Contributions to a funded plan by the employer increase plan assets and decrease the accrued
recognized postretirement benefit costliability or increase the prepaid recognized postretirement
benefit costasset, subject to the provision of paragraph 112 requiring recognition in net periodic
postretirement benefit cost of an additional amount of the unrecognized transition obligation
remaining in accumulated other comprehensive income in certain situations. All changes in the
accumulated postretirement benefit obligation and plan assets are reflected in the reconciliation.
Using Case 2A as the starting point, tThe following reconciliationstables (Cases 2B–2E)
illustrate the effect of changes in assumptions or changes in the plan on measurement of the
accumulated postretirement benefit obligation. In each case, it is assumed that the plan is
unfunded.
Case 2B—Employer Accrual of Net Periodic Postretirement Benefit Cost
421. Benefit payments of $42,000 are made at the end of 20X31993. Changes in accrued Net
periodic postretirement benefit cost and other comprehensive income for 20X3, accumulated and
changes in the postretirement benefit liabilityobligation, and accumulated other comprehensive
incomeunrecognized transition obligation forin 20X31993 are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
69
FSP FAS 158-1
Net Periodic
Accrued
Postretirement
Benefit Cost
Beginning of year
$
Other
Comprehensive
Income
0
Recognition of components
of net periodic postretirement
benefit cost:
Service cost
$(32,000)
Interest costa
(48,000)
Amortization of transition
obligationb
(30,000)
Total net periodic postretirement
benefit cost
$(110,000)
Total other comprehensive income
42,000
Benefit payments
Net change
(68,000)
End of year
$(68,000)
Accumulated
Postretirement
Benefit
Liability
Obligation
$(600,000)
Transition
Obligation
Remaining in
Accumulated
Other
Comprehensive
Income
Unrecognized
Transition
Obligation
$400,000
600,000
(32,000)
(48,000)
$(30,000)
(30,000)
(80,000)
(30,000)
42,000
(38,000)
$(638,000)
_______
(30,000)
$370,000
570,000
$(30,000)
____________________
aAssumed discount rate of 8% applied to the accumulated postretirement benefit obligation at the beginning of the year.
bThe transition obligation of $400,000600,000 is amortized on a straight-line basis over 20 yearsthe remaining amortization period of approximately 13 years.
Illustration 3, Case 3B, (paragraphs 435–442) illustrates the constraint on delayed recognition of the transition obligation pursuant to paragraph 112.
FSP on Statement 158 (FSP FAS 158-1)
70
FSP FAS 158-1
422. The funded status of the plan at January 1, 1993 and December 31, 1993 is reconciled with
the amount shown in the statement of financial position at those dates as follows:
Accumulated postretirement
benefit obligation
Plan assets at fair value
Funded status
Unrecognized transition obligation
Accrued postretirement benefit cost
1/1/93
Net Change
$(600,000)
0
(600,000)
600,000
$
0
$(38,000)
_______
(38,000)
(30,000)
$(68,000)
12/31/93
$(638,000)
0
(638,000)
570,000
$ (68,000)
Case 2C—Plan Amendment That Increases Benefits
423. The plan is amended on January 2, 20X41994, resulting in a $90,000 increase in the
accumulated postretirement benefit obligation. The effects of plan amendments are reflected
immediately in measurement of the accumulated postretirement benefit liabilityobligation
through a corresponding charge to other comprehensive income. Other comprehensive income is
subsequently adjusted as that prior service cost is amortized as a component of net periodic
postretirement benefit cost; however, the effects of the amendment are not recognized
immediately in the financial statements, but rather are recognized on a delayed basis (paragraph
52).
424. Benefit payments of $39,000 are made at the end of 20X41994. Changes in accrued Net
periodic postretirement benefit cost and other comprehensive income for 20X4, and changes in
the accumulated postretirement benefit liabilityobligation, unrecognized transition obligation,
and accumulated other comprehensive income forunrecognized prior service cost in 20X41994
are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
71
FSP FAS 158-1
Amounts Remaining in
Accumulated
Accumulated Other
Net Periodic
Postretirement
Comprehensive Income
Accrued
Other
Benefit
Unrecognized Unrecognized
Postretirement Comprehensive Liability
Transition
Prior
Income
Obligation
Obligation
Service Cost
Benefit Cost
Beginning of year
Plan amendment
Recognition of components of net
periodic postretirement benefit cost:
Service cost
Interest costa
Amortization of
transition obligation
Amortization of prior
service costb
Total net periodic postretirement
benefit cost
Total other comprehensive income
Benefit payments
Net change
End of year
FSP on Statement 158 (FSP FAS 158-1)
$(68,000)
$(638,000)
$90,000
$(30,000)
(58,240)
$370,000
570,000
(90,000)
$
0
90,000
(30,000)
(58,240)
(30,000)
(30,000)
(9,000)
(9,000)
$(127,240)
(30,000)
(9,000)
(178,240)
(30,000)
81,000
39,000
(139,240)
$(777,240)
________
(30,000)
$340,000
540,000
______
81,000
$81,000
$51,000
39,000
(88,240)
$(156,240)
72
FSP FAS 158-1
____________________
aAssumed discount rate of 8% applied to the accumulated postretirement benefit obligation at the beginning of the year and to the increase in that obligation for
the unrecognized prior service cost initially recognized in other comprehensive income at the date of the plan amendment [($638,000 × 8%) + ($90,000 × 8%)].
bAs permitted by paragraph 53, prior service cost of $90,000 is amortized in net periodic postretirement benefit cost on a straight-line basis over the average
remaining years of service to full eligibility for benefits of the active plan participants (10 years in this example).
FSP on Statement 158 (FSP FAS 158-1)
73
FSP FAS 158-1
425. The funded status of the plan at December 31, 1993 and 1994 is reconciled with amount
shown in the statement of financial position at those dates as follows:
12/31/93
Net Change
12/31/94
Accumulated postretirement
benefit obligation
Plan assets at fair value
Funded status
$(638,000)
0
(638,000)
$(139,240)
________
(139,240)
$(777,240)
0
(777,240)
Unrecognized prior service cost
Unrecognized transition obligation
Accrued postretirement benefit cost
0
570,000
$ (68,000)
81,000
(30,000)
$ (88,240)
81,000
540,000
$(156,240)
Case 2D—Negative Plan Amendment
426. The plan is amended on January 4, 20X51995, resulting in a $99,000 reduction in the
accumulated postretirement benefit obligation. As with a plan amendment that increases
benefits, the effect of a negative plan amendment (an amendment that decreases benefits) is
reflected immediately in the measurement of the accumulated postretirement benefit obligation.
The effects of the negative plan amendment are recognized by first reducing any existing
unrecognized prior service cost included in accumulated other comprehensive income and then
any existing unrecognized transition obligation remaining in accumulated other comprehensive
income; the remainder is recognized in net periodic postretirement benefit costthe financial
statements on a delayed basis.
427. Benefit payments in 20X51995 are $40,000. Changes in accrued Net periodic
postretirement benefit cost and other comprehensive income for 20X5, and the changes in the
accumulated postretirement benefit liabilityobligation, and accumulated other comprehensive
income forunrecognized transition obligation, and unrecognized prior service cost in 20X51995
are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
74
FSP FAS 158-1
Amounts Remaining in
Accumulated
Accumulated Other
Net Periodic
Postretirement
Comprehensive Income
Accrued
Other
Benefit
Unrecognized Unrecognized
Postretirement Comprehensive Liability
Transition
Prior
Income
Obligation
Obligation
Service Cost
Benefit Cost
Beginning of year
Plan amendmenta
Recognition of components of net
periodic postretirement benefit cost:
Service cost
Interest costb
Amortization of
transition obligationc
Amortization of prior
service cost
Total net periodic postretirement
benefit cost
Total other comprehensive income
Benefit payments
Net change
End of year
FSP on Statement 158 (FSP FAS 158-1)
$(156,240)
$(777,240)
$ (99,000)
$ (30,000)
(54,259)
(29,000)
0
99,000
$340,000
540,000
(18,000)
$81,000
(81,000)
(30,000)
(54,259)
(29,000)
(29,000)
0
$(113,259)
0
14,741
(47,000)
(81,000)
_______
(47,000)
$293,000
493,000
______
(81,000)
$
0
$(128,000)
40,000
(73,259)
$(229,499)
40,000
54,741
$(722,499)
75
FSP FAS 158-1
____________________
aParagraph 55 requires that the effects of a plan amendment that reduces the accumulated postretirement benefit obligation be used first to reduce any existing
unrecognized prior service cost included in accumulated other comprehensive income, then any unrecognized transition obligation remaining in accumulated
other comprehensive income. Amounts remaining in accumulated other comprehensive incomeAny remaining effects are recognized in net periodic
postretirement benefit cost on a delayed basis over the remaining years of service to full eligibility for those plan participants who were active at the date of the
amendment. If all or almost all of the plan participants were fully eligible at that date, the remaining effects should be recognized over the remaining life
expectancy of those plan participants.
bAssumed discount rate of 8% applied to the accumulated postretirement benefit obligation at the beginning of the year and to the decrease in that obligation at
the date of the plan amendment [($777,240 × 8%) – ($99,000 × 8%)].
cUnrecognized tTransition obligation remaining in accumulated other comprehensive income of $322,000522,000 ($340,000540,000 – $18,000) is amortized on
a straight-line basis over the 18 years remaining in the transition period of approximately 11 years.
FSP on Statement 158 (FSP FAS 158-1)
76
FSP FAS 158-1
428. The funded status of the plan at December 31, 1994 and 1995 is reconciled with the amount
shown in the statement of financial position at those dates as follows:
12/31/94
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status
Unrecognized prior service cost
Unrecognized transition obligation
Accrued postretirement benefit cost
$(777,240)
0
(777,240)
81,000
540,000
$(156,240)
Net Change
$ 54,741
_______
54,741
(81,000)
(47,000)
$(73,259)
12/31/95
$(722,499)
0
(722,499)
0
493,000
$(229,499)
Case 2E—Change in Assumption
429. The assumed health care cost trend rates are changed at December 31, 20X51995, resulting
in a $55,000 increase in the accumulated postretirement benefit obligation. The net loss that
results from a change in the health care cost trend rates assumption is reflected immediately in
the measurement of the accumulated postretirement benefit liabilityobligation. However, as with
most other gains and losses, the effect of a change in assumption may be recognized immediately
in net periodic postretirement benefit cost in the financial statements either immediately or on a
delayed basis through a charge or credit to other comprehensive income with subsequent
amortization as a component of net periodic postretirement benefit cost, as long as the
recognition method of recognizing the change in assumption in net periodic postretirement
benefit cost is applied consistently.
FSP on Statement 158 (FSP FAS 158-1)
77
FSP FAS 158-1
Before
Change
Accumulated postretirement
benefit obligation
Plan assets at fair value
Funded status and recognized
liability
Net Loss
Recognized in Other
Comprehensive
Income
After
Change
$(722,499)
0
$(55,000)
_______
$(777,499)
0
$(722,499)
$(55,000)
$(777,499)
$55,000
_______
$ 55,000
293,000
493,000
$348,000
(229,499)
Accumulated other comprehensive
income:
$
0
Unrecognized nNet lossa
Unrecognized tTransition obligation 293,000
493,000
Accrued postretirement benefit cost $293,000
(229,499)
$ 55,000
0
____________________
aThis Statement generally does not require recognition of gains and losses in net periodic postretirement benefit cost
in the period in which they arise (paragraphs 56–61). However, at a minimum, amortization of an unrecognized net
gain or loss is required to be recognized included in accumulated other comprehensive income is required to be
subsequently recognized as a component of net periodic postretirement benefit cost for a year if, as of the beginning
of the year, the unrecognized net gain or loss exceeds 10 percent of the greater of the accumulated postretirement
benefit obligation or the market-related value of plan assets. Applications of those provisions are included in
Illustration 5 (paragraphs 455–471).
FSP on Statement 158 (FSP FAS 158-1)
78
FSP FAS 158-1
Illustration 3—Transition—Determination of Amount and Timing of Recognition
[This illustration has been deleted. See Status page.]
430. This Statement provides two options for recognizing the transition obligation or asset in the
statement of financial position and in the statement of income. An employer can phase in
recognition of the transition obligation (asset) over future periods, as illustrated in Case 3A
(paragraphs 432–434). However, phasing in recognition of a transition obligation should not
result in less rapid recognition than would have resulted under pay-as-you-go accounting. That
is, after the transition date, the cumulative postretirement benefit cost accrued should not be less
than cumulative benefit payments (paragraph 112). Case 3B (paragraphs 435–442) illustrates a
situation in which recognition of the transition obligation is accelerated as a result of that
constraint.
431. Alternatively, an employer can recognize the transition obligation (asset) immediately in
net income of the period of the change. However, if immediate recognition is elected, the
amount attributable to the effects of a plan initiation or any benefit improvements adopted after
December 21, 1990 is treated as prior service cost and excluded from the transition amount
immediately recognized. In addition, an employer who chooses to immediately recognize its
transition obligation shall, in accounting for any purchase business combination consummated
after December 21, 1990, include in the purchase price allocation the unfunded accumulated
postretirement benefit obligation assumed (paragraph 111). Case 3C (paragraphs 443–448)
illustrates a situation in which those limitations apply.
Case 3A—Measuring the Transition Obligation and Delayed Recognition
432. Company C adopts this Statement for its financial statements for the year beginning
January 1, 1993. Prior to adopting this Statement, Company C accrued postretirement benefit
costs and made contributions to the plan to the extent those contributions were tax deductible.
At January 1, 1993, the company had accrued postretirement benefit cost of $150,000 and plan
assets of $180,000.
433. The transition obligation or asset is measured as the difference between (a) the accumulated
postretirement benefit obligation and (b) the fair value of plan assets plus any recognized accrued
postretirement benefit cost or less any recognized prepaid postretirement benefit cost as of the
date of transition (paragraph 110). Company C’s transition obligation is determined as follows:
Accumulated postretirement benefit obligation
Plan assets at fair value
Accumulated postretirement benefit
obligation in excess of plan assets
Accrued postretirement benefit cost
Transition obligation
$(465,000)
180,000
(285,000)
150,000
$(135,000)
434. Company C elects to delay recognition of its transition obligation. Paragraph 112 permits
straight-line amortization of the transition obligation or asset over the average remaining service
period of plan participants or 20 years, if longer. Company C estimates the average remaining
FSP on Statement 158 (FSP FAS 158-1)
79
FSP FAS 158-1
service period of its active employees who are plan participants at the date of transition to be 10
years. Therefore, Company C can elect to amortize its transition obligation of $135,000 on a
straight-line basis over either the average remaining service period of 10 years or 20 years. That
amortization (either $13,500 for 10 years or $6,750 for 20 years) is included as a component of
net periodic postretirement benefit cost. However, amortization of the transition obligation is
accelerated when the constraint on delayed recognition described in paragraph 112 applies.
(Refer to Case 3B, paragraphs 435–442.)
Case 3B—Constraint on Delayed Recognition of Transition Obligation
435. At December 31, 1992, the accumulated (and unrecognized) postretirement benefit
obligation and plan assets of a defined benefit postretirement plan sponsored by Company D are
as follows:
Accumulated postretirement benefit obligation
Plan assets at fair value
Transition obligation
$(255,000)
0
$(255,000)
436. Company D adopts this Statement for the year beginning January 1, 1993. At December
31, 1992, Company D has no prepaid or accrued postretirement benefit cost (postretirement
benefit cost in prior years was accounted for on a pay-as-you-go basis). The average remaining
service period of active plan participants at the date of transition is 17 years. Since the average
remaining service period is less than 20 years, Company D may elect to amortize the transition
obligation over 20 years rather than 17 years (paragraph 112); Company D elects the 17-year
period.
437. Benefit payments in 1993 are $45,000. Changes in accrued postretirement benefit cost,
accumulated postretirement benefit obligation, and unrecognized transition obligation in 1993
are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
80
FSP FAS 158-1
Accrued
Postretirement
Benefit Cost
Beginning of year
Recognition of components
of net periodic postretirement
benefit cost:
Service cost
Interest costa
Amortization of transition
obligationb
Benefit payments
Net change
End of year
$
0
Accumulated
Postretirement
Benefit
Obligation
$(255,000)
(30,000)
(20,400)
(30,000)
(20,400)
(15,000)
(65,400)
45,000
(20,400)
$ (20,400)
________
(50,400)
45,000
(5,400)
$(260,400)
Unrecognized
Transition
Obligation
$255,000
(15,000)
(15,000)
_______
(15,000)
$240,000
_____________________
aAn 8% discount rate is assumed.
b$255,000 ÷ 17 years = $15,000 per year.
FSP on Statement 158 (FSP FAS 158-1)
81
FSP FAS 158-1
438. The funded status of the plan at January 1, 1993 and December 31, 1993 is reconciled with
the amount shown in the statement of financial position at those dates as follows:
1/1/93
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status
Unrecognized transition obligation
Accrued postretirement benefit cost
$(255,000)
0
(255,000)
255,000
$
0
Net Change
$ (5,400)
_______
(5,400)
(15,000)
$(20,400)
12/31/93
$(260,400)
0
(260,400)
240,000
$ (20,400)
439. In 1994, benefit payments increase to $95,000 and service cost increases to $35,000.
Changes in accrued postretirement benefit cost, accumulated postretirement benefit obligation,
and unrecognized transition obligation in 1994 are summarized as follows:
Accrued
Postretirement
Benefit Cost
Beginning of year
Recognition of components of
net periodic postretirement
benefit cost:
Service cost
Interest cost
Amortization of transition
obligationc
Benefit payments
Net change
End of year
Accumulated
Postretirement
Benefit
Obligation
$(20,400)
$(260,400)
(35,000)
(20,832)
(35,000)
(20,832)
(18,768)
(74,600)
95,000
20,400
$
0
________
(55,832)
95,000
39,168
$(221,232)
FSP on Statement 158 (FSP FAS 158-1)
Unrecognized
Transition
Obligation
$240,000
(18,768)
(18,768)
________
(18,768)
$221,232
82
FSP FAS 158-1
____________________
cAmortization of the transition obligation in 1994 includes straight-line amortization of $15,000 plus additional
recognition of $3,768. The additional recognition is required because in 1994 cumulative benefit payments
subsequent to the January 1, 1993 transition date exceed cumulative postretirement benefit cost accrued subsequent
to that date (paragraph 112). The additional transition obligation required to be recognized ($3,768) is determined
as follows:
1994
1993
Benefit payments:
1/1/93 to beginning of current year
$ 45,000
Current year
$45,000
95,000
Cumulative 1/1/93 to end of current year
$45,000
$140,000
Postretirement benefit cost recognized:
1/1/93 to beginning of current year
$ 65,400
Current year prior to recognition of any additional amount
pursuant to paragraph 112
$65,400
70,832
Cumulative 1/1/93 to end of current year before
applying paragraph 112 constraint
65,400
136,232
Additional amount required to be recognized
pursuant to paragraph 112
0
3,768
Cumulative 1/1/93 to end of current year
$65,400
$140,000
440. The objective of the constraint on delayed recognition of the transition obligation
(paragraph 112) is to preclude slower recognition of postretirement benefit cost (as a result of
applying the delayed recognition provisions of this Statement) than would have resulted under
pay-as-you-go accounting for costs. An indication that the constraint may apply is the existence
of a prepaid postretirement benefit cost after the date of transition for an enterprise that prior to
the application of this Statement was on a pay-as-you-go basis of accounting for other
postretirement benefits. For example, in paragraph 439, if the employer had not recognized the
additional $3,768 of transition obligation, the employer would have had a prepaid postretirement
benefit cost equal to that amount.
441. The funded status of the plan at December 31, 1993 and 1994 is reconciled with the amount
shown in the statement of financial position at those dates as follows:
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status
Unrecognized transition obligation
Accrued postretirement benefit cost
12/31/93
Net Change
12/31/94
$(260,400)
0
(260,400)
240,000
$ (20,400)
$39,168
______
39,168
(18,768)
$20,400
$(221,232)
0
(221,232)
221,232d
$
0
____________________
dIn 1995, the straight-line amortization of the unrecognized transition obligation will be $14,749 ($221,232 ÷ 15
years remaining in the transition period).
442. Paragraph 113 states that if at the measurement date for the beginning of an employer’s
fiscal year it is expected that additional recognition of any remaining unrecognized transition
FSP on Statement 158 (FSP FAS 158-1)
83
FSP FAS 158-1
obligation will be required pursuant to paragraph 112, amortization of the transition obligation
for interim reporting purposes shall be based on the amount expected to be amortized for the
year, except for the effects of applying the constraint in paragraph 112 for any settlement
required to be accounted for pursuant to paragraphs 90–94. Those effects shall be recognized
when the related settlement is recognized. The effects of changes during the year in the initial
assessment of whether additional recognition of the unrecognized transition obligation will be
required for the year shall be recognized over the remainder of the year. The amount of the
unrecognized transition obligation to be recognized for a year shall be finally determined at the
end of the year (or the measurement date, if earlier) based on the constraints on delayed
recognition discussed in paragraph 112; any difference between the amortization of the transition
obligation recognized during interim periods and the amount required to be recognized for the
year shall be recognized immediately.
Case 3C—Limitation on Immediate Recognition of Transition Obligation
443. Company F plans to adopt this Statement for its financial statements for the year beginning
January 1, 1993. Company F’s postretirement defined benefit health care plan is presently
accounted for on a pay-as-you-go basis.
444. On January 1, 1991, Company F acquires Company G in a business combination.
Company G has a postretirement health care plan that Company F agrees to combine with its
own plan. Company F assumes the accumulated postretirement benefit obligation of Company
G’s plan as part of the acquisition agreement. However, at the date the business combination is
consummated, no liability is recognized for the postretirement benefit obligation assumed.
445. On July 3, 1992, Company F amends its postretirement benefit plan to provide
postretirement life insurance benefits to its employees; employees are given credit for their
service prior to that date. At the date of the plan amendment, prior service cost is estimated at
$250,000. Average remaining years of service to the full eligibility dates of the plan participants
active at the date of the amendment is 25 years.
446. At December 31, 1992, the accumulated postretirement benefit obligation is $2,000,000;
there are no plan assets or accrued postretirement benefit cost. On January 1, 1993, when
Company F adopts this Statement, it elects to recognize immediately the transition obligation.
Because the plan amendment occurred after December 21, 1990, Company F must treat the
effect of the amendment as unrecognized prior service cost (paragraph 111). Company F elects
to recognize prior service cost on a straight-line basis over the average remaining years of
service to full eligibility of the active plan participants as permitted by paragraph 53. Therefore,
at December 31, 1992, the remaining prior service cost to be recognized over those plan
participants’ future years of service to their full eligibility dates is $245,000 ($250,000 less
$5,000 retroactively recognized for the period from July 3, 1992 to December 31, 1992).
447. Because the purchase business combination also occurred after December 21, 1990,
Company F must retroactively reallocate the purchase price to the assets acquired and
obligations assumed to reflect the postretirement benefit obligation assumed. Company F
determines that the postretirement benefit obligation it assumed with the acquisition of Company
G, measured as of the date of the acquisition, was $800,000. The cumulative effect on
FSP on Statement 158 (FSP FAS 158-1)
84
FSP FAS 158-1
statements of income for the period January 1, 1991 to December 31, 1992 is the amortization of
additional goodwill ($40,000), which Company F recognizes in 1993 as part of the effect of the
change in accounting (paragraph 111).
448. On January 1, 1993, Company F recognizes on its statement of financial position goodwill
of $760,000 and an obligation for postretirement benefits of $1,755,000 ($2,000,000 unfunded
postretirement benefit obligation less $245,000 unrecognized prior service cost). The difference
of $995,000 ($1,755,000 – $760,000) is recognized in the statement of income as the effect of an
accounting change and comprises the following:
Consequences of events affecting accumulated postretirement benefit
obligation other than the business combination and plan amendment
Amortization of goodwill for prior purchase business combination
Amortization of prior service cost for prior plan amendment
Effect of accounting change
$950,000
40,000
5,000
$995,000
The unrecognized prior service cost ($245,000) will be recognized on a delayed basis over the
remaining 24.5-year amortization period for the plan participants active at the date of the
amendment.
Illustration 4—Plan Amendments and Prior Service Cost
449. This Statement requires that, at a minimum, prior service cost arising from a plan initiation
or plan amendment be recognized initially in other comprehensive income with subsequent
amortization in net periodic postretirement benefit cost, at a minimum, by assigning an equal
amount of the prior service cost to each remaining year of service to the full eligibility date of
each plan participant active at the date of the plan initiation or amendment (paragraph 52).
Consistent use of an alternative amortization method that more rapidly reduces the unrecognized
prior service cost in accumulated other comprehensive income is permitted (paragraph 53).
450. Company H has a postretirement benefit plan that provides benefits to employees who
render at least 20 years of service after age 35. On January 2, 20X41994, Company H amends
its postretirement benefit plan to increase the lifetime cap on benefits provided, resulting in
unrecognized prior service cost of $750,000 that is initially recognized in other comprehensive
income (the increase in the accumulated postretirement benefit obligation as a result of the plan
amendment). Amortization of that unrecognized prior service cost is illustrated in Cases 4A and
4B (paragraphs 451–454) illustrate the amortization of prior service cost included in accumulated
other comprehensive income.
Case 4A—Equal Amount Assigned to Each Future Year of Service to Full Eligibility Date
451. The determination of the amortization of prior service cost in net periodic postretirement
benefit cost is based on remaining years of service prior to the full eligibility date of each plan
participant active at the date of the amendment but not yet fully eligible for benefits. (Refer to
the glossary for the definition of plan participant.) Future years of service of active employees
who are not plan participants are excluded. Each remaining year of service prior to the full
eligibility date of each active plan participant not yet fully eligible for benefits is assigned an
FSP on Statement 158 (FSP FAS 158-1)
85
FSP FAS 158-1
equal share of the prior service cost (paragraph 52). Thus, the portion of prior service cost to be
recognized in net periodic postretirement benefit cost in each of those future years is weighted
based on the number of those plan participants expected to render service in each of those future
years.
452. At the date of the amendment (January 2, 20X41994), the Company H has 165 employees
of whom 15 are fully eligible for benefits, 10 are under age 35, and 40 are expected to terminate
before becoming eligible for any benefits. Because the 10 employees under age 35 have not met
the age requirements to participate in the plan (only service after age 35 is credited) and 40
employees are not expected to receive benefits under the plan, those 50 employees are not
considered to be plan participants and, therefore, are excluded from the calculation. The 15 fully
eligible plan participants also are excluded from the calculation because they do not have to
render any additional service to earn the added benefits. The remaining 100 employees have not
yet earned the full amount of the benefits they are expected to earn under the plan. Those
employees are expected to become fully eligible for those benefits over the next 20 years. Their
remaining years of service to full eligibility for benefits is the basis for amortization of the prior
service cost.
453. The following schedules illustrate the calculation of the expected remaining years of service
prior to full eligibility (Schedule 1) and the amortization schedule for recognizing the prior
service cost in net periodic postretirement benefit cost (Schedule 2). Employees hired after the
date of the plan amendment or who attain age 35 after the date of the plan amendment do not
affect the amortization nor do revised estimates of remaining years of service, except those due
to a curtailment.
FSP on Statement 158 (FSP FAS 158-1)
86
FSP FAS 158-1
Schedule 1—Determination of expected remaining years of service prior to full eligibility as of January 2, 20X41994
Remaining
Years of
Service
Prior to
Year
Indiv. Full Elig. 20X4 20X5 20X6 20X7 20X8 20X9 20Y0 20Y1 20Y2 20Y3 20Y4 20Y5 20Y6 20Y7 20Y8 20Y9 20Z0 20Z1 20Z2 20Z3
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
A1–A4
1
4
B1–B6
2
6
6
C1–C5
3
5
5
5
D1–D5
4
5
5
5
5
E1–E7
5
7
7
7
7
7
F1–F5
6
5
5
5
5
5
5
G1–G9
7
9
9
9
9
9
9
9
H1–H7
8
7
7
7
7
7
7
7
7
I1–I5
9
5
5
5
5
5
5
5
5
5
J1–J5
10
5
5
5
5
5
5
5
5
5
5
K1–K4
11
4
4
4
4
4
4
4
4
4
4
4
L1–L8
12
8
8
8
8
8
8
8
8
8
8
8
8
M1–M8
13
8
8
8
8
8
8
8
8
8
8
8
8
8
N1–N5
14
5
5
5
5
5
5
5
5
5
5
5
5
5
5
O1–O4
15
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
P1–P3
16
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
Q1–Q4
17
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
4
R1–R3
18
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
S1–S2
19
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
2
T1
20
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Service Years
Rendered
100
96
90
85
80
73
68
59
52
47
42
38
30
22
17
13
10
6
3
1
Amortization
Fraction
100
932
96
932
90
932
85
932
FSP on Statement 158 (FSP FAS 158-1)
80
932
73
932
68
932
59
932
52
932
47
932
42
932
38
932
30
932
22
932
17
932
13
932
10
932
6
932
3
932
1
932
87
Total
Remaining
Years of
Service
Prior to
Full Elig.
4
12
15
20
35
30
63
56
45
50
44
96
104
70
60
48
68
54
38
20
932
FSP FAS 158-1
Note: To determine total remaining service years prior to full eligibility, consideration is given to the remaining number of years of service to the full eligibility date of each plan participant or
group of plan participants active at the date of the plan amendment who is not yet fully eligible for benefits. For example, in 20X41994, individuals A1–A4 meet the company’s age and service
requirements for full eligibility for the benefits they are expected to receive under the plan. Although it may be expected that those employees will work beyond 20X41994, benefits are not
attributed to years of service beyond their full eligibility date (paragraph 21). Refer to Case 4B, paragraph 454, for less complex amortization approaches.
FSP on Statement 158 (FSP FAS 158-1)
88
FSP FAS 158-1
Schedule 2—Amortization of unrecognized prior service cost
Year
20X41994
20X51995
20X61996
20X71997
20X81998
20X91999
20Y02000
20Y12001
20Y22002
20Y32003
20Y42004
20Y52005
20Y62006
20Y72007
20Y82008
20Y92009
20Z02010
20Z12011
20Z22012
20Z32013
Beginning-ofYear Balance
$750,000
669,528
592,275
519,850
451,449
387,071
328,326
273,605
226,126
184,281
146,459
112,661
82,082
57,940
40,236
26,556
16,095
8,048
3,220
806
Amortization
Rate
100/932
96/932
90/932
85/932
80/932
73/932
68/932
59/932
52/932
47/932
42/932
38/932
30/932
22/932
17/932
13/932
10/932
6/932
3/932
1/932
Amortization
$80,472
77,253
72,425
68,401
64,378
58,745
54,721
47,479
41,845
37,822
33,798
30,579
24,142
17,704
13,680
10,461
8,047
4,828
2,414
806
End-ofYear Balance
$669,528
592,275
519,850
451,449
387,071
328,326
273,605
226,126
184,281
146,459
112,661
82,082
57,940
40,236
26,556
16,095
8,048
3,220
806
0
Case 4B—Straight-Line Amortization over Average Remaining Years of Service to Full Eligibility
Date
454. To reduce the complexity and detail of the computations shown in Case 4A (paragraph 453,
Schedules 1 and 2), alternative amortization approaches that more rapidly reducerecognize prior
service cost related to plan amendments more rapidly previously recognized in other
comprehensive income may be applied if used consistently (paragraph 53). For example, if
Company H (Case 4A) elects to use straight-line amortization of prior service cost over the
average remaining years of service prior to full eligibility for benefits of the active plan
participants (932 future service years ÷ 100 employees = 9.32 years), the amortization would be
as follows:
FSP on Statement 158 (FSP FAS 158-1)
89
FSP FAS 158-1
Year
20X41994
20X51995
20X61996
20X71997
20X81998
20X91999
20Y02000
20Y12001
20Y22002
20Y32003
Beginningof-Year Balance
$750,000
669,528
589,056
508,584
428,112
347,640
267,168
186,696
106,224
25,752
Amortization
$80,472a
80,472
80,472
80,472
80,472
80,472
80,472
80,472
80,472
25,752
End-of-Year
Balance
$669,528
589,056
508,584
428,112
347,640
267,168
186,696
106,224
25,752
0
____________________
a$750,000 ÷ 9.32 years = $80,472.
Note: Under this approach, the first year’s amortization is the same as the first year’s amortization under the
weighted remaining years of service method illustrated in Case 4A (paragraph 453, Schedule 2). Thereafter, the
amortization pattern will differ.
Illustration 5—Accounting for Gains and Losses and Timing of Measurements
455. Gains and losses are changes in the amount of the accumulated postretirement benefit
obligation or plan assets resulting from experience different from that assumed or changes in
assumptions (paragraph 56). This illustration demonstrates the effects of gains and losses in
accounting for postretirement benefits for Company I from 20X31993 to 20X51995. Case 5A
(paragraphs 457–461) illustrates the accounting for a loss resulting from changes in assumptions
in measuring the accumulated postretirement benefit obligation. Case 5B (paragraphs 462–464)
illustrates the effect of a gain when the return on plan assets exceeds projections. Case 5C
(paragraphs 465–467) illustrates the accounting in a year when both gains and losses are
experienced.
FSP on Statement 158 (FSP FAS 158-1)
90
FSP FAS 158-1
456. Company I adopts this Statement for the fiscal year beginning January 1, 1993 and elects a
December 31 measurement date (date at which the accumulated postretirement benefit obligation
and plan assets are measured). Alternatively, as discussed in paragraph 72, the company could
choose a measurement date not earlier than September 30. The cCompany I’s plan is unfunded
and the accumulated postretirement benefit obligation on December 31, 1992 is $6,000,000, and
the plan is unfundedat the beginning of 20X3. There is also a $2,000,000 transition obligation
remaining in accumulated other comprehensive income at that date. Beginning in 20X31993,
and unless otherwise noted, the company decides to funds at the end of each year an amount
equal to the benefits paid that year plus the service cost and interest cost for that year. For
illustrative purposes, the following assumptions are used to project changes in the accumulated
postretirement benefit obligation and plan assets during the period 20X31993–20X51995:
Discount rate
Expected long-term rate of return
on plan assets
Average remaining years of service
of active plan participants
20X3
1993
20X4
1994
9.5%
9.0%
9.0%
10.0%
10.0%
12
12
12
20X5
1995
Case 5A—Loss on Obligation
457. The reconciliation of the funded status of Company I’s postretirement benefit plan with the
amount shown in the statement of financial position at the date of transition (January 1, 1993)
follows:
Actual
1/1/93
Accumulated postretirement benefit obligation
Plan assets at fair value
Funded status
Unrecognized transition obligation
(Accrued)/prepaid postretirement benefit cost
$(6,000,000)
0
(6,000,000)
6,000,000
$
0
458. Pursuant to paragraph 112, Company I elects to amortizes the unrecognized transition
obligation remaining in accumulated other comprehensive income over a 20-year period rather
than the average remaining service period of active plan participants at the date of transition (12
years). Projected changes in net periodicprepaid postretirement benefit cost and other
comprehensive income for 20X3, and changes in theaccumulated postretirement benefit
liabilityobligation, unrecognized transition obligation, and accumulated other comprehensive
income forplan assets in 20X31993 are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
91
FSP FAS 158-1
Unrecognized
Transition
Obligation
Accumulated
Remaining in
Net Periodic
Postretirement Accumulated
Other
Benefit
Other
Prepaid
Postretirement Comprehensive Liability
Comprehensive
Income
Obligation
Income
Plan Assets
Benefit Cost
Beginning of year 20X3
Recognition of components of net
periodic postretirement benefit cost:
Service cost
Interest cost
Amortization of
transition obligation
Total net periodic postretirement
benefit cost
Total other comprehensive income
Excess of Aassets contributed
to plan over benefit payments
($1,500,000 – $630,000 = $870,000)
Benefit payments from plan
Net change
End of year 20X3—projected
FSP on Statement 158 (FSP FAS 158-1)
$
0
$(6,000,000)
$ (300,000)
(570,000)
(300,000)
$2,000,000
6,000,000
$
0
(300,000)
(570,000)
$(300,000)
$(1,170,000)
________
(870,000)
(300,000)
(300,000)
$(300,000)
1,500,000
________
330,000
$ 330,000
870,000
630,000
630,000
(240,000)
$(5,370,000)
(6,240,000)
(300,000)
$1,700,000
5,700,000
1,500,000
(630,000)
870,000
$870,000
92
FSP FAS 158-1
459. When Company I’s plan assets and obligations are measured at December 31, 20X31993,
the accumulated postretirement benefit obligation is $760,000 greater than had been projected (a
loss occurs) because the discount rate declined to 9 percent and for various other reasons not
specifically identified. Company I elects to amortize amounts in excess of the “corridor” over
the average remaining service period of active plan participants.a
460. The projected and actual postretirement benefit liability and accumulated other
comprehensive incomechange in the funded status of the plan at December 31, 20X31993, and
the difference between those projected and actual amounts from amounts projected and the
reconciliation of the funded status of the plan with the amount shown in the statement of
financial position at that date follow:
____________________
aParagraph 59 states that, at a minimum, amortization of an unrecognized net gain or loss remaining in accumulated
other comprehensive income is included as a component of net periodic postretirement benefit cost if, as of the
beginning of the year, that unrecognized net gain or loss exceeds 10 percent of the greater of the accumulated
postretirement benefit obligation or market-related value of plan assets. As used herein, amounts in excess of the
corridor refers to the portion of the unrecognized net gain or loss remaining in accumulated other comprehensive
income in excess of the greater of those defined amounts.
FSP on Statement 158 (FSP FAS 158-1)
93
FSP FAS 158-1
Projected
12/31/X3
12/31/93
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status and recognized liability
Accumulated other
comprehensive income:
Unrecognized nNet loss
Unrecognized tTransition obligation
Prepaid postretirement benefit cost
Net Loss
Recognized
Actual
in Other
Comprehensive 12/31/X3
Income
12/31/93
$(6,240,000)
870,000
$(5,370,000)
$(760,000)
________
$(760,000)
$(7,000,000)
870,000
$(6,130,000)
$
0
1,700,000
5,700,000
$1,700,000
330,000
$760,000
_______
$ 760,000
1,700,000
5,700,000
$2,460,000
330,000
$760,000
0
461. In addition to the disclosures regarding changes in plan assets and benefit obligations
required by paragraphs 5(a) and 5(b) of Statement 132(R) funded status reconciliation, the
20X31993 financial statements include the following disclosure of the components of net
periodic postretirement benefit cost (as required by paragraph 5(h) of Statement 132(R)):
Service cost
Interest cost
Amortization of transition obligation
Net periodic postretirement benefit cost
$ 300,000
570,000
300,000
$1,170,000
Case 5B—Gain on Assets
462. Changes in Net periodicprepaid postretirement benefit cost and other comprehensive
income for 20X4, and changes in theaccumulated postretirement benefit liabilityobligation,
unrecognized transition obligation, unrecognized net loss, and accumulated other comprehensive
incomeplan assets are projected at the beginning of the year. That projection serves as the basis
for interim accounting until a subsequent event occurs requiring remeasurement. The projection
at the beginning of 20X41994 follows:
FSP on Statement 158 (FSP FAS 158-1)
94
FSP FAS 158-1
Net Periodic
Prepaid
Postretirement
Benefit Cost
Beginning of year 20X4
Recognition of components of net periodic
postretirement benefit
cost:
Service cost
Interest cost
Amortization of transition obligation
Amortization of unrecognized net lossa
Expected return on
plan assetsb
Amounts Remaining in
Accumulated
Accumulated Other
Postretirement
Comprehensive Income
Other
Benefit
Unrecognized
Comprehensive Liability
Transition
Unrecognized
Income
Obligation
Obligation
Net Loss_
$ 330,000
$(6,130,000)
(7,000,000)
$ (320,000)
(630,000)
$(300,000)
(5,000)
(5,000)
Total net periodic
postretirement
benefit cost
$(1,168,000)
Total other comprehensive
income
FSP on Statement 158 (FSP FAS 158-1)
$760,000
$ 870,000
(320,000)
(630,000)
(300,000)
(87,000)
$1,700,000
5,700,000
Plan Assets
_______
(300,000)
(5,000)
87,000
(950,000)
(300,000)
(5,000)
87,000
87,000
$(305,000)
95
FSP FAS 158-1
Excess of Aassets contributed
to plan over benefit
payments ($1,650,000 –
$700,000 = $950,000)
1,650,000
Benefit payments
from plan
_________
Net change
482,000
End of year 20X4
—projected
$ 812,000
950,000
700,000
787,000
(250,000)
$(5,343,000)
(7,250,000)
1,650,000
(300,000)
$1,400,000
5,400,000
(5,000)
$755,000
(700,000)
1,037,000
$1,907,000
____________________
aRefer to Schedule 2 (paragraph 469) for computation.
bRefer to Schedule 1 (paragraph 468) for computation.
FSP on Statement 158 (FSP FAS 158-1)
96
FSP FAS 158-1
463. When Company I’s plan assets and obligations are measured at December 31, 20X41994,
the fair value of the plan assets is $150,000 greater than expected (an experience gain) because
market performance was better than the 10 percent return that was assumed. The projected and
actual postretirement benefit liability and accumulated other comprehensive income change in
the funded status of the plan at December 31, 20X41994, and the difference between those
projected and actual amounts from amounts projected and the reconciliation of the funded status
of the plan with the amount shown in the statement of financial position at that date follow:
Projected
12/31/X4
12/31/94
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status and recognized liability
Accumulated other
comprehensive income:
Unrecognized nNet (gain) or loss
Unrecognized tTransition obligation
Prepaid postretirement benefit cost
$(7,250,000)
1,907,000
$(5,343,000)
$ 755,000
1,400,000
5,400,000
$2,155,000
$812,000
Net Gain
Recognized in
Other
Actual
Comprehensive 12/31/X4
Income
12/31/94
$150,000c
$150,000
$(150,000)
________
$(150,000)
$0
$(7,250,000)
2,057,000
$(5,193,000)
$ 605,000
1,400,000
5,400,000
$2,005,000
$812,000
____________________
cRefer to Schedule 1 (paragraph 468) for computation.
FSP on Statement 158 (FSP FAS 158-1)
97
FSP FAS 158-1
464. The 20X41994 financial statements include the following disclosure of the components of
net periodic postretirement benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Amortization ofRecognized net actuarial loss
Net periodic postretirement benefit cost
$ 320,000
630,000
(87,000)
300,000
5,000
$1,168,000
Case 5C—Loss on Assets and Gain on Obligation
465. Projected changes in net periodicprepaid postretirement benefit cost and other
comprehensive income for 20X5, and changes in the accumulated postretirement benefit
liabilityobligation, unrecognized transition obligation, unrecognized net loss, and accumulated
other comprehensive incomeplan assets for 20X51995 are summarized as follows:
FSP on Statement 158 (FSP FAS 158-1)
98
FSP FAS 158-1
Net Periodic
Prepaid
Postretirement
Benefit Cost
Beginning of year 20X5
Recognition of components of net periodic
postretirement benefit
cost:
Service cost
Interest cost
Amortization of
transition obligation
Amortization of
unrecognized net lossa
Expected return on
plan assetsb
Total net periodic
postretirement
benefit cost
Total other
comprehensive income
Amounts Remaining in
Accumulated
Accumulated Other
Postretirement
Comprehensive Income
Other
Benefit
Unrecognized
Comprehensive Liability
Transition
Unrecognized
Income
Obligation
Obligation
Net Loss_
$ 812,000
$(5,193,000)
(7,250,000)
$(360,000)
(652,500)
(300,000)
0
(193,700)
193,700
$605,000
$2,057,000
(360,000)
(652,500)
$(300,000)
(300,000)
0
_________
0
193,700
193,700
$(1,118,800)
FSP on Statement 158 (FSP FAS 158-1)
$1,400,000
5,400,000
Plan Assets
(1,012,500)
(300,000)
0
193,700
$(300,000)
99
FSP FAS 158-1
Excess of Aassets
contributed to plan over
benefit payments
($1,912,500 – $900,000 =
$1,012,500)
1,912,500
Benefit payments from
plan
_________
Net change
793,700
End of year 20X5
—projected
$1,605,700
1,012,500
900,000
1,093,700
(112,500)
$(4,099,300)
$(7,362,500)
1,912,500
_________
(300,000)
_______
0
$1,100,000
5,100,000
$605,000
(900,000)
1,206,200
$3,263,200
____________________
aRefer to Schedule 2 (paragraph 469) for computation.
bRefer to Schedule 1 (paragraph 468) for computation.
FSP on Statement 158 (FSP FAS 158-1)
100
FSP FAS 158-1
466. When Company I’s plan assets and obligations are measured at December 31, 20X51995,
both an asset loss of $220,360 and a liability gain of $237,260 are determined. The projected
and actual postretirement benefit liability and accumulated other comprehensive income change
in the funded status of the plan at December 31, 20X51995, and the difference between those
projected and actual amounts from amounts projected and the reconciliation of the funded status
of the plan with the amount shown in the statement of financial position at that date follow:
Net Gain/Loss
Recognized in
Other
Projected Comprehensive Actual
12/31/X5
Income
12/31/X5
12/31/95
12/31/95
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status and recognized liability
Accumulated other
comprehensive income:
Unrecognized nNet (gain) or loss
Unrecognized tTransition obligation
Prepaid postretirement benefit cost
$(7,362,500)
3,263,200
$(4,099,300)
$ 605,000
1,100,000
5,100,000
$1,705,000
1,605,700
$237,260
$(7,125,240)
c
(220,360)
3,042,840
$ 16,900
$(4,082,400)
$(16,900)
$(16,900)
$ 588,100
1,100,000
5,100,000
$1,688,100
1,605,700
____________________
cRefer to Schedule 1 (paragraph 468) for computation.
FSP on Statement 158 (FSP FAS 158-1)
101
FSP FAS 158-1
467. The 20X51995 financial statements include the following disclosure of the components of
net periodic postretirement benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of transition obligation
Net periodic postretirement benefit cost
$ 360,000
652,500
(193,700)
300,000
$1,118,800
Supporting Schedules
Schedule 1—Plan assets
468. This Statement requires use of an assumption about the long-term rate of return on plan
assets and a market-related value of plan assets to calculate the expected return on plan assets. If
the fund holding plan assets is a taxable entity, the expected long-term rate of return on plan
assets is net of estimated income taxes, and the nonbenefit liability for accrued income taxes
reduces plan assets. This Statement defines market-related asset value as either fair value or a
calculated value that recognizes changes in fair value in a systematic and rational manner over
not more than five years (paragraph 57). This schedule reflects the calculation of market-related
value, the fair value of plan assets, the actual return on plan assets, and the deferred asset gain or
loss for the year (the difference between actual and expected return on plan assets included in the
net amortization and deferral component of net periodic postretirement benefit cost).
FSP on Statement 158 (FSP FAS 158-1)
102
FSP FAS 158-1
20X4
1994
20X3
1993
Expected long-term rate of return
on plan assets
Beginning balance, market-related valuea
Contributions to plan (end of year)
Benefits paid by plan
Expected return on plan assets
10.0%
$ 870,000
1,650,000
(700,000)
87,000
1,907,000
10.0%
$1,937,000
1,912,500
(900,000)
193,700
3,143,200
$ 870,000
30,000
$1,937,000
(14,072)
$3,129,128
$
0
1,500,000
(630,000)
0
$ 870,000
1,650,000
(700,000)
237,000
$2,057,000
1,912,500
(900,000)
(26,660)
$ 870,000
$
0
$2,057,000
$ 150,000
$3,042,840
$ (220,360)
$
$ 120,000
$
$
0
1,500,000
(630,000)
870,000
20% of each of last 5 years’ asset gains
(losses)
Ending balance, market-related value
Beginning balance, fair value of
plan assets
Contributions to plan
Benefits paid
Actual return (loss) on plan assetsb
Ending balance, fair value of plan
assets
Deferred asset gain (loss) for yearc
Gain (loss) not included in ending
balance of market-related valued
20X5
1995
0
(86,288)
____________________
aThis example uses an approach that adds in 20% of each of the last 5 years’ gains or losses.
bRefer to Schedule 3 (paragraph 470) for computation.
c(Actual return on plan assets) – (expected return on plan assets).
d(Ending balance, fair value of plan assets) – (ending balance, market-related value of plan assets).
FSP on Statement 158 (FSP FAS 158-1)
103
FSP FAS 158-1
Schedule 2—Test for amortization in net periodic postretirement benefit cost of unrecognized the net
gain or loss initially recognized in other comprehensive income
469. This Statement generally does not require immediate recognition in net periodic
postretirement benefit cost of any of the gain or loss in the period in which it arises. Rather, it
and permits initial recognition of gains and losses in other comprehensive income with a
minimum amortization of an unrecognized the net gain or loss in accumulated other
comprehensive income whereby the net amount in excess of the “corridor” is amortized over the
average remaining service period of active plan participants (paragraph 59 and paragraph 459,
footnote a). That allows a reasonable opportunity for gains and losses to offset each other
without affecting net periodic postretirement benefit cost.
20X3
1993
20X4
1994
20X5
1995
10% of beginning balance of accumulated
postretirement benefit obligation
10% of beginning balance of marketrelated value of plan assetse
$600,000
$700,000
$725,000
$
0
$ 87,000
$193,700
Greater of the above
$600,000
$700,000
$725,000
Unrecognized nNet (gain) loss in accumulated
other comprehensive income at beginning of year
Asset gain (loss) not included in beginning
balance of market-related valuef
Amount subject to amortization
$760,000
$605,000
0
$760,000
120,000
$725,000
Amount in excess of the corridor
subject to amortization
$ 60,000
$
Divided by average remaining
service period (years)
Required amortization
0
12
$ 5,000
____________________
eRefer to Schedule 1 (paragraph 468) for calculation of market-related value of plan assets.
fRefer to Schedule 1 (paragraph 468) for calculation of gain or loss not included in prior year’s ending balance
market-related value.
FSP on Statement 158 (FSP FAS 158-1)
104
FSP FAS 158-1
Schedule 3—Determination of actual return or loss on plan assets
470. The determination of the actual return or loss on plan assets component of net periodic
postretirement benefit cost is as follows:
Plan assets at fair value, beginning of year
Plus: assets contributed to plan
Less: benefit payments from plan
Less: plan assets at fair value, end of year
Actual (return) loss on plan assets
20X3
1993
20X4
1994
$
0
1,500,000
(630,000)
870,000
(870,000)
$
0
$ 870,000
1,650,000
(700,000)
1,820,000
(2,057,000)
$ (237,000)
20X5
1995
$2,057,000
1,912,500
(900,000)
3,069,500
(3,042,840)
$ 26,660
471. [This paragraph has been deleted. See Status page.]
Illustration 6—Defined-Dollar Capped Plans
472. The following cases (6A and 6B, paragraphs 473–478) demonstrate the operation of
defined-dollar capped plans and the possible effect of the “cap” on projecting costs for purposes
of measuring the accumulated postretirement benefit obligation and net periodic postretirement
benefit cost. The examples are simplified and illustrate only one aspect of the measurement
process (paragraph 17 and paragraph 33, footnote 13).
Case 6A—Dollar Cap Defined on Individual Coverage
473. Company J sponsors a postretirement health care plan for its salaried employees. The plan
has an annual limitation (a “cap”) on the dollar amount of the employer’s share of the cost of
covered benefits incurred by a plan participant. The retiree is responsible, therefore, for the
amount by which the cost of the benefit coverage under the plan incurred during a year exceeds
that cap. The company adjusts the cap annually for the effects of inflation. For 20X31993, the
cap is $1,500; the inflation adjustment in 20X41994 and 20X51995 is assumed to be 4 percent.
The employer’s health care cost trend rate assumption is 13 percent for 20X41994 and 12
percent for 20X51995.
474. The employer’s projected cost of providing benefit coverage in 20X31993–20X51995 for a
67-year-old retiree follows. Similar projections are made for each age at which a plan participant
is expected to receive benefits under the plan. In this example, the incurred claims cost exceeds
the cap on the employer’s share of the cost in each year.
FSP on Statement 158 (FSP FAS 158-1)
105
FSP FAS 158-1
Expected Cost for 67-Year-Old Retiree
20X3
20X4
20X5
1993
1994
1995
Gross eligible charges
Medicarea
Deductible/coinsurance
Incurred claims cost
Annual cap on employer’s cost
Employer’s share of incurred claims cost
Retiree’s share of gross eligible chargesb
$3,065
(890)
(325)
$1,850
$1,500
$1,500
$ 675
$3,463
(1,003)
(340)
$2,120
$1,560
$1,560
$ 900
$3,879
(1,125)
(355)
$2,399
$1,622
$1,622
$1,132
____________________
aThe change in Medicare reflects the portion of the gross eligible charges for which Medicare is responsible under
enacted Medicare legislation.
bDeductible/coinsurance plus share of incurred claims:
199320X3—[$325 + ($1,850 – $1,500)]; 199420X4—[$340 + ($2,120 – $1,560)]; 199520X5—[$355 + ($2,399 –
$1,622)].
475. If, based on the health care cost trend rate assumptions, the employer’s share of costs for
each plan participant is not expected to be less than the cap in the future, Company J could
measure its expected postretirement benefit obligation by projecting the annual cap. However, if
per capita claims data for some plan participants or estimates of the health care cost trend rate
indicate that in the future the employer’s share of the incurred claims cost will be less than the
cap for at least some plan participants, the employer’s obligation is to be measured as described
in paragraphs 34–42.
Case 6B—Dollar Cap Defined in the Aggregate for the Retiree Group
476. Company K sponsors a contributory postretirement health care plan for its hourly
employees. The plan has an annual limitation (a “cap”) on the dollar amount of the employer’s
share of the cost of covered benefits incurred by the retiree group as a whole. The Company
agrees to bear annual costs equal to a specified dollar amount ($1,500 in 20X31993) multiplied
by the number of retired plan participants (the employer contribution); participating retirees are
required to contribute a stated amount each year ($1,000 in 20X31993). The cap on the
employer’s share of annual costs and the retirees’ contribution rates are increased 5 percent
annually. The shortfall in a year (the amount by which incurred claims cost exceed the
combined employer and retiree contributions) is initially borne by the employer but is passed
back to retirees in the subsequent year through supplemental retiree contributions for that year (a
retrospective adjustment).
477. The employer projects the aggregate cost of benefits expected to be paid to current plan
participants (40 retirees) in each future period as follows:
FSP on Statement 158 (FSP FAS 158-1)
106
FSP FAS 158-1
Gross eligible charges
Medicare
Deductible/coinsurance
Incurred claims cost
Retiree contributionsa
Maximum employer contributionb
Shortfall (to be recovered by
additional retiree contributions
in subsequent year)
Supplemental contribution from
retirees due to shortfall in prior year
20X3
1993
20X4
1994
20X5
1995
$160,000
(46,500)
(20,750)
$ 92,750
$ 40,000
60,000
$100,000
$215,000
(62,350)
(27,440)
$125,210
$ 42,000
63,000
$105,000
$197,000
(57,300)
(24,700)
$115,000
$ 44,080
66,160
$110,240
$ 20,210
$ 4,760
$ 20,210
____________________
aPer retiree: 199320X3—$1,000; 199420X4—$1,050; 199520X5—$1,102.
bPer retiree: 199320X3—$1,500; 199420X4—$1,575; 199520X5—$1,654.
478. If, as in this example, retirees absorb the entire shortfall in annual contributions and if there
is a projected shortfall for all future years, the employer could measure its expected
postretirement benefit obligation by projecting its annual contribution (contribution rate ×
expected number of retirees = expected obligation for the year).
Illustration 7—Disclosure Requirements
479–483. [These paragraphs have been replaced. See Status page. Refer to the illustrations in
paragraphs C1 through C5 in Statement 132(R).]
FSP on Statement 158 (FSP FAS 158-1)
107
FSP FAS 158-1
Illustration 8—Accounting for Settlements
484. This Statement provides for delayed recognition in net periodic postretirement benefit cost
of the effects of a plan initiation or a plan amendment, the transition obligation or transition
asset, and gains or losses arising in the ordinary course of operations. That is, this Statement
permits those amounts to be recognized in other comprehensive income with subsequent
amortization in net periodic postretirement benefit cost. In certain circumstances, however,
recognition in net periodic postretirement benefit cost of some or all of those previously delayed
amounts initially recognized in other comprehensive income is appropriate. Settlements are
events that may require income or expense recognition of certain previously unrecognized
amounts initially recognized in other comprehensive income and adjustments to liabilities or
assets recognized in the employer’s statement of financial position. The settlement of all or part
of the accumulated postretirement benefit obligation is anthe event that requires recognition in
income of all or part of a previously unrecognized net gain or loss and unrecognized transition
asset remaining in accumulated other comprehensive income. A settlement also may accelerate
recognition in income of a transition obligation under the constraint in paragraph 112
(paragraphs 92 and 93). The following cases (8A–8C, paragraphs 485–495) illustrate the
accounting for settlements in various circumstances.
Case 8A—Settlement When an Unrecognized Transition Obligation Remains in Accumulated Other
Comprehensive IncomeExists
485. Company L sponsors a postretirement life insurance plan. On January 1, 1993, the
company adopts this Statement; prior to that date it accounted for postretirement benefits on a
pay-as-you-go (cash) basis. On December 31, 20X41994, Company L settles the accumulated
postretirement benefit obligation for its current retirees ($70,000) through the purchase of
nonparticipating life insurance contracts.
486. In accounting for the settlement, Company L must determine whether recognition in
income of an additional amount of any unrecognized transition obligation remaining in
accumulated other comprehensive income is required pursuant to the constraint on delayed
recognition in income of the transition obligation (paragraphs 112 and 113). At December 31,
20X41994, the cumulative postretirement benefit cost accrued subsequent to the date of
transition exceeds the cumulative benefits payments subsequent to that date (including payments
made pursuant to the settlement in this example); thus, the constraint on delayed recognition in
income of the transition obligation remaining in accumulated other comprehensive income is not
operative. The results of the settlement are as follows:
FSP on Statement 158 (FSP FAS 158-1)
108
FSP FAS 158-1
December 31, 20X41994
Before
After
Settlement Settlement
Settlement
Accumulated postretirement
benefit obligation
$(257,000)
Plan assets at fair value
73,000
Funded status and recognized liability $(184,000)
Accumulated other
comprehensive income:
$ (44,575)
Unrecognized nNet gain
Unrecognized pPrior service cost
33,000
Unrecognized tTransition obligation 195,000
Accrued postretirement benefit cost
$183,425
(575)
$ 70,000
(70,000)a
$
0
$(187,000)
3,000
$(184,000)
$12,124a
$ (32,451)
33,000
182,876
$183,425
(575)
(12,124)a
$
0
____________________
aThe maximum settlement gain subject to recognition in income is the unrecognized net gain included in
accumulated other comprehensive income subsequent to transition plus any unrecognized transition asset remaining
in accumulated other comprehensive income ($44,575 + $0 = $44,575) (paragraph 92). If, as in this case, only part
of the accumulated postretirement benefit obligation is settled, a pro rata portion of the maximum gain based on the
relationship of the accumulated postretirement benefit obligation settled to the total accumulated postretirement
benefit obligation ($70,000 ÷ $257,000 or 27.2%) is subject to recognition in income. That amount ($44,575 ×
27.2% = $12,124) must first reduce any unrecognized transition obligation remaining in accumulated other
comprehensive income; any excess is recognized in income in the current period (paragraph 93). In this case, the
settlement gain is entirely offset against the unrecognized transition obligation remaining in accumulated other
comprehensive income.
Case 8B—Settlement When an Unrecognized Transition Asset Remains in Accumulated Other
Comprehensive IncomeExists
487. Company M sponsors a postretirement life insurance plan. On January 2, 20X51995,
Company M settles the accumulated postretirement benefit obligation for its current retirees
($200,000) through the purchase of nonparticipating life insurance contracts.
488. Pursuant to paragraphs 92 and 93, a settlement gain of $78,506 is recognized in income,
determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
109
FSP FAS 158-1
January 2, 20X51995
Before
After
Settlement Settlement
Settlement
Accumulated postretirement
benefit obligation
Plan assets at fair value
Funded status and recognized [asset]
Accumulated other
comprehensive income:
Unrecognized nNet gain
Unrecognized pPrior service cost
Unrecognized tTransition asset
Prepaid postretirement benefit cost
$(257,000)
350,900
$ 93,900
$200,000
(200,000)
$
0
$(57,000)
150,900
$ 93,900
$(44,575)
33,000
(56,333)
$(67,908)
25,992
$34,679a
$ (9,896)
33,000
(12,506)
$10,598
104,498
43,827a
$78,506
____________________
aThe maximum settlement gain is measured as the unrecognized net gain included in accumulated other
comprehensive income subsequent to transition plus the unrecognized transition asset remaining in accumulated
other comprehensive income ($44,575 + $56,333 = $100,908) (paragraph 92). Since only a portion of the
accumulated postretirement benefit obligation is settled, a pro rata portion of the maximum gain based on the
relationship of the accumulated postretirement benefit obligation settled to the total accumulated postretirement
benefit obligation ($200,000/$257,000 or 77.8%) is subject to recognition in income. That amount ($100,908 ×
77.8% = $78,506) must first reduce any unrecognized transition obligation remaining in accumulated other
comprehensive income ($0); any excess is recognized in income in the current period (paragraph 93). In this case,
the entire settlement gain of $78,506 is recognized in income. The transition constraint of paragraph 112 that
requires additional recognition in income of a transition obligation remaining in accumulated other comprehensive
income in certain circumstances is not applicable because there is an unrecognized transition asset remaining in
accumulated other comprehensive income.
Case 8C—Effect of Mid-Year Settlement on Transition Constraint
489. A settlement is an event that requires remeasurement of the accumulated postretirement
benefit obligation prior to the settlement. This case illustrates the accounting for a settlement of
part of the accumulated postretirement benefit obligation that occurs mid-year and the interaction
between that event and other provisions of the Statement, such as the constraint on delayed
recognition in net periodic postretirement benefit cost of the transition obligation.
490. Company N adopts this Statement for the fiscal year beginning January 1, 1993 and elects a
year-end (December 31) measurement date. At the date of transition, the cCompany N’s
accumulated postretirement benefit obligation for its postretirement life insurance plan wasis
$6,000,000, and there wereare no plan assets. In 20X31993, the company establishes a policy of
funding at the end of each year an amount equal to the benefits paid during the year plus the
service and interest cost for the year. Benefits are paid at the end of each year and in 20X31993
are $630,000, which is less than the net periodic postretirement benefit cost accrued for the year
($1,170,000); thus, no additional transition obligation is recognized in net periodic
postretirement benefit cost pursuant to paragraph 112. Company N elects to amortize net
unrecognized gains and losses included in accumulated other comprehensive income in excess of
FSP on Statement 158 (FSP FAS 158-1)
110
FSP FAS 158-1
the “corridor” over the average remaining service period of plan participants (paragraph 59 and
paragraph 459, footnote a).
491. At the beginning of 20X41994, Company N projects the life insurance benefits expected to
be paid in 20X41994 to retirees’ beneficiaries to determine whether recognition in net periodic
postretirement benefit cost of an additional amount of the unrecognized transition obligation
remaining in accumulated other comprehensive income will be required (paragraph 113).
Although Company N is considering settling a portion of the accumulated postretirement benefit
obligation, the effects of the settlement are not included in the projection because plan
settlements are not anticipated for measurement or recognition prior to their occurrence. The
projection indicates that no additional amount is required to be recognized in net periodic
postretirement benefit cost. On June 30, 20X41994, Company N contributes additional funds
($1,430,000) and settles a portion ($1,900,000) of the accumulated postretirement benefit
obligation for its current retirees through the purchase of nonparticipating life insurance
contracts.
492. The changes in the funded status of the plan and amounts included in accumulated other
comprehensive income during the first six months of the year and a reconciliation of the funded
status of the plan with the amount shown in the statement of financial position immediately prior
to the settlement are as follows:
FSP on Statement 158 (FSP FAS 158-1)
111
FSP FAS 158-1
Actual
12/31/X3
12/31/93
Accumulated postretirement benefit
obligation
$(6,600,000)
Plan assets at fair value
870,000
Funded status and
recognized liability $(5,730,000)
Accumulated other
comprehensive income:
Unrecognized nNet
(gain) or loss
$ 360,000
Unrecognized tTransition obligation
5,700,000
Total accumulated other
comprehensive income $6,060,000
Total net periodicPrepaid
postretirement benefit cost 330,000
Effects of
Remeasurement
Six Months
Assets
Immediately
Before
Postretirement Contributed
before
Settlement
Benefit Cost
to Plan
Settlement
6/30/X4
6/30/94
$(457,000)a
43,500c
$1,430,000
$420,000b
0b
$(6,637,000)
2,343,500
(413,500)
$1,430,000
$420,000
$(4,293,500)
$(420,000)b
$ (60,000)
(150,000)
_______
5,550,000
(150,000)
$(420,000)
$5,490,000d
0
$(563,500)
$1,430,000
0
1,196,500
____________________
aRepresents 6 months’ service cost of $160,000 and interest cost of $297,000 on the accumulated postretirement
benefit obligation for 20X41994, assuming a 9% discount rate.
bA gain results from the remeasurement of the accumulated postretirement benefit obligation immediately prior to
the settlement as a result of a change in the assumed discount rates based on the interest rates inherent in the price at
which the accumulated postretirement benefit obligation for the retirees will be settled. No gain or loss results from
remeasurement of plan assets.
cRepresents 6 months’ return on plan assets, assuming a 10% return.
dBecause there is a settlement (treated as a benefit payment) and a prepaid asset exists as a result of providing the
funds are provided by the employer to effect that settlement, the constraint on delayed recognition in net periodic
postretirement benefit cost of the transition obligation pursuant to paragraph 112 may be applicable. The test to
determine whether additional recognition in income is necessary should be done based on amounts for the full year
(paragraph 494).
493. In accounting for a settlement, an employer must determine whether recognition in income
of an additional amount of any unrecognized transition obligation remaining in accumulated
other comprehensive income is required pursuant to the constraint on delayed recognition in
income (paragraph 112). Any additional transition obligation required to be recognized in
income as a result of a settlement is recognized when the related settlement is recognized
(paragraph 113) as illustrated in the following table. Detailed calculations are presented in
paragraph 494.
FSP on Statement 158 (FSP FAS 158-1)
112
FSP FAS 158-1
Before
Settlement
Accumulated postretirement
benefit obligation
Plan assets at fair value
Funded status and recognized
liability
Accumulated other
comprehensive income:
Unrecognized nNet (gain)
or loss
Unrecognized tTransition
obligation
Prepaid postretirement
benefit cost
June 30, 20X41994
Recognition in
Income
of Transition
After
Settlement
Obligation Settlement
$(6,637,000)
2,343,500
$1,900,000
(1,900,000)
$(4,737,000)
443,500
$(4,293,500)
$
$(4,293,500)
$
(60,000)
5,550,000
$5,490,000
1,196,500
0
$17,160e
$
(42,840)
(17,160)e
$(718,822)
$
$(718,822) $4,771,178
477,678
0
4,814,018
____________________
eThe maximum settlement gain subject to recognition in income is the unrecognized net gain included in
accumulated other comprehensive income subsequent to transition plus any unrecognized transition asset remaining
in accumulated other comprehensive income ($60,000 + $0 = $60,000). If, as in this case, only part of the
accumulated postretirement benefit obligation is settled, a pro rata portion of the maximum gain based on the
relationship of the accumulated postretirement benefit obligation settled to the total accumulated postretirement
benefit obligation ($1,900,000 ÷ $6,637,000 or 28.6%) is subject to recognition in income. That amount ($60,000 ×
28.6% = $17,160) must first reduce any unrecognized transition obligation remaining in accumulated other
comprehensive income (paragraph 93); any excess is recognized in income. In this situation, the settlement gain is
entirely offset against the unrecognized transition obligation remaining in accumulated other comprehensive income.
494. When a settlement occurs in the middle of the year, as in this example, the additional
transition obligation to be recognized in income, if any, pursuant to the constraint in paragraph
112 is determined based on projected amounts for the full year. In this case, at June 30,
20X41994, cumulative benefit payments from the date of transition (January 1, 1993) to
December 31, 20X41994 are projected to exceed cumulative postretirement benefit cost accrued
for that same period as illustrated in the following table. The additional transition obligation to
be recognized in income is the amount by which cumulative benefit payments exceed cost
accrued, or $718,822.
FSP on Statement 158 (FSP FAS 158-1)
113
FSP FAS 158-1
Projected
12/31/X4
12/31/94
Benefit payments:
Date of transition1/1/93 to beginning of 20X41994
20X41994 excluding settlement
Settlement
Cumulative benefit payments
Postretirement benefit cost recognized:
Date of transition1/1/93 to beginning of 20X41994
20X41994
Cumulative cost recognized
Benefit payments in excess of cost recognized
$ 9,160,000
630,000
410,000
1,900,000
$11,470,000
2,940,000
$ 9,700,000
1,170,000
1,051,178 f
$10,751,178
2,221,178
$
718,822
____________________
f$563,500 for period 1/1/X4–6/30/X41/1/94–6/30/94 plus $487,678 for period 7/1/X4–12/31/X47/1/94–12/31/94.
The net postretirement benefit cost of $487,678 recognized in the second half of 20X41994 (paragraph 495) includes
amortization ($130,108) of the unrecognized transition obligation that remains in accumulated other comprehensive
income after recognizing in income an additional portion ($718,822) of the unrecognized transition obligation
remaining in accumulated other comprehensive income pursuant to paragraph 112. Because determination of the
additional portion of the transition obligation to be recognized in income and the transition obligation amortized in
income in the second half of 20X41994 are interrelated, those amounts are determined in a single computation that
is intended to result in theunrecognized transition obligation remaining in accumulated other comprehensive income
at the end of the year that appropriately reflects the constraint of paragraph 112.
495. After the settlement, net periodic postretirement benefit cost for the remainder of the year is
remeasured. The projected funded status of the plan and the amounts remaining in accumulated
other comprehensive incomereconciled to the projected amounts to be shown in the statement of
financial position follows:
FSP on Statement 158 (FSP FAS 158-1)
114
FSP FAS 158-1
After
Settlement
6/30/X4
6/30/94
Accumulated postretirement benefit
obligation
Plan assets at fair value
Funded status and
recognized liability
Six Months
Postretirement
Benefit Cost
Benefit
Payments
Contributed
to Plan
$(4,737,000)
443,500
$(379,745)g
22,175h
$410,000
(410,000)
$1,246,745
$(4,706,745)
1,302,420
$(4,293,500)
(357,570)
$
$1,246,745
$(3,404,325)
0
Projected
12/31/X4
12/31/94
Accumulated other
comprehensive income:
Unrecognized nNet gain
UnrecognizedtTransition
obligation
Total accumulated other
comprehensive income
Total net periodic
(Accrued)/prepaid postretirement benefit cost
$ (42,840)
0
$(42,840)
4,814,018
(130,108)i
4,683,910
$4,771,178
(130,108)
$4,641,070
477,678
$(487,678)
$
0
$1,246,745
1,236,745
____________________
gRepresents 6 months’ service cost of $150,000 and interest cost of $229,745 on the accumulated
postretirement benefit obligation, assuming a 9.7% discount rate.
hRepresents 6 months’ return on plan assets, assuming a 10% return.
iUnrecognized tTransition obligation remaining in accumulated other comprehensive income at
6/30/X46/30/94 of $4,814,018 ÷ 18.5 years remaining in amortization period = $260,217; half-year
amortization = $130,108.
Illustration 9—Accounting for Curtailments
496. This Statement provides for delayed recognition in net periodic postretirement benefit cost
of the effects of a plan initiation or a plan amendment, the transition obligation or transition
asset, and gains or losses arising in the ordinary course of operations. That is, this Statement
permits those amounts to be recognized in other comprehensive income with subsequent
amortization in net periodic postretirement benefit cost. In certain circumstances, however,
recognition in net periodic postretirement benefit cost of some or all of those previously delayed
amounts initially recognized in other comprehensive income is appropriate. Curtailments are
events that may require income or expense recognition of certain previously unrecognized
amounts that were initially recognized in other comprehensive income and adjustments to
liabilities or assets recognized in the employer’s statement of financial position.
497. A curtailment is an event that significantly reduces the expected years of future service of
active plan participants or eliminates the accrual of defined benefits for some or all of the future
services of a significant number of active plan participants. Such a reduction or elimination
FSP on Statement 158 (FSP FAS 158-1)
115
FSP FAS 158-1
raises doubt about the continued existence of the future economic benefits of prior plan
amendments. Therefore, an appropriate portion of the remaining unrecognized prior service cost
remaining in accumulated other comprehensive income should be recognized in income when it
is probable that a curtailment will occur, the effects are reasonably estimable, and the estimated
effects of the curtailment are a net loss. When the estimated effects of a curtailment are a net
gain, the gain should be recognized in income when the related employees terminate or the plan
suspension or amendment is adopted (paragraphs 97–99). For purposes of measuring those
effects, any remaining unrecognized transition obligation remaining in accumulated other
comprehensive income is treated as unrecognized prior service cost remaining in accumulated
other comprehensive income. The following cases (9A and 9B, paragraphs 498–501) illustrate
the accounting for curtailments.
Case 9A—Curtailment When an Unrecognized Gain and an Unrecognized Transition Obligation
Remain in Accumulated Other Comprehensive IncomeExist
498. Company P sponsors a postretirement benefit plan. On October 29, 20X41994, Company
P decides to reduce its operations by terminating a significant number of employees effective
December 31, 20X41994. On October 29, 20X41994, it is expected that a curtailment gain will
result from the termination. A consequence of the curtailment is a significant reduction in the
number of employees accumulating benefits under the plan. The remaining years of expected
service associated with those terminated employees who were plan participants at the date of
transition is 22 percent of the remaining years of service of all plan participants at the date of
transition. The remaining years of service prior to full eligibility associated with those
terminated employees who were plan participants at the date of a prior plan amendment is 18
percent of the remaining years of service of all plan participants at the date of that plan
amendment.
499. The sum of the effects of the plan curtailment is a gain of $5,160 that should be recognized
in income when the related employees terminate (paragraph 99). That gain is determined as
follows:
FSP on Statement 158 (FSP FAS 158-1)
116
FSP FAS 158-1
December 31, 20X41994
Before
After
Curtailment Curtailment
Curtailment
Accumulated postretirement
benefit obligation
$(257,000)
Plan assets at fair value
73,000
Funded status and recognized liability $(184,000)
Accumulated other
comprehensive income:
Unrecognized nNet gain
$(44,575)
33,000
Unrecognized pPrior service cost
Unrecognized tTransition obligation 195,000
Total accumulated other
comprehensive income
$183,425
Gain from curtailment
(Accrued)/prepaid postretirement
benefit cost
$54,000a
______
$54,000
$(203,000)
73,000
$(130,000)
$ (5,940)a
(42,900)a
$(44,575)
27,060
152,100
$(48,840)
$134,585
$ (5,160)
(575)
4,585
____________________
aThe effect of the curtailment consists of two components:
1. The unrecognized transition obligation and unrecognized prior service cost remaining in accumulated other
comprehensive income associated with remaining years of service no longer expected to be rendered—
measured as 22% (reduction in the remaining years of expected service associated with those terminated
employees who were plan participants at the date of transition) of the unrecognized transition obligation
remaining in accumulated other comprehensive income of $195,000 ($42,900) and 18% (reduction in the
remaining years of service prior to full eligibility for benefits associated with those terminated employees who
were plan participants at the date of a prior plan amendment) of the unrecognized prior service cost included in
accumulated other comprehensive income of $33,000 related to that amendment ($5,940) (paragraph 97)
2. The gain from the decrease in the accumulated postretirement benefit obligation of $54,000 (due to the
termination of employees whose accumulated benefits were not vested under the plan) in excess of the
unrecognized net loss included in accumulated other comprehensive income of $0, or $54,000 (paragraph
98(a)).
FSP on Statement 158 (FSP FAS 158-1)
117
FSP FAS 158-1
Case 9B—Curtailment Related to a Disposal of a Portion of the Business When aand an
Unrecognized Loss and aUnrecognized Transition Obligation Remain in Accumulated Other
Comprehensive IncomeExist
500. Company R sponsors a postretirement benefit plan. On December 31, 20X41994,
Company R sells a portion of its business at a gain of $100,000 before considering the effect of
the related curtailment of its postretirement benefit plan. In connection with the sale, the number
of employees accumulating benefits under the plan is significantly reduced; thus, a curtailment
occurs. The remaining years of expected service associated with the terminated employees who
were plan participants at the date of transition is 22 percent of the remaining years of service of
all plan participants at the date of transition. The remaining years of service prior to full
eligibility associated with the terminated employees who were plan participants at the date of that
prior plan amendment is 18 percent of the remaining years of service of all plan participants at
the date of that plan amendment.
501. The sum of the effects of the plan curtailment is a loss of $36,265 that should be
recognized in income with the gain of $100,000 associated with Company R’s sale of a portion
of its business. The loss is determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
118
FSP FAS 158-1
December 31, 20X41994
Before
After
Curtailment Curtailment
Curtailment
Accumulated postretirement
benefit obligation
$(343,000)
Plan assets at fair value
73,000
Funded status and recognized liability $(270,000)
Accumulated other
comprehensive income:
Unrecognized nNet loss
$ 41,425
33,000
Unrecognized pPrior service cost
Unrecognized tTransition obligation 195,000
Total accumulated other
$269,425
comprehensive income
Curtailment lossAccrued
postretirement benefit cost
(575)
$54,000a
_______
$54,000
$(289,000)
73,000
$(216,000)
$(41,425)a
(5,940)a
(42,900)a
$
$(90,265)
$179,160
$(36,265)
0
27,060
152,100
(36,840)
____________________
aThe effect of the curtailment consists of two components:
1. The unrecognized transition obligation and unrecognized prior service cost remaining in accumulated other
comprehensive income associated with remaining years of service no longer expected to be rendered—
measured as 22% (reduction in the remaining years of expected service associated with those terminated
employees who were plan participants at the date of transition) of the unrecognized transition obligation
remaining in accumulated other comprehensive income of $195,000 ($42,900) and 18% (reduction in the
remaining years of service prior to full eligibility for benefits associated with those terminated employees who
were plan participants at the date of a prior plan amendment) of the unrecognized prior service cost included in
accumulated other comprehensive income of $33,000 related to that amendment ($5,940) (paragraph 97)
2. The gain from the decrease in the accumulated postretirement benefit obligation of $54,000 (due to the
termination of employees whose accumulated benefits were not vested under the plan) in excess of the
unrecognized net loss included in accumulated other comprehensive income of $41,425, or $12,575 (paragraph
98(a)).
Illustration 10—Accounting for a Partial Settlement and a Full Curtailment That Occur as
a Direct Result of a Sale of a Line of Business
502. Company S sells a line of business on December 31, 20X41994; prior to that date, the
company had no formal plan for disposal of those operations. Company S has a separate
postretirement benefit plan that provides health care benefits to retirees of the division that is
sold. In connection with that sale, (a) all of the employees of that division are terminated by
Company S resulting in no further accumulation of benefits under the postretirement benefit plan
(a full curtailment), (b) most of the terminated employees are hired by the acquiring company
(some terminated employees fully eligible for benefits elect to retire immediately), (c) an
accumulated postretirement benefit obligation of $80,000 for postretirement benefits related to
the hired employees is assumed by the acquiring company (a partial settlement, since the
FSP on Statement 158 (FSP FAS 158-1)
119
FSP FAS 158-1
obligation for current retirees is retained by Company S), and (d) plan assets of $100,000,
representing $80,000 for the settlement of the accumulated postretirement benefit obligation and
$20,000 as an excess contribution, are transferred from the plan to the acquiring company. A
$300,000 gain from the sale is calculated before considering the related effects on the plan.
503. The employer’s accounting policy is to determine the effects of a curtailment before
determining the effects of a settlement when both events occur simultaneously. Pursuant to
paragraph 97, the unrecognized prior service cost included in accumulated other comprehensive
income associated with the portion of the future years of service that had been expected to be
rendered, but as a result of a curtailment are no longer expected to be rendered, is a loss. When a
full curtailment occurs, the entire remaining unrecognized prior service cost and unrecognized
transition obligation remaining in accumulated other comprehensive income is a loss because
there are no future years of service to be rendered.
504. The net loss from the curtailment is $228,000, which is recognized with the $300,000 gain
resulting from the disposal of the division. The effect of the curtailment is determined as
follows:
FSP on Statement 158 (FSP FAS 158-1)
120
FSP FAS 158-1
December 31, 20X41994
CurtailmentRelated Effects
Before
Resulting
After
from Sale
Curtailment
Curtailment
Accumulated postretirement
benefit obligation
$(257,000)
Plan assets at fair value
110,000
Funded status and recognized liability $(147,000)
$(10,000)a
_______
$(10,000)
$(267,000)
110,000
$(157,000)
Accumulated other
comprehensive income:
$(49,575)
Unrecognized nNet gain
Unrecognized pPrior service cost
33,000
Unrecognized tTransition obligation 195,000
Total accumulated other
comprehensive income
$178,425
$ 10,000a
(33,000)b
(195,000)c
$(39,575)
0
0
$(218,000)
$(39,575)
Curtailment loss(Accrued)/prepaid
postretirement benefit cost
$(228,000)
(196,575)
31,425
____________________
aThe increase in the accumulated postretirement benefit obligation as a result of the fully eligible employees retiring
earlier than expected is a loss of $10,000. That loss reduces the unrecognized net gain included in accumulated
other comprehensive income of $49,575; any excess (none in this case) would be recognized in income as the effect
of a curtailment (paragraph 98).
bMeasured as 100% (reduction in the remaining years of service prior to full eligibility for benefits associated with
those terminated employees who were plan participants at the date of a prior plan amendment) of the unrecognized
prior service cost included in accumulated other comprehensive income of $33,000 related to that amendment
(paragraph 97).
cMeasured as 100% (reduction in the remaining years of expected service associated with those terminated
employees who were plan participants at the date of transition) of the unrecognized transition obligation remaining
in accumulated other comprehensive income of $195,000 (paragraph 97).
505. The $8,128 loss related to the settlement and transfer of plan assets that is recognized in
income with the gain from the sale is determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
121
FSP FAS 158-1
December 31, 20X41994
Settlement
After
and Transfer of
Plan Assets
Curtailment
Accumulated postretirement
benefit obligation
$(267,000)
Plan assets at fair value
110,000
Funded status and recognized liability $(157,000)
After
Settlement
$ 80,000d
(100,000)d
$(20,000)
$(187,000)
10,000
$(177,000)
$11,872e
Accumulated other
comprehensive income:
Unrecognized nNet gain
$(39,575)
0
Unrecognized pPrior service cost
Unrecognized tTransition obligation
0
Total accumulated other
$(39,575)
comprehensive income
______
$(27,703)
0
0
$11,872
$(27,703)
Settlement lossAccrued
postretirement benefit cost
$(8,128)
(204,703)
(196,575)
____________________
dThe accumulated postretirement benefit obligation for the employees hired by the purchaser is determined to be
$80,000 and is settled when Company S transfers plan assets of an equal amount to the purchaser. In connection
with the purchase agreement, Company S transfers an additional $20,000 of plan assets.
eRepresents a pro rata amount of the maximum gain based on the relationship of the accumulated postretirement
benefit obligation settled to the total accumulated postretirement benefit obligation ($80,000 ÷ $267,000 or 30%).
The maximum gain is measured as the unrecognized net gain included in accumulated other comprehensive income
subsequent to transition plus any unrecognized transition asset remaining in accumulated other comprehensive
income ($39,575 + $0 = $39,575). The settlement gain is, therefore, 30% of $39,575, or $11,872; recognition in
income of that gain is subject to first reducing any remaining unrecognized transition obligation remaining in
accumulated other comprehensive income. As there is no remaining unrecognized transition obligation remaining in
accumulated other comprehensive income (the remainder was recognized in income in connection with the
curtailment), the gain of $11,872 is recognized in income together with the excess $20,000 transfer of plan assets as
part of the net gain from the sale (paragraphs 92 and 93).
506. The sum of the effects related to postretirement benefits resulting from the sale is a loss of
$236,128, the components of which are as follows:
Curtailment loss (paragraph 504)
Net Ssettlement gain and loss from transfer of plan assets (paragraph 505)
Effects of sale
FSP on Statement 158 (FSP FAS 158-1)
$228,000
8,128
$236,128
122
FSP FAS 158-1
Illustration 11—Accounting for the Effects of an Offer of Special Termination Benefits
507. The measurement of the effects of an offer of special termination benefits pursuant to
paragraphs 101 and 102 and the accounting for the related curtailment are illustrated in the
following paragraphs.
508. On January 16, 20X51995, Company T offers for a short period of time (until January 30,
20X51995) special benefits to its employees who elect voluntary termination of employment
during that period (special termination benefits). As part of the offer, employees who voluntarily
terminate will be credited with an additional five years of service and five years of age to
determine eligibility for postretirement health care benefits. Employees are normally eligible for
those benefits upon attaining age 55 and rendering at least 20 years of service.
509. On January 30, 20X51995, employees representing 18 percent of the work force accept the
offer of special termination benefits. For those employees, the accumulated postretirement
benefit obligation attributed to prior service periods based on their previously expected
retirement dates (without consideration of the special offer) is $280,000. If those employees
were assumed to terminate (retire) immediately upon attaining full eligibility for benefits (age 55
with 20 years of service), the accumulated postretirement benefit obligation for those employees
would be $450,000. The accumulated postretirement benefit obligation for those employees
after they accept the offer of the special termination benefits (full eligibility date accelerated,
benefit coverage begins immediately) is $630,000.
510. The remaining years of expected service associated with the terminated employees who
were plan participants at the date of transition is 24 percent of the remaining years of service of
all plan participants at the date of transition. In addition, the portion of the unrecognized prior
service cost remaining in accumulated other comprehensive income arising from a prior plan
amendment associated with the remaining years of service prior to full eligibility that are no
longer expected to be rendered by the terminated employees is $25,000.
511. Pursuant to paragraph 99, if the sum of the effects resulting from a curtailment is a net loss,
it shall be recognized in income when it is probable that a curtailment will occur and the effects
are reasonably estimable. In this illustration, the effects resulting from the curtailment are not
reasonably estimable until January 30, 20X51995, the acceptance date of the offer of special
termination benefits. Consequently, at January 30, 20X51995, the employer recognizes a loss of
$453,400 that includes the cost of the special termination benefits ($180,000) and the net loss
from the curtailment ($273,400) determined as follows:
FSP on Statement 158 (FSP FAS 158-1)
123
FSP FAS 158-1
January 30, 20X51995
Before
Special
After
Employee
Termination Effect of
Employee
Terminations Benefits
Curtailment Terminations
Accumulated postretirement
benefit obligation:
Employees accepting offer
Other employees
Plan assets at fair value
Funded status and
recognized liability
$(280,000)
(633,000)
(913,000)
141,000
$(180,000)a
________
(180,000)
________
$(170,000)b $ (630,000)
________
(633,000)
(170,000)
(1,263,000)
________
141,000
$(772,000)
$(180,000)
$(170,000)
Accumulated other
comprehensive income:
Unrecognized nNet gain
$(88,000)
Unrecognized pPrior service cost 148,500
Unrecognized tTransition
obligation
693,333
Total accumulated other
comprehensive income
$753,833
Net lossAccrued postretirement
benefit cost
(18,167)
$ 88,000b
(25,000)c
(166,400)c
$180,000
(180,000)
$(1,122,000)
$
0
123,500
526,933
$(103,400)
$650,433
$ 273,400
(273,400)
(471,567)
____________________
aThe loss from acceptance of the special termination benefits is $180,000 ($450,000 – $630,000), representing the
difference between (1) the accumulated postretirement benefit obligation measured assuming that active plan
participants not yet fully eligible for benefits would terminate employment at their full eligibility date and that fully
eligible plan participants would retire immediately and (2) the accumulated postretirement benefit obligation
reflecting the special termination benefits (paragraph 102).
bThe increase in the accumulated postretirement benefit obligation as a result of the employees (fully eligible plan
participants and other active plan participants not yet fully eligible for benefits) retiring at a date earlier than
expected is a loss of $170,000 ($280,000 – $450,000). That amount is reduced by the unrecognized net gain of
$88,000 included in accumulated other comprehensive income (paragraph 98(b)) as part of the accounting for the
curtailment.
cAdditional effects of the curtailment are (1) the reduction of $25,000 in the unrecognized prior service cost
included in accumulated other comprehensive income (arising from a prior plan amendment) associated with the
remaining years of service prior to full eligibility that are no longer expected to be rendered by the terminated
employees and (2) the reduction of $166,400 in the unrecognized transition obligation remaining in accumulated
other comprehensive income associated with remaining years of service no longer expected to be rendered—
measured as 24% (reduction in the remaining years of expected service associated with those employees affected by
the early retirement who were plan participants at the date of transition) of the unrecognized transition obligation
remaining in accumulated other comprehensive income of $693,333 (paragraph 97).
FSP on Statement 158 (FSP FAS 158-1)
124
FSP FAS 158-1
Amendments to the Questions and Answers Issued for Statement 87
8.
FASB Special Report, A Guide to Implementation of Statement 87 on Employers’
Accounting for Pensions, is superseded, and the questions and answers contained in that Special
Report are amended and incorporated into Statement 87 as Appendix E as follows: [Added text
is underlined and deleted text is struck out.]
Appendix E
ADDITIONAL IMPLEMENTATION GUIDANCE
Note: This appendix contains additional implementation guidance for applying the provisions of
this Statement. Numbers in brackets refer to the paragraphs in this Statement to which the
question and answer relate. To simplify the illustrations, the effects of income taxes have been
ignored.
E1.
[This question has been deleted. See Status page.]
Q—Does FASB Statement No. 87, Employer’s Accounting for Pensions, apply to
employers that are:
a.
State and local governmental units
b.
Federal executive agencies? [7]1
A—a.
Governmental Accounting Standards Board (GASB) Statement No. 5,
Disclosure of Pension Information by Public Employee Retirement Systems and
State and Local Governmental Employers, established requirements for pension
disclosures by public employee retirement systems and by state and local
government employers. GASB Statement No. 27, Accounting for Pensions by
State and Local Governmental Employers, establishes requirements for pension
accounting by state and local government employers. Paragraph 4 of GASB
Statement 27 states that:
The requirements of this Statement apply to the financial statements
of all state and local governmental employers that provide or participate
in pension plans, including general purpose governments, public benefit
corporations and authorities, utilities, hospitals and other healthcare
providers, colleges and universities, and public employee retirement
systems that are employers. . . .
Paragraph 5 states that GASB Statement 27 supersedes the portions of GASB
Statement 5 applicable to employer disclosures. [Revised 12/98.]
FSP on Statement 158 (FSP FAS 158-1)
125
FSP FAS 158-1
b.
The Federal Accounting Standards Advisory Board (FASAB) was established
in October 1990 by the Secretary of the Treasury, the Director of the Office of
Management and Budget (OMB), and the Comptroller General of the United
States, to consider and recommend accounting standards and principles for the
Federal Government. Statements of Federal Financial Accounting Standards
(SFFASs) must be followed by federal agencies and cover most transactions. In
December 1995 the FASAB issued SSFAS No. 5, Accounting for Liabilities of
the Federal Government, the scope of which included two Interpretations
related to pensions: Interpretation No. 3, Measurement Date for Pension and
Retirement Health Care Liabilities (August 1997) and Interpretation No. 4,
Accounting for Pension Payments in Excess of Pension Expense (December
1997). [Revised 12/98.]
____________________
1
E2.
Numbers in brackets refer to the paragraphs in Statement 87 to which the question and answer relate.
Q—Does this Statement 87 apply to a non-U.S. pension plan that provides death and
disability benefits that are greater than the incidental death and disability benefits allowed
in U.S. tax-qualified pension plans? [7, 8, 72]
A—Yes, if the non-U.S. pension plan is, in substance, similar to a U.S. pension plan. The
relative level of death and disability benefits paid by a plan that provides primarily
pension benefits should not, in itself, cause the pension plan to be “in substance” different
from a U.S. pension plan.
E3.
[This question has been deleted. See Status page.]
[Question deleted 5/03 because no longer technically useful.]
E4.
Q—How should an employer with regulated operations account for the effects of
applying this Statement 87 for financial reporting purposes if another method of
accounting for pensions is used for determining allowable pension cost for rate-making
purposes? [7, 36, 210]
A—This Statement 87 applies to employers with regulated operations. Paragraph 210 of
Statement 87 states:
For rate-regulated enterprises, FASB Statement No. 71, Accounting for the
Effects of Certain Types of Regulation, may require that the difference between
net periodic pension cost as defined in this Statement and amounts of pension cost
considered for rate-making purposes be recognized as an asset or a liability
created by the actions of the regulator. Those actions of the regulator change the
timing of recognition of net pension cost as an expense; they do not otherwise
affect the requirements of this Statement.
Accordingly, if Statement 71 applies to the employer, and the amount of net periodic
pension cost determined under the method used for rate-making purposes differs from
that determined under this Statement 87, the difference would be (a) an asset if the
FSP on Statement 158 (FSP FAS 158-1)
126
FSP FAS 158-1
criteria in paragraph 9 of Statement 71 are met or (b) a liability if the situation is as
described in paragraph 11(b) of Statement 71.
Usually, continued use of different methods for rate-making purposes and general
purpose external financial reporting purposes would result in either the criteria in
paragraph 9 of Statement 71 being met or the situation described in paragraph 11(b) of
Statement 71. However, if pension cost determined in accordance with this Statement 87
exceeds pension cost determined in accordance with the method used in setting current
rates, the criteria in paragraph 9 of Statement 71 would not be met if (a) it is probable that
the regulator soon will accept a change for rate-making purposes so that pension cost is
determined in accordance with this Statement 87 and (b) it is not probable that the
regulator will provide revenue to recover the excess cost that results from the use of this
Statement 87 for financial reporting purposes during the period between the date that the
employer adopts this Statement 87 and the rate case implementing the change.
Similarly, if pension cost determined in accordance with the method used in setting
current rates exceeds pension cost determined in accordance with this Statement 87, the
situation would not be as described in paragraph 11(b) of Statement 71 if it is probable
that (a) the regulator soon will accept a change for rate-making purposes so that pension
cost is determined in accordance with this Statement 87, (b) the regulator will not hold
the employer responsible for the costs that were intended to be recovered by the current
rates and that have been deferred by the change in method, and (c) the regulator will
provide revenue to recover those same costs when they are eventually recognized under
the method required by this Statement 87.
Because a regulator cannot eliminate a liability that was not imposed by its actions, the
need to record a minimum liabilityrecognize the underfunded status of a defined benefit
pension plan as a liability under paragraphs 35 and 36 of this Statement 87 is unaffected
by regulation.
Refer to Illustration 1 below for an example of the employer’s accounting when
paragraphs 9 and 11(b) of Statement 71 apply.
FSP on Statement 158 (FSP FAS 158-1)
127
FSP FAS 158-1
Illustration 1—Accounting for Pensions by an Employer with Regulated Operations
[Revised 12/98; 5/03; 12/03.]
An employer with regulated operations sponsors a defined benefit pension plan which is
accounted for pursuant to this Statement 87. To simplify the illustration, it is assumed that there
are no remaining differences between amounts previously recognized as net periodic pension
cost and amounts allowable for rate-making purposes. The employer’s determination of net
periodic pension cost (NPPC) under this Statement 87, however, differs from that allowable for
rate-making purposes. The following schedule shows the amounts under both bases for the years
20X0–20X3.
Year
NPPC under
This Statement 87
20X0
20X1
20X2
20X3
Allowable for
Rate-Making
Difference
for the Period
Cumulative
Difference
200
100
140
200
(80)
100
30
(80)
(80)
20
50
(30)
120
200
170
120
Journal Entries
Year 20X0
In 20X0, the amount allowable for rate-making purposes exceeds net periodic pension cost
determined under this Statement 87. In that case, paragraph 11(b) of Statement 71 requires the
amount determined under this Statement 87 ($120) to be recognized as net periodic pension cost
in the employer’s financial statements.
The difference ($80) between net periodic pension cost determined under this Statement 87
($120) and that allowable for rate-making purposes ($200) is recognized as a liability (unearned
revenue) and represents an amount collected or collectible for recovery of future pension cost.
When that pension cost is incurred for financial reporting purposes, the liability (unearned
revenue) should be eliminated and revenue should be recognized.
The journal entries to account for the accrual of net periodic pension cost and the contribution
made to the pension plan during the year are as follows:
Journal Entry 1
Net periodic pension cost
Revenue
Pension liability (Unfunded accrued) prepaid pension cost
Unearned revenue
FSP on Statement 158 (FSP FAS 158-1)
120
80
120
80
128
FSP FAS 158-1
To record net periodic pension cost for the period and the liability created by actions of the
regulator
Journal Entry 2
Pension liability (Unfunded accrued) prepaid pension cost
Cash
200
200
To record contribution to pension plan
No modifications of the disclosures generally disclosure required by paragraph 5(h) of FASB
Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other
Postretirement Benefits, Statement 87 are required in this case because the accounting required
by Statement 71 does not change the amount of net periodic pension cost recognized under this
Statement 87. (Refer to Table 2 below.)
Year 20X1
In 20X1, the amount allowable for rate-making purposes is less than net periodic pension cost
determined under this Statement 87 by $100. Of that amount, $80 was allowable for rate-making
purposes in 20X0. Therefore, the 20X0 unearned revenue of $80 is recognized as revenue for
20X1. Paragraph 9 of Statement 71 requires the remaining portion of the $100 difference ($20)
to be capitalized as an incurred cost for which future recovery is assured by actions of the
regulator.
The journal entries to account for the accrual of net periodic pension cost and the contribution
made to the pension plan during the year are as follows:
Journal Entry 1
Net periodic pension cost
Capitalized cost for future recovery
Unearned revenue
Pension liability (Unfunded accrued) prepaid pension cost
Revenue
180
20
80
200
80
To record net periodic pension cost for the period and the asset created by actions of the
regulator
Journal Entry 2
Pension liability (Unfunded accrued) prepaid pension cost
Cash
100
100
To record contribution to pension plan
FSP on Statement 158 (FSP FAS 158-1)
129
FSP FAS 158-1
In this case, the accounting required by Statement 71 changes the amount of net periodic pension
cost that otherwise would have been recognized under this Statement 87 requiring modification
of the disclosure required by paragraph 5(h) of FASB Statement No. 132(R). (revised 2003),
Employers’ Disclosures about Pensions and Other Postretirement Benefits. (Refer to Table 2.)
Year 20X2
In 20X2, the amount allowable for rate-making purposes is less than net periodic pension cost
determined under this Statement 87 by $30. None of that amount was allowable for rate-making
purposes in prior years. Paragraph 9 of Statement 71 requires the $30 to be capitalized as an
incurred cost for which future recovery is assured by actions of the regulator.
The journal entries to account for the accrual of net periodic pension cost and the contribution
made to the pension plan during the year are as follows:
Journal Entry 1
Net periodic pension cost
Capitalized cost for future recovery
Pension liability (Unfunded accrued) prepaid pension cost
140
30
170
To record net periodic pension cost for the period and the asset created by actions of the
regulator
Journal Entry 2
Pension liability (Unfunded accrued) prepaid pension cost
Cash
140
140
To record contribution to pension plan
The situation in 20X2 is similar to that in 20X1, necessitating additional disclosure. (Refer to
Table 2.)
Year 20X3
In 20X3, the amount allowable for rate-making purposes exceeds net periodic pension cost
determined under this Statement 87 by $80. In prior years (20X1 and 20X2), $50 of that amount
was recognized as a capitalized cost.
Accordingly, that capitalized cost ($50) is expensed in 20X3. Additionally, paragraph 11(b) of
Statement 71 requires recognition of a liability (unearned revenue) equal to the remaining
portion ($30) of the amount allowable for rate-making purposes in excess of net periodic pension
cost determined under this Statement 87 [($200 – $120) – $50 = $30]. When that pension cost is
incurred for financial reporting purposes, the $30 liability (unearned revenue) should be
eliminated and revenue should be recognized.
FSP on Statement 158 (FSP FAS 158-1)
130
FSP FAS 158-1
The journal entries to account for the accrual of net periodic pension cost and the contribution
made to the pension plan during the year are as follows:
Journal Entry 1
Net periodic pension cost
Revenue
Capitalized cost for future recovery
Pension liability (Unfunded accrued) prepaid pension cost
Unearned revenue
170
30
50
120
30
To record net periodic pension cost for the period and the liability created by actions of the
regulator
Journal Entry 2
Pension liability (Unfunded accrued) prepaid pension cost
Cash
200
200
To record contribution to pension plan
The situation in 20X3 is similar to that in 20X1 and 20X2, necessitating additional disclosure.
(Refer to Table 2 below.)
Table 1
[This table has been deleted. See Status page.]
The following illustrates the reconciliation of the pension plan’s funded status with amounts
recognized in the employer’s statement of financial position at year-end. To simplify the
illustration, it is assumed that there is no unrecognized net asset or net obligation at the date of
initial application of Statement 87 and there are no gains or losses for the four-year period.
20X0
Projected benefit obligation
Plan assets at fair value
Projected benefit obligation (in
excess of) less than plan assets
Unrecognized net (gain) loss
Prepaid pension cost (pension
liability) recognized in the
statement of financial position
FSP on Statement 158 (FSP FAS 158-1)
$
$
20X1
20X2
(500)
580
$ (705) $
685
(882)
832
80
0
(20)
0
(50)
0
80
$ (20)
$ (50)
20X3
$ (1,030)
1,060
30
0
$
30
131
FSP FAS 158-1
Table 2
The following table illustrates the disclosure of the components of net periodic pension cost for
20X0–20X3. As noted earlier, iIt is assumed that there is no unrecognized net transition asset or
net obligation remaining in accumulated other comprehensive income at the date of initial
application of Statement 87 and there are no gains or losses for the four-year period.
20X0
20X1
20X2
20X3
Service cost*
Interest cost*
Expected return on plan assets*
Net amortization and deferral
Net periodic pension cost determined
under this Statement 87
Amount (capitalized) expensed due to
actions of the regulator
Net periodic pension cost recognized
$ XXX
XXX
(XXX)
0
120
—
$ 120
$ XXX
XXX
(XXX)
0
$ XXX
XXX
(XXX)
0
$ XXX
XXX
(XXX)
0
200
170
120
(20)
$ 180
(30)
$ 140
50
$ 170
____________________
*Amounts are excluded for illustrative purposes only.
E5.
Q—If an employer has a pension plan that also provides postemployment health care
benefits, should this Statement 87 apply to those benefits? [8]
A—No. Accounting for postemployment health care benefits is covered by FASB
Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than
Pensions. [Revised 12/98.]
E6.
Q—Does footnote 4 of this Statement 87 (which states that “the interest cost component
of net periodic pension cost shall not be considered to be interest for purposes of applying
FASB Statement No. 34, Capitalization of Interest Cost”) proscribe the capitalization of
the interest cost component of net periodic pension cost when employee compensation is
capitalized as part of the cost of inventory or other assets? [16]
A—No. A fundamental aspect of this Statement 87 is to combine or aggregate the
various pension cost components (service cost; interest cost; expected return on plan
assets; and amortization of the following items recognized in accumulated other
comprehensive income: (a) unrecognized net transition asset or net obligation existing at
the date of initial application of Statement 87, (b) prior service cost or credit, and (c) net
gain or loss). In the aggregate, net periodic pension cost is viewed as an element of
employee compensation. Therefore, when it is appropriate to capitalize employee
compensation in connection with the construction or production of an asset, the net
periodic pension cost applicable to the pertinent employees for the period, not individual
components of that amount, is the relevant amount.
E7.
Q—May an employer have net periodic pension cost that is a net credit (that is, net
periodic pension income)? [16, 20]
FSP on Statement 158 (FSP FAS 158-1)
132
FSP FAS 158-1
A—Yes. Net periodic pension cost is an aggregation of various pension cost
components, some of which are expenses or losses (which increase net periodic pension
cost) and some of which are revenues or gains (which decrease net periodic pension
cost). It is possible for the revenue or gain components to exceed the expense or loss
components, resulting in net periodic pension income. For example, a pension plan may
have an expected return on plan assets or amortization of a transition asset remaining in
accumulated other comprehensive income an unrecognized net asset existing at the date
of initial application of Statement 87 that exceeds the other net periodic pension cost
components.
E8.
Q—If an employer has net periodic pension cost that is a net credit (that is, net periodic
pension income), how should that be treated if employee compensation is capitalized as
part of the cost of inventory or other assets? [16, 20]
A—If a cost allocation process capitalizes net periodic pension cost as part of the cost of
inventory or other assets, net periodic pension income also should be capitalized, thereby
reducing the total employee compensation and other costs being capitalized.
E9.
Q—If an employer sponsoring a pension plan that is overfunded has net periodic pension
cost that is a net credit (that is, net periodic pension income) and the employer makes no
contribution to the pension plan because it cannot currently deduct that amount for tax
purposes, is the difference between net periodic pension income and the tax deductible
amount a temporary difference as discussed in paragraphs 10–11 of FASB Statement No.
109, Accounting for Income Taxes?5 If it is a temporary difference, when and how will it
reverse? [16, 20] [Revised 12/98.]
A—Yes. The difference between net periodic pension income and the tax deductible
amount represents the origination or reversal of a portion of the overall temporary
difference related to a pension plan for which deferred taxes should be provided.
Ultimately, the employer’s cost of providing pension benefits to employees equals the net
amount funded, which is equal to the total benefits paid less earnings on plan assets.
Thus, cumulative pension cost for accounting purposes will equal the cumulative amount
recognized for tax purposes. [Revised 12/98; 5/03.]
The overall temporary difference will reverse in one of two ways. First, at some future
time the pension plan may not be so overfunded because of poor investment performance
or because of increases in the obligation due to (a) a decline in interest rates, (b)
additional pension benefits earned for future years of service, or (c) amendments to the
pension plan that increase pension benefits. In this case, net periodic pension cost for
future years would eventually exceed amounts funded in those years. Second, if the
pension plan remains overfunded and continually generates investment returns in excess
of increases in the pension obligation, the employer may terminate the pension plan to
recapture excess assets. In this case, the gain for accounting purposes from the pension
plan termination would be less than the taxable amount resulting from that event.
Although the reversal of the temporary difference may be far in the future and may be
somewhat under the employer’s control, there is a temporary difference for which
deferred taxes should be provided. [Revised 12/98; 5/03.]
FSP on Statement 158 (FSP FAS 158-1)
133
FSP FAS 158-1
____________________
5
E10.
FASB Statement No. 109, Accounting for Income Taxes.
Q—If transferable securities issued by the employer are included in plan assets, should
the measurement of plan assets also include the interest accrued but not yet received on
those securities? [19]
A—Yes. The exclusion from plan assets in paragraph 19 of Statement 87 of “amounts
accrued by the employer but not yet paid to the plan” is intended to relate to unfunded
accrued pension costsa recognized pension liability.
E11.
Q—If an employer has a nonqualified pension plan (for tax purposes) that is funded with
life insurance policies owned by the employer, should the cash surrender value of those
policies be considered plan assets for purposes of applying this Statement 87? [19, 62]
A—No. If the employer is the owner or beneficiary, the life insurance policies do not
qualify as plan assets and the accounting for those policies should be in accordance with
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, and
EITF Issue No. 06-5, “Accounting for Purchases of Life Insurance—Determining the
Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 854.”6
____________________
6
E12.
FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.
Q—If the actual return on plan assets for a period is a component of net periodic pension
cost, how does the expected return on plan assets affect the determination of net periodic
pension cost? [23, 30–34]
A—The expected return on plan assets generally will be different from the actual return
on plan assets for the year. This Statement 87 provides for deferral recognition of that
difference (an unrecognized a net gain or loss) in other comprehensive income in the
period it arises). The deferred amount recognized in other comprehensive income is also
a component of net periodic pension cost for the current period. Thus, the deferred
amount recognized in other comprehensive income and the actual return on plan assets,
when aggregated, equal the expected return on plan assets. The deferred amount
recognized in accumulated other comprehensive income affects future net periodic
pension cost through subsequent amortization, if any, of the unrecognized net gain or
loss.
E13.
Q—If an employer has a substantive commitment to have a formula greater than the
pension plan’s written formula, how should the difference between the effects of a
retroactive plan amendment that were anticipated as part of that substantive commitment
and the effects of the actual retroactive plan amendment be accounted for? [24–34, 41]
A—If that difference results from an intended modification of the formula for which there
is a substantive commitment, the accounting should be that prescribed in paragraphs 24–
FSP on Statement 158 (FSP FAS 158-1)
134
FSP FAS 158-1
28 of Statement 87 for a retroactive plan amendment. Otherwise, that difference is a gain
or loss subject to the accounting specified in paragraphs 29–34 of Statement 87.
E14.
Q—Once a schedule of amortization of unrecognized prior service cost from a specific
retroactive plan amendment has been established, should that schedule remain the same
or is it subject to revision on a periodic basis? [24–28, 167]
A—The initial schedule should be revised only if a curtailment occurs (paragraphs 6 and
12 of FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits) or if events indicate that
(a) the period during which the employer expects to realize future economic benefits
from the retroactive plan amendment giving rise to the prior service cost is shorter than
originally estimated or (b) the future economic benefits have been impaired. The
schedule should not be revised because of ordinary variances in expected service lives of
employees. This Statement 87 proscribes revising the schedule so that the unrecognized
prior service cost would be recognized in net periodic pension cost more slowly.
E15.
Q—If the acquiring employer in a business combination accounted for in accordance
with FASB Statement No. 141, Business Combinations, includes the employees of the
acquired employer in its pension plan and grants them credit for prior service (the
acquired employer did not have a pension plan), should the credit granted for prior
service be treated as unrecognized prior service cost and recognized in other
comprehensive income or treated as part of the cost of the acquisition? [24–27, 74]
[Revised 9/01.]
A—The answer to this question depends on an analysis of all the facts and circumstances
surrounding the acquisition. If the acquiring employer’s granting of credit for prior
service to the employees is required by the seller as part of the consummation of the
acquisition, then it should be considered as part of the cost of the acquisition. Otherwise,
the credit granted for prior service should be accounted for as a retroactive plan
amendment.
If the credit granted for prior service is considered part of the cost of the acquisition, the
debit offsetting the increase in the projected benefit obligation should be an adjustment of
the goodwill otherwise determined for the acquisition. If the credit granted for prior
service is accounted for as a retroactive plan amendment, the unrecognized prior service
cost is recognized in other comprehensive income and subject to amortizationdelayed
recognition as specified in paragraphs 24–27 of Statement 87. The effects of the
alternatives on the balance sheet, and income statement, and other comprehensive income
could differ. [Revised 9/01.]
E16.
Q—In determining the periods for (a) amortization of unrecognized prior service cost
included in accumulated other comprehensive income, (b) minimum amortization of
unrecognized net gain or loss included in accumulated other comprehensive income, or
(c) amortization of the unrecognized net transition asset or net obligation remaining in
accumulated other comprehensive incomeexisting at the date of initial application of
Statement 87, is it necessary to include the service periods of employees who are
FSP on Statement 158 (FSP FAS 158-1)
135
FSP FAS 158-1
expected to receive only a return of their contributions (plus interest, if applicable) to a
contributory defined benefit pension plan in determining the future service periods of
employees expected to receive benefits under that pension plan? [24–26, 32, 77]
A—No. Only the future service periods of those employees who are expected to receive
an employer-provided benefit should be included.
E17.
Q—Are the service periods of employees expected to terminate before their benefits are
vested included in the determination of the average remaining service period of
employees expected to receive benefits under the pension plan? [24, 26, 32, 77]
A—No. Only the service periods of those employees working as of the date for which
the determination is made and who are expected to actually receive employer-provided
benefits are included.
E18.
Q—Is there a specific threshold for determining if a pension plan has “almost all”
inactive participants for purposes of selecting the amortization period for certain
components of net periodic pension cost? [25, 26, 32, 77]
A—No. The threshold for using the average life expectancy of inactive participants
requires judgment based on the facts and circumstances of the particular pension plan.
E19.
Q—May an employer adopt an accounting policy to recognize immediately as a
component of net periodic pension cost the cost of all plan amendments that grant
increased benefits for services rendered in prior periods (prior service cost)? [26, 27]
A—No. An accounting policy to recognize immediately as a component of net periodic
pension cost the cost of all plan amendments that grant increased benefits for services
rendered in prior periods is not permitted. Prior service cost is recognized immediately in
other comprehensive income, unless, based on an assessment of the facts and
circumstances, the employer does not expect to realize any future economic benefits from
that retroactive plan amendment. Immediate recognition of prior service cost due to a
retroactive plan amendment is appropriate only if, based on an assessment of the facts
and circumstances, the employer does not expect to realize any future economic benefits
from that retroactive plan amendment.8 (Refer to paragraph 27.) Adopting an accounting
policy to recognize immediately prior service cost in net periodic pension cost would
preclude making that assessment for future plan amendments as they occur. [Revised
5/03.]
The Board did not intend to include immediate recognition as a component of net
periodic pension cost among those alternative amortization methods for prior service cost
permitted by paragraph 26 of Statement 87. Rather, the permissibility of adopting an
alternative method as an accounting policy was intended to be responsive to respondents’
concerns that the method defined in paragraph 259 of Statement 87 would be
unnecessarily complex and would require employers to maintain detailed records for long
periods. The Board agreed to allow alternative methods of amortization that would
simplify computations and record keeping but with the intent that such methods would
consider employees’ service lives (or inactive participants’ remaining lives, if applicable)
FSP on Statement 158 (FSP FAS 158-1)
136
FSP FAS 158-1
and would not have the effect of delaying recognition of prior service cost as a
component of net periodic pension cost to a greater extent than the method defined in
paragraph 25 of Statement 87.
____________________
8
Paragraph 27 of Statement 87 states:
In some situations a history of regular plan amendments and other evidence may indicate
that the period during which the employer expects to realize economic benefits from an
amendment granting retroactive benefits is shorter than the entire remaining service period
of the active employees. Identification of such situations requires an assessment of the
individual circumstances and the substance of the particular plan situation. In those
circumstances, the amortization of prior service cost shall be accelerated to reflect the more
rapid expiration of the employer’s economic benefits and to recognize the cost in the
periods benefited.
9
E20.
Paragraph 25 of Statement 87 states:
Except as specified in paragraphs 26 and 27, that prior service cost shall be amortized by
assigning an equal amount to each future period of service of each employee active at the
date of the amendment who is expected to receive benefits under the plan. If all or almost
all of a plan’s participants are inactive, the cost of retroactive plan amendments affecting
benefits of inactive participants shall be amortized based on the remaining life expectancy
of those participants instead of based on the remaining service period.
Q—If an employer has a history of granting retroactive plan amendments every three
years, should the resulting unrecognized prior service costs be amortized over a threeyear period? [27]
A—One of the objectives of this Statement 87 is to amortize the cost of a retroactive plan
amendment over the period benefited if that period is shorter than the employees’
remaining service period. If an employer has a history of granting retroactive plan
amendments every three years, for example, as part of union negotiations, the period
benefited may be three years. If employees expect the pattern to continue, the future
economic benefits to be obtained from a retroactive plan amendment may not continue if
the pattern is broken; effectively, the future economic benefit of each retroactive plan
amendment may expire over the period of the union contract (in this case, three years).
In that situation, amortization of unrecognized prior service cost included in accumulated
other comprehensive income over a three-year period would be appropriate. Whether
three years is the appropriate amortization period for a retroactive plan amendment that is
part of a three-year amendment pattern should be determined based on the facts and
circumstances of the particular situation.
E21.
Q—If an employer grants a retroactive plan amendment that reduces the projected benefit
obligation (a negative retroactive plan amendment), what method should be used to
reduce any existing unrecognized prior service cost included in accumulated other
comprehensive income when several prior retroactive plan amendments in the aggregate
have resulted in unrecognized prior service costs included in accumulated other
comprehensive income that exceed the effects of the negative retroactive plan
amendment? [28]
FSP on Statement 158 (FSP FAS 158-1)
137
FSP FAS 158-1
A—Unless the retroactive plan amendment that reduces benefits can be specifically
related to a prior retroactive plan amendment, any systematic and rational method (for
example, Last-In, First-Out; First-In, First-Out; or pro rata), applied on a consistent basis,
is acceptable.
E22.
Q—If an employer amends a pension plan to delete a provision that a percentage of the
employee’s accumulated benefits be paid to the employee’s spouse upon death of the
employee prior to a specified age, should the reduction in benefits be accounted for as a
retroactive plan amendment? [28]
A—Yes.
E23.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E24.
Q—Should the amount and timing of pension plan contributions and benefit payments
expected to be made during the year be considered in determining the expected return on
plan assets for that year? [30]
A—Yes. The expected return on plan assets should take into consideration the
availability of all plan assets for investment throughout the year. For example, if the
employer’s pension plan contribution for the year is expected to be made two months
before the next measurement date, then the expected return on plan assets should include
an amount related to the expected return on that contribution only for those two months.
E25.
[This question and its related Illustration 2 have been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E26.
Q—May an employer that has several pension plans with similar plan assets use different
asset valuation methods to determine the market-related value of those plan assets? [30]
A—An employer should use different asset valuation methods for similar plan assets only
if the pension plans’ inherent facts and circumstances justify the difference in
methodology. Otherwise, the use of a variety of asset valuation methods for similar plan
assets is inconsistent with this Statement’s 87’s objective of enhancing the comparability
of reported pension information.
E27.
Q—Is there a limitation on the number of classes into which plan assets may be divided
for purposes of selecting asset valuation methods for determining the market-related
value of plan assets? [30]
A—No. However, the asset valuation method selected for each class should accomplish
the objective of recognizing changes in the fair value of those plan assets in a systematic
and rational manner over not more than five years. Once that method is selected, it
should be applied consistently for that class of plan assets as should the method for
dividing plan assets into classes.
FSP on Statement 158 (FSP FAS 158-1)
138
FSP FAS 158-1
E28.
Q—Is the following an acceptable asset valuation method for determining the marketrelated value of plan assets?
The market-related value of plan assets is determined with a total return-on-plan asset
component consisting of three layers:
a.
b.
c.
An expected return-on-plan asset component based on the beginning-of-year
market-related value of plan assets, cash flow during the year, and the expected
long-term rate of return on plan assets
An amount equal to the change in the accumulated benefit obligation that resulted
from any change during the year in the assumed discount rates used to determine
the accumulated benefit obligation (The amount is reduced pro rata if plan assets
are less than the accumulated benefit obligation.)
A variance component equal to a percentage (for example, 20 percent if a five-yearaveraging period is used) of the difference between the actual return on plan assets
based on the fair values of those plan assets and the expected return on plan assets
derived from components (a) and (b). [30]
A—No. The method described introduces a factor (refer to layer (b)) that can be unrelated
to the change in the fair value of plan assets. For a method to meet this Statement’s 87’s
criteria of being systematic and rational, it should reflect only the changes in the fair
value of plan assets between various dates.
The use of a market-related value of plan assets was developed as a response to
suggestions to reduce the asset-related volatility of net periodic pension cost. The
method described appears intended to accomplish an objective that the use of a marketrelated value was not designed to achieve, namely, to smooth further the effects of
changes in assumed discount rates.
E29.
Q—How does the use of a market-related value of plan assets affect the determination of
net periodic pension cost? [30–32]
A—The use of a market-related value of plan assets affects the determination of net
periodic pension cost in two ways. First, the market-related value of plan assets is the
basis on which the expected return on plan assets is computed. Second, to the extent that
unrecognized gains or losses based on the fair value of plan assets are not yet reflected in
the market-related value of plan assets, such amounts are excluded from the unrecognized
net gain or loss included in accumulated other comprehensive income that is subject to
amortization beginning in the following year. Although those excluded gains or losses
eventually affect net periodic pension cost, their impact is delayed through use of a
market-related value of plan assets.
E30.
[This question has been deleted. See Status page.]
Q—If an employer uses a market-related value of plan assets in determining net periodic
pension cost, is the determination of an additional minimum liability also based on that
value of plan assets? [30, 36]
FSP on Statement 158 (FSP FAS 158-1)
139
FSP FAS 158-1
A—No. Paragraph 36 of Statement 87 states that “if the accumulated benefit obligation
exceeds the fair value of plan assets, the employer shall recognize in the statement of
financial position a liability . . . that is at least equal to the unfunded accumulated benefit
obligation.” (Emphasis added.) The objective of that paragraph is to provide a measure
of the pension plan’s minimum underfunded status as of a particular point in time. For
that purpose, the most relevant measure of plan assets is their fair value. The use of fair
value of plan assets also enhances the comparability of information reported for similarly
situated pension plans. The objective of using a market-related value of plan assets, on
the other hand, is only to smooth the effects on earnings of the changes in the fair value
of plan assets.
E31.
Q—If all or almost all of a pension plan’s participants are inactive due to a temporary
suspension of the pension plan (that is, for a limited period of time, employees will not
earn additional defined benefits), should the minimum amortization of an unrecognized
net gain or loss included in accumulated other comprehensive income be determined
based on the average remaining life expectancy of the temporarily inactive participants?
[32]
A—No. The minimum amortization of an unrecognized net gain or loss included in
accumulated other comprehensive income should be determined based on the average
remaining service period of the temporarily inactive participants expected to receive
benefits under the pension plan.
E32.
Q—If all employees covered by a pension plan are terminated but not retired, should the
minimum amortization of an unrecognized net gain or loss included in accumulated other
comprehensive income be determined based on the average remaining life expectancy of
the inactive participants? [32]
A—Yes. The situation described could arise, for example, if a division with its own
pension plan is sold by the employer thus terminating the related employees, but the
pension plan remains in existence and it retains the obligation for benefits accrued to the
date of sale. In that situation, the minimum amortization of an unrecognized net gain or
loss included in accumulated other comprehensive income should be determined based
on the average remaining life expectancy of the inactive participants.
E33.
Q—May an employer immediately recognize gains and losses as a component of net
periodic pension cost instead of initially recognizing them in other comprehensive
income delaying their recognition? [33, 54]
A—Yes. Immediate recognition of gains and losses as a component of net periodic
pension cost is permitted if (a) that method is applied consistently, (b) the method is
applied to all gains and losses (on both plan assets and obligations), and (c) the method
used is disclosed in accordance with paragraph 5(o) of Statement 132(R). [35, 36, 52].
[Revised 12/98; 12/03.]
E34.
[This question has been deleted. See Status page.]
FSP on Statement 158 (FSP FAS 158-1)
140
FSP FAS 158-1
Q—If an employer recognized an additional minimum liability at its prior fiscal year-end,
what balance sheet pension account(s) should be affected during subsequent interim
periods for the accrual of net periodic pension cost or for contributions made to the
pension plan? [35, 36, 52]
A—The accounting for interim net periodic pension cost accruals and contributions made
to the pension plan should be reflected in the unfunded accrued or prepaid pension cost
account balance. That balance should be combined with the additional minimum liability
account balance for presentation in the statement of financial position.
E35.
[This question has been deleted. See Status page.]
Q—May an employer recognize an additional pension asset for an overfunded pension
plan beyond that which results from (a) funding more than the amount of net periodic
pension cost or (b) recognizing net periodic pension income? [35, 74]
A—No. Although Statement 87 acknowledges that, in concept, a pension asset should be
recognized for any pension plan with plan assets in excess of the projected benefit
obligation, it does not permit recognition of an additional pension asset on a discretionary
basis. Such an asset is recognized on a delayed basis when the item giving rise to that
excess is amortized as a component of net periodic pension cost (income). (Note,
however, that Statement 87 requires recognition of such an additional pension asset in a
business combination.) [Revised 9/01.]
E36.
[This question has been deleted. See Status page.]
Q—If a pension plan has fixed-income investments (such as guaranteed investment
contracts or bonds) that it intends to hold until they mature, should the determination of
the additional minimum liability be based on the amortized cost or fair value of those
fixed-income investments? [36, 49, 62]
A—For purposes of determining the additional minimum liability, the fixed-income
investments should be measured at their fair value. The intent of Statement 87 is to
provide pension information based on the current values of the pension obligations and
plan assets. The assumed discount rates used to determine the pension obligations are to
reflect the interest rates inherent in the price at which the pension benefits could be
effectively settled—currently. The fair value used to measure plan assets is also a current
determination of the value of those assets. The notion of measuring bonds intended to be
held to maturity at their fair value is not new. That methodology was required in
providing Statement 3610 pension disclosure information and continues to be a
requirement under Statement 35.11 The Basis for Conclusions of Statement 35 provides
additional discussion of the issue.
____________________
10
FASB Statement No. 36, Disclosure of Pension Information.
11
FASB Statement No. 35, Accounting and Reporting by Defined Benefit Pension Plans.
FSP on Statement 158 (FSP FAS 158-1)
141
FSP FAS 158-1
E37.
[This question and its related Illustration 3 have been deleted. See Status page.]
Q—How should an employer determine whether an additional minimum liability is
required if it has a financial report date of December 31 and a measurement date of
September 30? [36, 52]
A—The determination should be based on the funded status of the pension plan as of
September 30, the measurement date, compared with the accrued or prepaid pension cost
recognized by the employer as of December 31 excluding amounts contributed to the
plan during the period after the measurement date and prior to year-end—in this case, the
fourth quarter. The accrued or prepaid pension cost is not adjusted to exclude the effect
of the net periodic pension cost recognized by the employer during the period from
September 30 to December 31 because that amount is reflected in the funded status as of
September 30. Refer to Illustration 3. [Revised 12/98; 10/02.]
Illustration 3—Determination of Minimum Pension Liability When Measurement Date
Precedes Reporting Date [Revised 12/98; 10/02.]
As of September 30, 20X2, the accumulated benefit obligation, projected benefit obligation, and
fair value of plan assets of a defined benefit pension plan sponsored by an employer are (in
thousands):
Accumulated benefit obligation
Projected benefit obligation
Plan assets at fair value
September 30
$(880)
(975)
800
The employer uses a September 30 measurement date in accounting for its pension plan in its
financial statements for the year ending December 31. Based on the amount of the unfunded
accumulated benefit obligation, a minimum liability of $80,000 must be recognized in the
financial statements. At December 31, 20X2, the employer has a recognized prepaid pension
cost (an asset) of $151,000, which includes (a) a fourth-quarter pension cost accrual of $24,000
and (b) a fourth-quarter contribution to the pension plan of $100,000. At September 30, 20X2,
the employer has an unrecognized net loss of $156,000 and unrecognized prior service cost of
$70,000.
The reconciliation of the pension plan’s funded status at September 30, 20X2 to the balance
sheet amount (before giving effect to any additional minimum liability) at December 31, 20X2
follows (in thousands):
Actuarial present value of benefit obligations at September 30, 20X2:
Accumulated benefit obligation
Projected benefit obligation
Plan assets at fair value at September 30, 20X2
Projected benefit obligation in excess of plan assets
Unrecognized net loss
Unrecognized prior service cost
Prepaid pension cost before fourth-quarter 20X2 contribution
FSP on Statement 158 (FSP FAS 158-1)
$(880)
$(975)
800
(175)
156
70
51
142
FSP FAS 158-1
Amount contributed to plan during fourth quarter 20X2
Prepaid pension cost recognized in the statement of
financial position at December 31, 20X2
100
$ 151
The determination of the additional minimum liability to be recognized at December 31, 20X2,
follows (in thousands):
Required minimum liability (unfunded
accumulated benefit obligation)
Prepaid pension cost recognized in statement of
financial position at December 31, 20X2
Amount contributed to the plan during fourth quarter 20X2
Less: Adjusted prepaid pension cost
Additional minimum liability
$ (80)
$ 151
(100)
51
$(131)
Journal entry required to reflect minimum liability at December 31, 20X2:
Intangible asset
Other comprehensive income
Additional minimum liability
70
61
131
To record an additional liability to reflect the required minimum liability. (For financial
statement presentation, the additional liability [$131] is combined with the prepaid pension cost
[$151], and the net amount [$20] is presented as an asset.)
E38.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E39.
[This question has been deleted. See Status page.]
Q—In determining whether an additional minimum liability is required, may an employer
compare the fair value of plan assets to a measure of the pension obligation greater than
the accumulated benefit obligation (such as the projected benefit obligation)? [36, 74]
A—No. Statement 87 does not permit recognition of an additional minimum liability that
would result in a net balance sheet liability greater than the unfunded accumulated benefit
obligation. (Note, however, that paragraph 74 requires recognition of a net liability or
asset based on a comparison of the projected benefit obligation to plan assets.) [Revised
9/01; 5/03.]
E40.
[This question has been deleted. See Status page.]
Q—If an acquiring employer has accounted for a business combination by the purchase
method under now-superseded guidance related to business combinations and income
taxes that required the recognition of a net of tax pension asset or liability at the date of
that prior business combination, should that employer’s determination of any additional
FSP on Statement 158 (FSP FAS 158-1)
143
FSP FAS 158-1
minimum liability consider the remaining portion of (a) the net-of-tax pension asset or
pension liability or (b) the gross pension asset or pension liability determined at the date
of the acquisition? [36, 74] [Revised 12/98; 9/01; 5/03.]
A—The determination of any additional minimum liability should consider the remaining
portion of the gross pension liability or pension asset, not the net-of-tax amount.
E41.
[This question has been deleted. See Status page.]
Q—If an employer recognizes an additional minimum liability and an equal amount as an
intangible asset, should those amounts be classified as current or noncurrent in the
statement of financial position? [37]
A—The criteria for current or noncurrent classification of the additional minimum
liability or the intangible asset are the same as for any other liability or asset. If it is
assumed that the additional minimum liability will not be funded in the next 12 months
(or operating cycle, if longer), then it should be classified as noncurrent. If, however, it is
expected that a part or all of the additional minimum liability will be funded in the next
12 months (or operating cycle, if longer), the amount to be funded should be classified as
current.
The intangible asset should be classified as noncurrent since it represents an amount that
is being amortized over future years, either unrecognized prior service cost or an
unrecognized net obligation existing at the date of initial application of Statement 87.
E42.
[This question has been deleted. See Status page.]
Q—If an employer recognizes an additional minimum liability and an equal amount as an
intangible asset, is the intangible asset subject to separate amortization over a specified
period? [37]
A—No. The intangible asset results from either (a) unrecognized prior service cost or (b)
the remaining portion of the unrecognized net obligation existing at the date of initial
application of Statement 87. Those amounts are amortized as part of the net periodic
pension cost determination, thereby effectively amortizing the intangible asset.
E43.
[This question and its related Illustration 4 have been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E44.
Q—If a career-average-pay pension plan has a formula that provides pension benefits
equal to 1 percent of each year’s salary for that year’s service and prospective (flatbenefit) plan amendments are granted every three years as part of union negotiations (for
example, a negotiated increase may provide that additional benefits of $360 per year are
earned for each of the following three years of service), should the projected unit credit
method be used for both the career-average-pay and the flat-benefit portions of the
pension benefits provided under the pension plan? [39, 40]
FSP on Statement 158 (FSP FAS 158-1)
144
FSP FAS 158-1
A—No. The projected unit credit method should be used to attribute the career-averagepay portion of the pension benefits over employees’ service periods, and the unit credit
method should be used for the flat-benefit portion for the limited service period, which,
for this example, is three years.
E45.
Q—If an employer has a pension plan that provides a pension benefit of 1 percent of final
pay for each year of service up to a maximum of 20 years of service and final pay is
frozen at the 20th year, should the employer attribute the total projected benefits under
the pension plan for an employee over the employee’s expected service period even if
that service period is anticipated to exceed the 20-year limitation? [39, 40]
A—No. Footnote 8 (paragraph 40) of Statement 87 limits the attribution period to the 20year period for an employee anticipated to work beyond that period.
Although total projected benefits ordinarily should be attributed to years of service based
on the pension plan’s formula, paragraph 42 of Statement 87 explains that some pension
plans have formulas that attribute a disproportionate share of those pension benefits to
later years of service and requires attribution of those pension benefits ratably over the
service period (which would be faster than the pension plan formula). However, no basis
exists for attribution of pension benefits to years of service more slowly than the pension
plan’s formula. For this example, the service cost component of net periodic pension cost
for the employee should be zero after year 20. However, interest cost should continue to
accrue on the projected benefit obligation.
E46.
Q—Would the answer to the question in paragraph E45 Question 45 be different if the
pension plan’s formula provided a pension benefit of 1 percent of final pay for each year
of service up to a maximum of 20 years of service and final pay is not frozen at the 20th
year? [39, 40]
A—No, except to note that gains or losses will occur after the 20-year period if
experience is different from that assumed regarding the final level of compensation.
E47.
Q—How should an employer determine the accumulated and projected benefit
obligations if a pension plan has more than one formula and an employee’s pension
benefits are determined based on the formula that provides the greatest pension benefit at
the time the employee terminates or retires (for example, if the employee terminates in
year 10, the pension plan’s flat-benefit formula provides a greater pension benefit than
does the pension plan’s pay-related formula, while if the employee terminates in year 11,
the pension plan provides that same employee with a greater benefit under its pay-related
formula than under its flat-benefit formula)? [39, 40]
A—This question relates to a pension plan that effectively has a formula that defines
different benefits for different years of service and accordingly, an attribution approach
that does not assign the same amount of pension benefit to each year of an employee’s
service may be required.
Under this Statement 87, the accumulated benefit obligation cannot exceed the projected
benefit obligation. If a pension plan has more than one formula, the accumulated benefit
FSP on Statement 158 (FSP FAS 158-1)
145
FSP FAS 158-1
obligation should be based on the greatest of the pension benefits determined by applying
each of the plan’s formulas to service to date. The projected benefit obligation should be
determined based on the same formula until an allocation of incremental pension benefits
for the remaining expected service period using another formula provides a greater
pension benefit allocated to service in the current year. As indicated previously, that may
result in differing levels of benefits attributed to different years of an employee’s service.
Refer to Illustration 5 below for an example of how an employer should determine the
accumulated and projected benefit obligation for a pension plan that has more than one
benefit formula.
FSP on Statement 158 (FSP FAS 158-1)
146
FSP FAS 158-1
Illustration 5—Determination of Benefits for a Pension Plan with a Flat-Benefit and a PayRelated Formula
An employer has a pension plan that provides a pension benefit that is the greater of two
formulas. Formula A provides a flat benefit of $450 for each of the first 20 years of an
employee’s service, but no additional benefits are earned for years of service beyond 20 years;
Formula B provides a benefit equal to 1 percent of final pay for each year of service. In the
following cases, it is assumed that an employee starts at a salary of $11,000 in year 1 and
receives a $1,000 increase in salary for each year of service. To simplify the illustration, the
actuarial present values of the accumulated benefit obligation (ABO) and projected benefit
obligation (PBO) have not been determined. Rather, those obligations are expressed in terms of
the annual pension benefits that begin when the employee retires.
Case 1—30-Year Service Period
It is assumed that an employee will retire at the end of year 30 with a final salary of $40,000.
For that employee, Formula A provides an annual pension benefit of $9,000 for 30 years of
service ($450 for each of the first 20 years of service and no additional benefits for years of
service 21–30); Formula B provides an annual pension benefit of $12,000 for 30 years of service
(30 × 1% × $40,000 or $400 for each year of service). The attribution of pension benefits to
years of service for Formulas A and B is presented in Chart I.
Chart I
Attribution
Formula A vs. Formula B
FSP on Statement 158 (FSP FAS 158-1)
147
FSP FAS 158-1
Chart II shows the increase in accumulated and projected benefits for each year of service for the
employee under Formulas A and B. As can be seen, Formula A provides a greater accumulated
and projected benefit for years 1–20.
Chart II
Accumulated and Projected Benefit Obligation
Formula A vs. Formula B
FSP on Statement 158 (FSP FAS 158-1)
148
FSP FAS 158-1
Beginning in year 21, no additional pension benefits are provided under Formula A. At that
point, Formula B begins to provide a portion of the total projected benefit attributed to years 21–
30. The additional pension benefit expected to be provided under Formula B for service in years
21–30 is $3,000 ($9,000 accumulated benefit at year 20 under Formula A as compared with
$12,000 accumulated benefit at year 30 under Formula B); that additional pension benefit is
attributed to service ratably over years 21–30 ($300 per year). Note that although no additional
pension benefits are “earned” in years 21 and 22 (refer to projected benefit obligation in Chart II)
because the projected benefit under Formula B in those years is less than $9,000, pension
benefits are attributed to those years of service based on the total incremental pension benefit for
years 21–30. Attribution of total projected benefits to years of service is illustrated in Chart III.
Chart III
Attribution of Benefits over Service
FSP on Statement 158 (FSP FAS 158-1)
149
FSP FAS 158-1
Thus, while the accumulated benefit obligation at any point in time represents the greater of the
pension benefits determined under Formulas A and B, the projected benefit obligation is
determined on the basis of the formula providing the greater pension benefit (Formula A) until
an allocation of incremental pension benefits for the remaining service period using another
formula provides a greater pension benefit allocated to service in the current year. In this
example, the allocation of $3,000 of incremental benefits to years 21–30 under Formula B
provides a greater benefit allocated to service in those years ($300 per year) than Formula A
would allocate ($0). Chart IV presents the increase in the accumulated benefit obligation and
projected benefit obligation when the plan benefits are the greater of those determined under
Formulas A and B.
Chart IV
Accumulated and Projected Benefit Obligation
Greater of Benefit under Formulas A and B
FSP on Statement 158 (FSP FAS 158-1)
150
FSP FAS 158-1
The accumulated and projected benefit obligation for years 1–30 are as follows:
Year
1–19
20
21
22
23
24
25
26
27
28
29
30
ABO
PBO
a
a
a
$ 9,000a
9,300b
9,600b
9,900b
10,200b
10,500b
10,800b
11,100b
11,400b
11,700b
12,000b
$ 9,000
9,000a
9,000a
9,000a
9,000a
9,000a
9,360c
9,990c
10,640c
11,310c
12,000c
____________________
a
$450 × years of service, not to exceed 20 years (Formula A).
Formula A benefits earned through year 20 plus attribution of additional projected benefits under Formula B (for
21–30 years of service) in proportion to the number of completed years of service to the number of years of service
that are expected to be completed for the period during which Formula B is applied.
c
One percent of salary for the year noted for each year of service already rendered (Formula B).
b
Case 2—20-Year Service Period
It is assumed that an employee will retire at the end of year 20 with a final salary of $30,000.
For that employee, Formula A provides an annual pension benefit of $9,000 ($450 for each year
of service); Formula B provides an annual pension benefit of $6,000 (20 × 1% × $30,000 or $300
for each year of service). Since Formula A provides the greater benefit in each year, attribution
will be determined under Formula A. The accumulated benefit obligation and projected benefit
obligation will be equal in years 1–20 since Formula A is not pay-related.
Case 3—40-Year Service Period
It is assumed than an employee will retire at the end of year 40 with a final salary of $50,000.
For that employee, Formula A provides an annual pension benefit of $9,000 for 40 years of
service ($450 for each of the first 20 years of service and no additional benefits for service in
years 21–40); Formula B provides an annual pension benefit payable at retirement of $20,000 for
40 years of service (40 × 1% × $50,000 or $500 for each year of service). Since Formula B
provides the greater pension benefit in each year, attribution of the projected benefit obligation
will be determined under Formula B for all years of service. The accumulated benefit obligation,
however, continues to be determined for each year of service by the formula that provides the
greater accumulated benefit.
E48.
Q—Is it possible for a pension plan to have an accumulated benefit obligation that
exceeds the projected benefit obligation? [39–40, 42]
FSP on Statement 158 (FSP FAS 158-1)
151
FSP FAS 158-1
A—No. Under the attribution approach described in paragraphs 40 and 42 of Statement
87, the projected benefit obligation should always equal or exceed the accumulated
benefit obligation.
Under certain plans (typically non-U.S. plans), however, the actuarial present value of the
benefits to which an employee is entitled if the employee terminates immediately may
exceed the actuarial present value of the benefits to which the employee is entitled at the
employee’s expected date of separation based on service to date. In those situations, the
Emerging Issues Task Force (EITF) reached a consensus in EITF Issue No. 88-1,
“Determination of Vested Benefit Obligation for a Defined Benefit Pension Plan,” states
that the employer may record either the actuarial present value of vested benefits to
which the employee is entitled if the employee separates or the actuarial present value of
the vested benefits to which the employee is currently entitled based on the employee’s
expected date of separation or retirement. The SEC Observer noted that the method used
should be disclosed. [Revised 12/98]
E49.
Q—How is the projected benefit obligation attributed to a qualified pension plan (for tax
purposes) and an excess benefit (top-hat) pension plan during an employee’s service
period if the employee is expected to receive a pension benefit under the excess benefit
pension plan (that is, the employee’s pension benefit at retirement is expected to exceed
the Section 415 limitations of the U.S. Internal Revenue Code)? [39, 40, 46, 47, 55]
A—The projected benefit obligation should be attributed to the qualified pension plan
(for tax purposes) until it equals the assumed benefit limitations imposed by Section 415.
(Refer to the answer to the question in paragraph E63Question 63.) Any incremental
projected benefits for subsequent years of service should then be attributed to the excess
benefit pension plan.
Under this Statement 87, net periodic pension cost, liabilities, and assets are determined
on a plan-by-plan basis. Until an employee’s projected benefits for service already
rendered reach the benefit limitations of the underlying qualified pension plan, the
employee is not eligible for benefits under an excess benefit pension plan and no cost or
obligation should be attributed to that pension plan.
Refer to Illustration 6 below for an example of attribution of pension benefits to a
qualified pension plan (for tax purposes) and an excess benefit pension plan.
Illustration 6—Attribution of Pension Benefits to a Qualified and an Excess Benefit
Pension Plan
A pension plan’s formula is an annual pension benefit of 2 percent of final pay for each year of
service. It is assumed than an employee starts at a salary of $200,000 in year 1, receives annual
salary increases of $15,000, and retires at the end of 21 years at a salary of $500,000. It is
further assumed that the Section 415 limitation for annual pension benefit payments is $90,000
in year 1 and that the limitation under the existing law will increase to permit annual pension
benefit payments of $120,000 for all the years the employee will receive benefit payments.
FSP on Statement 158 (FSP FAS 158-1)
152
FSP FAS 158-1
Attribution of the accumulated benefit obligation (ABO) and projected benefit obligation (PBO)
for the employee is as follows. To simplify the illustration, the actuarial present values of the
accumulated and projected benefit obligation have not been determined. Rather, those
obligations are expressed in terms of the annual pension benefits that begin when the employee
retires.
Year of
Service
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
E50.
Salary
$200,000
215,000
230,000
245,000
260,000
275,000
290,000
305,000
320,000
335,000
350,000
365,000
380,000
395,000
410,000
425,000
440,000
455,000
470,000
485,000
500,000
______Total______
ABO
PBO
$ 4,000 $ 10,000
8,600
20,000
13,800
30,000
19,600
40,000
26,000
50,000
33,000
60,000
40,600
70,000
48,800
80,000
57,600
90,000
67,000
100,000
77,000
110,000
87,600
120,000
98,800
130,000
110,600
140,000
123,000
150,000
136,000
160,000
149,600
170,000
163,800
180,000
178,600
190,000
194,000
200,000
210,000
210,000
Qualified
___Pension Plan___
ABO
PBO
$ 4,000
$ 10,000
8,600
20,000
13,800
30,000
19,600
40,000
26,000
50,000
33,000
60,000
40,600
70,000
48,800
80,000
57,600
90,000
67,000
100,000
77,000
110,000
87,600
120,000
98,800
120,000
110,600
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
Excess Benefit
___Pension Plan___
ABO
PBO
$ 3,000
16,000
29,600
43,800
58,600
74,000
90,000
$10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Q—If a pension plan’s formula provides an annual pension benefit equal to 1 percent of
each year’s salary (that is, it does not base pension benefits for the current year on any
future salary level), should the projected unit credit method be used to attribute the
service cost component of net periodic pension cost over employees’ service periods?
[39, 40, 143]
A—Yes. This Statement 87 requires use of the projected unit credit method for payrelated pension plans. A pension plan that describes the pension benefits earned as 1
percent of current pay for each year of service is the same as a pension plan that describes
the pension benefits earned as 1 percent of total career pay. Both are, in effect, a careeraverage-pay pension plan. Because similar pension benefits could be provided by a finalpay pension plan that includes almost the entire service period (for example, service
period minus the first year) in determining the average final pay on which pension
benefits are based, the line between career-average-pay and final-pay pension plans
would need to be an arbitrary one if the two types of formulas were to be treated
differently. The Board decided to treat all pay-related pension plans the same; therefore,
FSP on Statement 158 (FSP FAS 158-1)
153
FSP FAS 158-1
the projected unit credit method should be used for both final-pay and career-average-pay
pension plans.
E51.
Q—What is intended by the fourth sentence of paragraph 143 of Statement 87 which
states the following: “The Board perceives a difference between an employer’s promise
to pay a benefit of 1 percent of an employee’s final pay and a promise to pay an
employee a fixed amount that happens to equal 1 percent of the employee’s current pay”?
Is the Board referring to a career-average-pay pension plan in the latter part of the
sentence? [39, 40, 143]
A—No. The intent of the sentence was to differentiate a final-pay pension plan from a
flat-benefit pension plan (not a career-average-pay pension plan). In reading the
sentence, the emphasis should be on the word “happens.” To illustrate the distinction the
sentence is intending to make, assume that an employee’s current salary is $30,000 and
the employee’s final salary will be $50,000. If future salary levels were not considered in
measuring the current obligation of a 1 percent final-pay pension plan, the pension
benefits promised for the current year of service for that employee would be $300. If the
plan were a flat-benefit pension plan that promises $300 of pension benefits for each year
of service, the measure of the obligation would be the same. The Board perceives a
difference regarding the employer’s promise under the two pension plans. Including the
future salary variable on which the obligation in the first case is based results in
recognizing that difference (a projected annual benefit of $500 under the final-pay
pension plan as compared to a $300 projected benefit under the flat-benefit pension plan).
E52.
Q—What constitutes a “substantive commitment” requiring recognition of pension
benefits beyond those defined in the pension plan’s written formula? [39, 41]
A—Paragraph 41 of Statement 87 states that “in some situations a history of regular
increases in non-pay-related benefits or benefits under a career-average-pay plan and
other evidence may indicate that an employer has a present commitment to make future
amendments and that the substance of the plan is to provide benefits attributable to prior
service that are greater than the benefits defined by the written terms of the plan.” The
determination of whether a substantive commitment exists to provide pension benefits for
employees beyond the written terms of the pension plan’s formula requires careful
consideration of all the facts and circumstances surrounding the pension plan. Actions of
the employer, including communications to the employees, can demonstrate the existence
of that commitment. (For example, paragraph 41 of Statement 87 requires disclosure of
the commitment in the financial statements.) However, a history of retroactive plan
amendments is not enough, in isolation, to establish a substantive commitment. Absent
other evidence of a substantive commitment, such a history should be considered in
applying paragraph 27 of Statement 87.
E53.
Q—Should an employer’s accounting for its pension plan anticipate a retroactive plan
amendment that is not part of a series of retroactive plan amendments necessary to effect
a substantive commitment to have a formula greater than its written form? [39, 41]
A—No.
FSP on Statement 158 (FSP FAS 158-1)
154
FSP FAS 158-1
E54.
Q—Is it always necessary for assumed compensation levels to change each time assumed
discount rates (and expectations of future inflation rates inherently contained in the
assumed discount rates) change? [39, 43, 46, 202]
A—No. This Statement 87 requires that assumed compensation levels be consistent with
assumed discount rates only to the extent that both incorporate expectations of the same
future economic conditions. It does not require that both assumptions contain the same
future inflation component unless that would be appropriate under the circumstances to
reflect the best estimate of the pension plan’s future experience. For example, an
employer that competes with significant foreign enterprises may not increase its assumed
compensation levels even though assumed discount rates increase because the employer
expects that it could not successfully compete in the future if its labor costs increased at a
rate greater than that already assumed. Another employer would increase its assumed
compensation levels if assumed discount rates increased because changes in that
employer’s labor costs over time have been highly correlated with changes in inflation
rates and the employer expects that correlation to continue.
E55.
Q—May an employer determine a range of discount rates each year based, for example,
on the Pension Benefit Guaranty Corporation’s interest rates and high-quality bond rates
and continue to use the prior year’s assumed discount rates as long as those rates fall
within the range? [39, 44]
A—No. Paragraph 44 of Statement 87 states:
Assumed discount rates shall reflect the rates at which the pension
benefits could be effectively settled. It is appropriate in estimating those
rates to look to available information about rates implicit in current prices
of annuity contracts that could be used to effect settlement of the
obligation. . . . In making those estimates, employers may also look to
rates of return on high-quality fixed-income investments currently
available and expected to be available during the period to maturity of the
pension benefits.
The intent of this Statement 87 is for the assumed discount rates to reflect the interest
rates inherent in the price at which the pension benefits could be effectively settled—
currently. Each year those rates should be reevaluated to determine whether they reflect
the best estimate of the current effective settlement rates. If interest rates generally
decline or rise, the assumed discount rates should change.
E56.
Q—May an employer determine a range of discount rates as described in the question in
paragraph E55, Question 55 and then arbitrarily select the assumed discount rates from
within that range? [39, 44]
A—No. An employer should not select arbitrarily the assumed discount rates from within
a range but should select the best estimate of the interest rates at which the pension
benefits could be effectively settled at that point in time.
FSP on Statement 158 (FSP FAS 158-1)
155
FSP FAS 158-1
E57.
Q—If an employer changes its basis of estimating assumed discount rates, for example,
by using high-quality bond rates for one year and annuity rates for the following year, is
that a change in method of applying an accounting principle? [39, 44]
A—No. The purpose of paragraph 44 of Statement 87 is to describe the objective of
selecting assumed discount rates, namely, to determine the interest rates inherent in the
price at which the pension benefits could be effectively settled—currently. If an
employer that previously used double A bond rates believes in a subsequent year that, in
consideration of its pension plan’s particular facts and circumstances, the interest rates
that would be inherent in an effective settlement of the pension benefits are now more
closely reflected by the rates implicit in current prices of annuity contracts, then those
rates should be used and the change is viewed as a change in estimate (the estimate’s
being the determination of the effective settlement rates). The key is that the employer is
using the rates implicit in current prices of annuity contracts as the basis to determine the
best estimate of the effective settlement rates. The decision to use a particular
methodology in a particular year does not mean that the employer must use that
methodology in subsequent years. A change in the facts and circumstances may warrant
the use of a different source that better reflects the rates at which the obligation could be
effectively settled—currently. A position that holds such a change as a change in
accounting principle would lend credence to the view that there are two or more
acceptable alternatives. That is not the case. The objective is to select the best estimate
of the effective settlement rates.
Another aspect of this issue is determining when to change the basis of estimation from
one particular methodology (for example, double A bond rates) to another (for example,
rates implicit in current prices of annuity contracts). There is no prescribed mathematical
formula for making that decision. As indicated above, the emphasis in selecting assumed
discount rates should be the use of the best estimate. Changes in the methodology used
to determine that best estimate should be made when facts or circumstances change (for
example, a general decline or rise in interest rates that has not, as yet, been reflected in
the rates implicit in the current prices of annuity contracts). If the facts and
circumstances do not change from year to year, it would be inappropriate to change the
basis of selection, particularly if the intent in changing the basis is to avoid a change in
the assumed discount rates.
E58.
Q—If a pension plan has a bond portfolio that was dedicated at a yield significantly
higher or lower than current interest rates, may the historical rates of return as of the
dedication date be used in discounting the projected and accumulated benefit obligations
to their present value? [39, 44]
A—No. Although it is acceptable in selecting the assumed discount rates for an employer
to look to “rates of return on high-quality fixed-income investments,” it is the current
rates of return on those investments (not historical rates of return as of the dedication
date) that are relevant.
Use of assumed discount rates based on historical rates of return is inconsistent with this
Statement’s 87’s requirement to value plan assets at fair value. If interest rates decline or
FSP on Statement 158 (FSP FAS 158-1)
156
FSP FAS 158-1
rise, the effect of this Statement’s 87’s requirement to use current rates is to increase or
decrease the present value of the projected benefit obligation. That increase or decrease
in the obligation is a loss or gain that would be offset to the extent of the gain or loss in
the fair value of the plan’s dedicated portfolio of fixed-income investments. Any net gain
or loss is subject to amortization as a component of net periodic pension cost.
E59.
Q—May the assumed discount rates used to discount the vested, accumulated, and
projected benefit obligations be different? [39, 44]
A—Yes, if the employer can justify such differences in terms of this Statement’s 87’s
requirement to make the best estimate of the assumed discount rates. For example,
different rates should be used to measure the pension obligations for active and retired
employees if necessary to reflect differences in the maturity and duration of pension
benefit payments. The assumed discount rates for pension benefits that mature in a
particular year should not differ, however, regardless of whether the obligation for those
pension benefits is presently classified as a vested, accumulated, or projected benefit
obligation.
E60.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E61.
Q—Because a current settlement of the portion of the projected benefit obligation that
relates to future compensation levels is unlikely, may an employer use those interest rates
implicit in current prices of annuity contracts to determine the accumulated benefit
obligation, and use interest rates expected to be implicit in future prices of annuity
contracts to determine the pension obligation in excess of the accumulated benefit
obligation? [39, 44, 191]
A—No. The use of rates implicit in future annuity prices is not consistent with this
Statement 87. The assumed discount rates used to determine the projected, accumulated,
and vested benefit obligations should reflect the interest rates inherent in the price at
which the pension benefits could be effectively settled—currently. It is acknowledged
that ordinarily an employer would not want to purchase annuities for that portion of the
pension benefit obligation related to future compensation levels and that an insurance
company would be unwilling to undertake an unconditional obligation based on future
compensation levels without charging increased premiums for the additional risk.
However, under this Statement 87, how the accumulated benefit obligation or the
projected benefit obligation (before discounting) is determined, that is, whether
assumptions as to future inflation or compensation levels are considered, is not relevant
in selecting discount rates.
This Statement 87 requires an explicit approach to assumptions. Those factors that are
relevant for determining the timing and amount of estimated future annuity payments
should not be reflected by an implicit approach to selecting discount rates. Once the
estimated future annuity payments are determined, the discounting process using an
explicit approach does not consider anything other than the time value of money for
purposes of determining the single sum which, if invested at the measurement date,
FSP on Statement 158 (FSP FAS 158-1)
157
FSP FAS 158-1
would generate the necessary cash flows to pay the pension benefits when due (the sum
necessary to settle effectively the pension obligation assuming no future experience gains
or losses).
The purpose of the guidance in paragraphs 44 and 44A of Statement 87 is to direct the
employer to the proper sources for selecting assumed discount rates. Its intent is not
necessarily to arrive at a discounted amount that would be the price an insurance
company would charge to assume the same pension benefit promise to employees. Many
factors affect the price at which an insurance company would undertake a particular
obligation. The insurance company’s assessment of the risks related to mortality
obviously affect that price as does the profit margin the insurance company hopes to
achieve. Had this Statement 87 intended to arrive at the insurer’s price, it would have
stated that the actuarial present value of the projected benefit obligation be the best
estimate of the price at which the insurance company would assume the employer’s
obligations. In that case, the approach to selecting various assumptions would be to
select those inherent in annuity prices rather than those that “reflect the best estimate of
the plan’s future experience” (paragraph 191, emphasis added). Instead, this Statement
87 identifies as one source for selecting assumed discount rates, the (explicit) rates
implicit in current prices of annuity contracts. The rates inherent in a dedicated highquality bond portfolio (for example, zero-coupon treasury securities) is another identified
source. Paragraphs 186–188 of Statement 106 provide additional guidance on selecting
the discount rate(s). [Revised 12/98.]
E62.
Q—Should the expected return on future years’ contributions to a pension plan be
considered in determining the expected long-term rate of return on plan assets? [39, 45]
A—No. The expected long-term rate of return on plan assets should reflect long-term
earnings expectations only on existing plan assets and those contributions expected to be
received during the current year. The words “to be invested” in the first sentence of
paragraph 45 of Statement 87 were intended to refer only to the reinvestment of returns
on existing plan assets.
E63.
Q—Should changes under existing law in benefit limitations, such as those currently
imposed by Section 415 of the U.S. Internal Revenue Code, that would affect benefits
provided by a pension plan be anticipated in measuring the service cost component of net
periodic pension cost and the projected benefit obligation? [39, 46]
A—Yes. If the existing law provides for indexing or has a schedule of changes inherent
in it, those effects should be considered in determining the service cost component of net
periodic pension cost and the projected benefit obligation to the extent consistent with
other assumptions (that is, salary and inflation). However, possible amendments of the
law should not be considered in determining those pension measurements.
E64.
Q—If Section 415 of the U.S. Internal Revenue Code is incorporated by reference into a
pension plan’s formula thereby limiting certain participants’ accumulated benefits, should
determination of the pension plan’s accumulated benefit obligation reflect the current
limitation if (a) the pension plan’s formula requires automatic increases in accumulated
FSP on Statement 158 (FSP FAS 158-1)
158
FSP FAS 158-1
benefits as each change in the limitation under existing law occurs and (b) future service
is not a prerequisite for participants to receive those increases? [39, 47, 48]
A—No. The determination of the pension plan’s accumulated benefit obligation should
not reflect the current limitation but should reflect those increases in the limitation under
existing law that would be consistent with the pension plan’s other assumptions. As
described, the pension plan formula incorporates the type of automatic benefit increases
addressed in paragraph 48 of Statement 87. However, if employees would not
automatically receive those pension benefit increases should they retire or terminate their
service, then paragraph 47 of Statement 87 would proscribe anticipating those increases
and, therefore, the current limitation would be used in determining the accumulated
benefit obligation in that situation.
E64A. [This question has been deleted. See Status page.]
Q—In June 2001, the U.S. Congress enacted the Economic Growth and Tax Relief
Reconciliation Act (“EGTRRA” or “the Act”). The Act increased the amount of benefits
that a qualified defined benefit plan can pay under the terms of U.S. Internal Revenue
Code (IRC) Section 415(b). However, that legislation is set to expire (or “sunset”) after
2010. That is, after December 31, 2010, the provisions of and amendments made by
EGTRRA (including increases to annual benefit payments) will no longer apply.
However, IRC Section 411(d)(6) generally prohibits a plan amendment that has the effect
of decreasing a participant’s accrued benefits under the plan (“anti-cutback provisions”).
For actuarial valuations of pension plans, it is necessary to estimate the benefits payable
in future years. In performing that estimate, which of the following three alternative
interpretations of the impact of the “sunset” provision is appropriate?
1)
2)
3)
Treat the sunset provision as having full impact. That is, estimate the benefits
payable in years after 2010 as if EGTRRA had never increased the Section 415(b)
limits.
Treat the sunset provision as being subject to the anti-cutback provisions of IRC
Section 411(d)(6).
Treat the sunset provision as having no impact—that is, assume that the sunset
provision will be repealed prior to its effective date.
A—The provisions of EGTRRA, including the sunset provision, represent enacted law.
The answer to Question 63 indicates that “. . . possible amendments of the law should not
be considered in determining . . . pension measurements.” As such, alternative 3 is not an
acceptable alternative as it anticipates future legislation or changes to existing law.
Whether alternative 1 or alternative 2 is appropriate depends on a determination as to
whether the anti-cutback provisions would apply and mitigate the reduction in benefits
otherwise triggered by the sunset provision. Making that determination may require
consultation with legal counsel. Disclosure of the determination made is voluntary.
However, if significant diversity in interpretation of existing law develops, the staff may
express at a later date its views as to whether certain disclosures should be required.
[Added 4/02]
FSP on Statement 158 (FSP FAS 158-1)
159
FSP FAS 158-1
E65.
Q—If an actuarial valuation is made as of a pension plan’s year-end and that date
precedes the date of the employer’s fiscal year-end statement of financial
positionmeasurement date for the pension plan, is it always necessary to have another
actuarial valuation made as of that datethe measurement date? [52, 53]
A—No. This Statement 87 requires that the projected benefit obligation reflect the
actuarial present value of all benefits attributed to employee service rendered prior to the
date of the employer’s fiscal year-end statement of financial position, with limited
exceptionsmeasurement date. The measurement of that obligation should be based on
actuarial assumptions appropriate for the date of the employer’s fiscal year-end statement
of financial positionmeasurement date (for example, turnover, mortality, discount rates,
and so forth) and census data as of that date. However, if an employer is assured that the
reliability of the measurement of that obligation determined by rolling forward data based
on a valuation prior to the date of the employer’s fiscal year-end statement of financial
positionmeasurement date is sufficiently high so that the amount of the pension
obligation is substantially the same as would be determined by an actuarial valuation as
of that date, then another actuarial valuation is not required. This is analogous to the
acceptability of having an annual physical inventory taken as of a date prior to the
financial report date if it has been demonstrated that reliance can be placed on perpetual
records or another system that reflects subsequent events.
E66.
Q—How should net periodic pension cost for the year be determined if it is necessary to
have an actuarial valuation as of the employer’s fiscal year-endmeasurement date (for
example, December 31) in addition to the actuarial valuation made as of the pension
plan’s preceding year-end (for example, June 30)? [52, 53]
A—Measurement of net periodic pension cost should be based on the most recent
measurements of plan assets and obligations. If actuarial valuations are made as of June
30 and December 31, net periodic pension cost for the year should be the sum of two sixmonth measurements (January 1–June 30, determined as of the preceding December 31;
July 1–December 31, determined as of the preceding June 30).
E67.
Q—If an employer that has a December 31 financial report date and that uses a
December 31 measurement date measures its plan assets and obligations as of an interim
date during its fiscal year, for example, because of a significant retroactive plan
amendment, should net periodic pension cost for the subsequent interim periods be based
on those measurements? [52, 53]
A—Yes. Net periodic pension cost for the remainder of the fiscal year should be based
on the most recent pension measurements. Paragraph 53 of Statement 87 states that
“measurements of net periodic pension cost for both interim and annual financial
statements shall be based on the assumptions used for the previous year-end
measurements unless more recent measurements of both plan assets and obligations are
available. . . .”
E68.
Q—Under the circumstances described in the question in paragraph E67Question 67,
should net periodic pension cost for the preceding interim periods be adjusted? [52, 53]
FSP on Statement 158 (FSP FAS 158-1)
160
FSP FAS 158-1
A—No.
E69.
Q—If aAn employer uses a measurement date of December 31September 30 but does not
complete the actual measurements until some time later in the year, for example, in
January.December, s Should the determination of the pension obligations be based on
the assumed discount rates and other actuarial assumptions as of JanuaryDecember? [52,
53]
A—No. The employer should use the actuarial assumptions (including assumed discount
rates) that were appropriate as of the measurement date of December 31September 30
because the objective is to determine the various pension measurements (including plan
assets) as of that date.
E70.
[This question has been deleted. See Status page.]
Q—If an employer has several pension plans with varying measurement dates, should the
pension disclosures be segregated by measurement date? [52, 56]
A—No. The use of different measurement dates by an employer for its various pension
plans, in itself, does not necessitate the segregation of pension disclosures by
measurement date. However, disclosure should be made of the different measurement
dates used.
E71.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E72.
[This question has been deleted. See Status page.]
[Question deleted because the disclosure (as part of “Plan Description”) is no longer
required by Statement 132 or Statement 132(R).]
E73.
[This question has been moved to paragraph E88A.]
[Renumbered 12/98 as Question 88A.]
E74.
[This question has been deleted. See Status page.]
Q—If the pension asset or pension liability recognized by the acquiring employer in a
business combination accounted for under now superseded guidance relating to business
combinations and income taxes reflects estimates of future tax effects, does that affect the
reconciliation required by paragraph 5(c) of Statement 132(R)? [74] [Revised 12/98;
9/01; 5/03; 12/03.]
A—Yes. That valuation adjustment will be another item disclosed in the reconciliation of
the funded status of the pension plan with amounts reported in the employer’s statement
of financial position.
E75.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
FSP on Statement 158 (FSP FAS 158-1)
161
FSP FAS 158-1
E76.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E77.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E78.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
E79.
Q—Should the assumptions disclosed be as of the beginning or ending measurement
date? [FAS132, ¶5] [Revised 12/98.]
A—The disclosed weighted-average assumed discount rate and rate of compensation
increase, if applicable, should be as of the year-end measurement date because that is the
date for which the projected benefit obligation is presented. [Revised 12/98.]
The weighted-average expected long-term rate of return on plan assets is used to
determine net periodic pension cost, and, therefore, in the absence of a subsequent
interim measurement of both pension assets and obligations (refer to paragraph 53 of
Statement 87), the disclosed rate is the rate determined as of the beginning of the year
measurement date. However, if that rate changes because of a subsequent interim
measurement of both pension assets and obligations, disclosure of the beginning and
more recently assumed rate, or a properly weighted combination of the two, should be
made.
E80.
Q—If an employer combines several of its pension plans and the assets of each
predecessor pension plan are available to satisfy the previously existing obligations of the
other, how should the combined pension plan be accounted for? [55] [Revised 12/98.]
A—Except for unrecognized prior service costs included in accumulated other
comprehensive income, similar unrecognized amounts of the predecessor pension plans
should be aggregated, and a single amortization schedule for each of the combined
amounts should be used. That is, (a) the amortization of the aggregate remaining portion
of the unrecognized net transition asset or net obligation remaining in accumulated other
comprehensive income existing at the date of initial application of Statement 87 should
reflect a reasonably weighted average of the remaining amortization periods used by the
separate pension plans for that unrecognized item and (b) the minimum amortization of
the aggregate unrecognized net gain or loss included in accumulated other comprehensive
income should reflect the average remaining service period of the combined employee
group.
The unrecognized prior service cost included in accumulated other
comprehensive income of each pension plan at the time of the combination should
continue to be amortized as previously determined based on specific employee groups
covered. The determination of any additional minimum liability should be made on a
combined pension plan basis.
Refer to Illustration 7 below.
FSP on Statement 158 (FSP FAS 158-1)
162
FSP FAS 158-1
Illustration 7—Combining of Two Plans [Revised 12/98.]
An employer has two pension plans (Plan A and Plan B) that are combined at December 31,
20X0. The following shows the assumptions and methods of amortizingrecognizing certain
deferred pension amounts initially recognized in other comprehensive income and the funded
status of each pension plan reconciled to amounts reported in the employer’s balance sheet
immediately before and after the combination of Plan A and Plan B.
December 31, 20X0—Prior to Combination of Plan A and Plan B
Assumptions:
Weighted-average discount rate
Expected long-term rate of return on plan
assets
Average remaining service period
Number of employees as of December 31,
20X0 expected to receive benefits under
the pension plan
Amortization method:
Unrecognized pPrior service cost
Plan A
Plan B
10%
9.25%
10%
17 years
10%
15 years
300
420
Straight-line
Straight-line
amortization over
amortization over
average remaining
average remaining
service period of
service period of
employees expected to employees
receive benefits (17 expected to receive
years)
benefits (15 years)
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset (liability)
Projected benefit obligation (in excess of) less than plan assets
Amounts recognized in accumulated
other comprehensive income:
Unrecognized nNet (gain) loss
Unrecognized pPrior service cost (credit)
Prepaid (accrued) pension cost
FSP on Statement 158 (FSP FAS 158-1)
Plan A
$(502)
804
$302
$(114)
120
$3086
Plan B
$(640)
205
$(435)
$ 41
321
$(73)362
163
FSP FAS 158-1
December 31, 20X0—Subsequent to Combination of Plan A and Plan B
Combined Plan AB
Assumptions:
Weighted-average discount rate
Expected long-term rate of return on plan
assets
Average remaining service period
Number of employees as of December 31,
20X0 expected to receive benefits under
the pension plan
Amortization method:
Unrecognized pPrior service cost
Unrecognized nNet gain or loss
9.6%a
10%b
15.8 yearsc
720
The existing unrecognized prior
service costs continued to be
amortized on the bases applied
prior to the combination
Minimum amortization specified in
paragraph 32 (average remaining
service period is 15.8 years)c
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset (liability)
Projected benefit obligation in excess of plan assets
Amounts recognized in accumulated other comprehensive income:
Unrecognized nNet (gain) loss
Unrecognized pPrior service (credit) cost
Prepaid pension cost
Combined Plan AB
$(1,142)
1,009
$ (133)
$(73)
441
$235368
____________________
a
The weighted-average assumed discount rate reflects the rates at which the combined pension benefits could be
effectively settled. (For purposes of this illustration, 9.6 percent is presumed to be the appropriate rate. It was not
actually calculated using any of the data for the previously separate plans.)
b
The expected long-term rate of return on plan assets does not change because both pension plans used the same
rate.
c
The average remaining service period of employees expected to receive benefits under the pension plan is weighted
by the number of covered employees from each group as follows: (17 years × 300/720) + (15 years × 420/720) =
15.8 years (rounded). That should be the same period that would be determined by a new calculation for the
combined group.
E81.
Q—If an employer divides a pension plan into two or more separate pension plans
subsequent to the date of initial application of this Statement 87, how should (a) the
remaining unrecognized net transition asset or net obligation remaining in accumulated
other comprehensive incomeexisting at the date of initial application of Statement 87, (b)
FSP on Statement 158 (FSP FAS 158-1)
164
FSP FAS 158-1
the unrecognized net gain or loss included in accumulated other comprehensive
incomearising subsequent to initial application, and (c) any unrecognized prior service
cost included in accumulated other comprehensive income be allocated to each of the
separate plans? [55]
A—Using Statement 881712 as guidance for this issue, an employer should allocate (a) the
remaining unrecognized net transition asset or obligation remaining in accumulated other
comprehensive income or net asset existing at the date of initial application of Statement
87 and (b) the unrecognized net gain or loss included in accumulated other
comprehensive incomearising subsequent to initial application, in proportion to the
projected benefit obligations of the two surviving plans. Unrecognized pPrior service
cost included in accumulated other comprehensive income should be allocated to the
surviving plans based on the applicable individuals included in the employee groups
covered.
Refer to Illustration 8 below.
____________________
1712
Statement 88 states that the pro rata amount of the maximum gain or loss to be recognized in earnings
when a pension obligation is settled is equal to the percentage reduction in the projected benefit obligation.
Paragraph 31 of Statement 88 indicates that determination could have been based on the reduction of assets
since a decrease in the amount of plan assets also affects the possibility of future gains and losses.
However, the Board concluded that it would be simpler and more practical to base the measurement only
on the obligation settled. [Revised 5/03.]
FSP on Statement 158 (FSP FAS 158-1)
165
FSP FAS 158-1
Illustration 8—Division of One Pension Plan into Separate Pension Plans [Revised 12/98.]
An employer has a pension plan that covers employees of the parent company and its
consolidated subsidiaries (Subsidiaries B and C). The employer divides its pension plan into
three separate pension plans (Plan A, Plan B, and Plan C) that are sponsored by the parent
company and Subsidiaries B and C, respectively.
The following shows the funded status of the pension plans immediately before and after the
division.
Prior to
_Division_
After Division
(Parent)
(Parent)
(Subsidiary B) (Subsidiary C)
___Plan B___ ___Plan C___
_Plan ABC_ _Plan A_
Projected benefit obligation
$(90,000)
Plan assets at fair value
160,000
Funded status and recognized asset
(liability)
$ 70,000
Projected benefit obligation (in excess
of) less than plan assets
Amounts recognized in accumulated
other comprehensive income:
Unrecognized nNet gain
$(55,000)
Prior service cost not yet recognized
25,000
in net periodic pension cost
Remaining unrecognized net
(40,000)
Transition asset existing at date of
initial application
$(70,000)
(Unfunded accrued) prepaid pension
cost
0
$(54,000)a
132,000b
$(18,000)a
15,000b
$(18,000)a
13,000b
$ 78,000
$ (3,000)
$ (5,000)
$(33,000)c
17,500d
$(11,000)c
5,000d
$(11,000)c
2,500d
(24,000)c
(8,000)c
(8,000)c
$(39,500)
38,500
$(14,000)
(17,000)
$(16,500)
(21,500)
____________________
a
Allocation based on individual employees covered by each plan.
Allocation determined by employer. (Illustration presumes that no regulatory requirements apply.)
c
Allocation based on percent of total projected benefit obligation ($90,000) assumed by each pension plan. For
Plans A, B, and C, that is 60 percent, 20 percent, and 20 percent, respectively.
d
Allocation based on applicable individual employees covered by each plan. (Illustration presumes prior service
cost not allocable on the same percentage basis as projected benefit obligation assumed by each pension plan.)
b
FSP on Statement 158 (FSP FAS 158-1)
166
FSP FAS 158-1
Journal Entries
The journal entries to account for the division of the pension plan are as follows:
Parent Company
Pension assetPrepaid pension cost
Accumulated other comprehensive income
Investment in Subsidiary B
Investment in Subsidiary C
38,5008,000
30,500
17,000
21,500
To record the transfer of pension assets, obligations, and amounts included in
accumulated other comprehensive incomenet deferred amounts from the parent
company to Subsidiaries B and C
Subsidiary B
Stockholder’s equity*
Pension liabilityUnfunded accrued pension cost
Accumulated other comprehensive income
17,000
17,0003,000
14,000
To record the receipt of pension assets, obligations, and amounts included in
accumulated other comprehensive incomenet deferred amounts from the parent
company
Subsidiary C
Stockholder’s equity*
Pension liabilityUnfunded accrued pension cost
Accumulated other comprehensive income
21,500
21,5005,000
16,500
To record the receipt of pension assets, obligations, and amounts included in
accumulated other comprehensive incomenet deferred amounts from the parent
company
____________________
* The accounting within the equity section is not addressed.
E82.
Q—Are annuity contracts defined differently in this Statements 87 and Statement 88? If
so, how are the definitions different, and why? [57–61]
A—Yes. Annuity contracts are defined differently in this Statements 87 and Statement
88. The difference in the definition of annuity contracts is that footnote 1 of Statement
88 excludes from settlement accounting those annuity contracts purchased from an
enterprise that is controlled by the employer, whereas footnote 14 of this Statement 87
excludes from annuity contracts those purchased from a captive insurer.1813 Therefore,
an employer who purchases annuity contracts from an insurance company that it controls
FSP on Statement 158 (FSP FAS 158-1)
167
FSP FAS 158-1
should not recognize any settlement gain or loss associated with the transaction (that is,
the transaction should not qualify for settlement accounting under Statement 88).
However, unless the insurance company is a captive insurer, the pension benefits covered
by the annuity contracts should be excluded from the projected benefit obligation and the
contracts should be excluded from plan assets (except for any participation rights) for
purposes of applying this Statement 87.
In Statement 88, the Board decided that the circumstances under which an employer
should recognize in earningspreviously unrecognized gains or losses the net gain or loss
included in accumulated other comprehensive income should be limited and that such
recognition should not occur if the settlement transaction is between an employer and an
entity that it controls. In the Board’s view, such a transaction merely shifts the risks from
one part of the entity to another part of the same entity. In the Exposure Draft preceding
this Statement 87, the Board proposed to treat such contracts as plan assets. However,
the Board was persuaded by constituents’ views that the cost incurred to treat those
contracts as plan assets and to include the related benefits in the measurement of the
projected benefit obligation was too high to justify that accounting unless the contracts
were with a captive insurer. The Board then concluded that disclosure of the
approximate amount of annual benefits covered by annuity contracts issued by the
employer and related parties should be required.
____________________
1813
Paragraph 60 of this Statement 87 states that benefits covered by annuity contracts shall be excluded
from the projected benefit obligation and the accumulated benefit obligation, and, except for participation
rights, annuity contracts shall be excluded from plan assets.
E83.
Q—Is a guaranteed investment contract an annuity contract? [62]
A—No. Guaranteed investment contracts are not annuity contracts because they transfer
only investment risk to the insurer. The insurer does not unconditionally undertake a
legal obligation to provide specified pension benefits to specific individuals.
E84.
Q—If a guaranteed investment contract is not considered an annuity contract, how should
an employer value the contract if it has a specified maturity date and there is no intent to
liquidate the contract before that date? [62]
A—Evidence of the fair value of a guaranteed investment contract might be obtained by
looking to current yields on fixed-maturity securities having similar risk characteristics
and duration.
E85.
Q—Should the market value adjustment in an immediate participation guarantee
investment contract be considered in determining its fair value? [62]
A—Yes. In effect, the contract value adjusted for any such market value adjustment
represents the “cash surrender value” referred to in paragraph 62 of Statement 87. If an
immediate participation guarantee investment contract can be converted into an annuity
contract, the conversion value of the contract should be considered in determining its fair
FSP on Statement 158 (FSP FAS 158-1)
168
FSP FAS 158-1
value. The evidence noted in the answer to the question in paragraph E84 Question 84
also should be considered.
E86.
Q—If a not-for-profit organization has a defined benefit pension plan that covers
employees at the national and all local chapters and (a) each chapter is required to
contribute to the pension plan based on a predetermined formula (for example, on a
percentage-of-salary basis), (b) plan assets are not segregated or restricted on a chapterby-chapter basis, and (c) if a chapter withdraws from the pension plan, the pension
obligations for its employees are retained by the pension plan as opposed to being
allocated to the withdrawing chapter, should that arrangement be accounted for as a
single-employer or multiemployer pension plan? [67–68]
A—The arrangement should be accounted for as a single-employer pension plan in the
not-for-profit organization’s consolidated financial statements. In each chapter’s separate
financial statements, however, the arrangement should be accounted for as a
multiemployer pension plan. It is unclear how an allocation of net periodic pension cost
or the overfunded or underfunded status of the defined benefit pension plan any
additional minimum liability would be made if each chapter were to view its respective
participation as a single-employer pension plan because the assets are not segregated or
restricted by chapter and obligations are not assumed by a withdrawing chapter.
Accounting for the pension plan as a multiemployer pension plan requires that a chapter’s
contribution for the period (in this example, the amount required to be contributed to the
pension plan based on a percentage of its employees’ salaries) be recognized as net
periodic pension cost. A liability would be recognized for any contributions due and
unpaid. Each chapter should provide the disclosures required by paragraph 12 of
Statement 132(R) as well as any related-party disclosures required by FASB Statement
No. 57, Related Party Disclosures.14 [Revised 12/98; 12/03.]
____________________
14
FASB Statement No. 57, Related Party Disclosures.
E87.
Q—Does the answer provided to the previous question also apply to a similar parentsubsidiary arrangement if the subsidiaries issue separate financial statements? [67–68]
A—Yes. Each subsidiary should account for its participation in the overall singleemployer pension plan as a participation in a multiemployer pension plan. The parent
company should, of course, account for the pension plan as a single-employer pension
plan in its consolidated financial statements.
E88.
Q—If the acquired enterprise sponsors a single-employer defined benefit pension plan at
the date of the acquisition, should the pension asset or pension liability recognized by the
acquiring employer be separately amortized to income in periods subsequent to the
acquisition? [74] [Revised 9/01.]
A—No. The pension asset or pension liability should not be separately amortized.
Rather, it is affected by the accounting for the pension plan in future periods. A pension
asset representing overfunding at the date of an acquisition will be reduced in each year
FSP on Statement 158 (FSP FAS 158-1)
169
FSP FAS 158-1
in which (a) employer contributions to the pension plan are less than net periodic pension
cost or (b) there is an asset reversion. A pension liability representing underfunding at
the date of an acquisition will be reduced in each year in which (a) employer
contributions to the pension plan are greater than net periodic pension cost or (b) there is
net periodic pension income as a result of a settlement or curtailment gain.
E88A. [Formerly Question 73.] Q—If an employer has (a) a qualified pension plan (for tax
purposes) and (b) a nonqualified pension plan (which pays pension benefits in excess of
the maximum allowed for the qualified pension plan by Section 415 of the U.S. Internal
Revenue Code—an excess benefit [top-hat] pension plan) and the plans cover the same
employees, may those pension plans be considered in substance a single pension plan
under this Statement 87? [55–56]
A—No. In most circumstances the plan assets of a qualified pension plan (for tax
purposes) are segregated and restricted to provide pension benefits only under that
pension plan. Therefore, unless an employer clearly has a legal right to use the plan
assets of the qualified pension plan to pay directly the pension benefits of the
nonqualified pension plan (a right that generally does not exist), the determination of net
periodic pension cost, including amortization periods and patterns for recognition in
earnings of the cost of retroactive plan amendments and gains or losses, and any
additional minimum liability and recognition of an underfunded or overfunded status
should be on a plan-by-plan basis. Also, the disclosures required by paragraph 6 of
Statement 132(R) may need to be made separately for each plan. The fact that an
employer could (a) fund less to the qualified pension plan and use those withheld funds to
pay the benefits of the nonqualified pension plan or (b) engage in an asset reversion
transaction of the qualified pension plan and use those withdrawn funds to pay the
pension benefits of the nonqualified pension plan does not, in itself, allow the pension
plans to be reported as a single pension plan. [Revised 12/98; 12/03.]
An additional reason that excess benefit (top-hat) pension plans should be viewed as
separate pension plans is that sometimes those pension plans cover employees of several
different qualified pension plans, in which case it would not be possible to sustain a oneplan view.
E89.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the applicable provision of Opinion 16 was superseded
by Statements 96 and 109.]
E90.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E91.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E92.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
FSP on Statement 158 (FSP FAS 158-1)
170
FSP FAS 158-1
E93.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E94.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E95.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E96.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E97.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E98.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E99.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E100. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E101. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E102. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E103. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E104. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E105. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E106. [This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
E107. Q—If a pension plan curtailment occurs causing almost all of the pension plan’s
participants to become inactive, should the employer continue to amortize any remaining
portion of the unrecognized net transition asset or net obligation remaining in
accumulated other comprehensive income existing at the date of initial application of
Statement 87 using the same amortization period determined at that date? [77]
FSP on Statement 158 (FSP FAS 158-1)
171
FSP FAS 158-1
A—Yes. The employer should continue to amortize any remaining portion of the
unrecognized net transition asset or net obligation remaining in accumulated other
comprehensive income (the amount remaining after the employer accounts for the
curtailment as required by paragraphs 12 and 13 of Statement 88)17 existing at the date of
initial application of Statement 87 using the same amortization period determined at the
date of initial application of this Statementthat date.
____________________
17
The remaining portion of the unrecognized net asset or net obligation existing at the date of initial
application of Statement 87 is the amount remaining after the employer accounts for the curtailment as
required by paragraphs 12 and 13 of Statement 88.
FSP on Statement 158 (FSP FAS 158-1)
172
FSP FAS 158-1
Amendments to the Questions and Answers Issued for Statement 88
9.
FASB Special Report, A Guide to Implementation of Statement 88 on Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, is superseded, and the questions and answers contained in that Special
Report are amended and incorporated into Statement 88 as Appendix C as follows: [Added text
is underlined and deleted text is struck out.]
Appendix C
ADDITIONAL IMPLEMENTATION GUIDANCE
Note: This appendix contains additional implementation guidance for applying the provisions of
this Statement. Numbers in brackets refer to the paragraphs in this Statement to which the
question and answer relate. To simplify the illustrations, the effects of income taxes have been
ignored.
C1.
Q—Should an employer recognize a settlement gain or loss in the period in which all of
the following occur: (a) the employer decides to terminate a pension plan1 and establish
a successor pension plan, (b) a nonparticipating annuity contract for the vested benefits of
all plan participants is purchased but can be rescinded if certain regulatory approvals for
the termination of the pension plan are not obtained, and (c) it is determined that the
regulatory approvals are probable? [3, 4]2
A—No. The employer should not recognize a settlement gain or loss until all three
criteria73 for a settlement are satisfied. In the situation described, an irrevocable84 action
has not occurred that relieves the employer (or the pension plan) of primary responsibility
for a pension benefit obligation and eliminates significant risks related to the pension
benefit obligation and the plan assets used to effect the settlement. Therefore,
recognition of a settlement gain or loss should await completion of the irrevocable action
necessary to relieve the employer (or the pension plan) of the primary responsibility for
the pension benefit obligation. The probability of completion of the irrevocable action is
not relevant.
____________________
1
All questions and answers in this Special Report relate to defined benefit pension plans unless otherwise
specified.
2
Numbers in brackets refer to the paragraphs in FASB Statement No. 88, Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, to which the
question and answer relate.
73
For purposes of this Statement 88, a settlement is defined as a transaction that (a) is an irrevocable action,
(b) relieves the employer (or the pension plan) of primary responsibility for a pension benefit obligation,
and (c) eliminates significant risks related to a pension benefit obligation and the plan assets used to effect
the settlement.
FSP on Statement 158 (FSP FAS 158-1)
173
FSP FAS 158-1
84
The term irrevocable is used in this Statement 88 consistent with its definition in Webster’s New World
Dictionary, Second College Edition, to mean that a transaction or event cannot be revoked, recalled, or
undone; the transaction or event is unalterable.
C2.
Q—If an employer decides in 20X1 to terminate its pension plan, withdraw excess plan
assets, and establish a successor pension plan but is unable to effect the transactions
(which include the settlement of the vested benefit obligation) until regulatory approval is
obtained, does the purchase of nonparticipating annuity contracts in January 20X2 (after
regulatory approval has been obtained and prior to issuance of the 20X1 financial
statements) require adjustment of the 20X1 financial statements? [Revised 12/98.] [3, 4]
A—No. As noted in the answer to the question in paragraph C1Question 1, a settlement
gain or loss is not recognized until all three criteria for a settlement are satisfied. That
does not occur until January 20X2. Therefore, adjustment of the 20X1 financial
statements would not be appropriate, although disclosure of the event may be required.
[Revised 12/98.]
C3.
Q—If plan participants have agreed to accept lump-sum cash payments in exchange for
their rights to receive specified pension benefits and the amounts of the payments have
been fixed, may a settlement gain or loss be recognized before the cash payments are
made to plan participants? [3, 4]
A—As noted in the answer to the question in paragraph C7Question 7, the timing of the
payment is relevant in assessing whether the criteria for a settlement have been met. If
the cash payments have not been made, the agreement may be revocable. Further, if plan
assets have not been transferred by the pension plan to effect the settlement, they may be
at risk. If significant risks related to the pension benefit obligation and the plan assets to
be used to effect the settlement have not been eliminated, no gain or loss should be
recognized.
C4.
Q—If an employer withdraws excess plan assets (cash) from a pension plan but is not
required to settle a pension benefit obligation as part of the asset reversion transaction,
should any of the previously unrecognized net gain or loss included in accumulated other
comprehensive income be immediately recognized in earnings? [3, 4]
A—No. A settlement has not occurred. Therefore, none of the previously unrecognized
net gain or loss included in accumulated other comprehensive income should be
recognized in earnings.
C5.
Q—What is the accounting for the transaction described in the question in paragraph
C4Question 4? [3, 4]
A—The withdrawal of excess plan assets should be recorded as a negative contribution.
That is, the employer should record a debit to cash and a credit to accrued or prepaid
pension cost the net pension asset or liability, as appropriate.
FSP on Statement 158 (FSP FAS 158-1)
174
FSP FAS 158-1
C6.
Q—If individual nonparticipating annuity contracts are to be used to settle a pension
benefit obligation, may a settlement gain or loss be recognized if the individual annuity
contracts have not been issued? [3–5]
A—The issuance of individual annuity contracts is not the critical event but is relevant in
assessing the critical issue, that is, whether a transaction has occurred that irrevocably
relieves the employer (or the pension plan) of primary responsibility for a pension benefit
obligation and eliminates significant risks related to the pension benefit obligation and
the plan assets used to effect the settlement. However, the absence of individual annuity
contracts together with an assessment of other relevant information (for example, refer to
the question in paragraph C7Question 7) may indicate that only a commitment has been
made to purchase annuity contracts. A commitment does not satisfy the criteria for a
settlement and does not result in a settlement gain or loss.
C7.
Q—If individual nonparticipating annuity contracts are to be used to settle a pension
benefit obligation, may a settlement gain or loss be recognized if the premium for the
purchase of the individual annuity contracts has not been paid? [3–5]
A—The timing of the payment of the premium is relevant in assessing whether a
transaction has occurred that irrevocably relieves the employer (or the pension plan) of
primary responsibility for a pension benefit obligation and eliminates significant risks
related to the pension benefit obligation and the plan assets used to effect the settlement.
For a settlement gain or loss to be recognized, the insurance company must have
unconditionally undertaken a legal obligation to provide the specified pension benefits.
If the premium has not been paid, the purchase of the annuity contracts may be revocable.
Further, if plan assets have not been transferred by the pension plan to effect the
settlement, they may be at risk. If significant risks related to the pension benefit
obligation and the plan assets to be used to effect the settlement have not been eliminated,
no gain or loss should be recognized.
C8.
Q—Does a settlement occur if a contract is entered into with an insurance company that
requires the insurance company to pay only a portion of specific participants’ pension
benefits, for example, payments due retirees for the next five years? [3–5]
A—No. The contract should provide life annuities, not limited-term annuities, for a
settlement to occur. A contract for limited-term annuities does not eliminate significant
risks related to the pension benefit obligation for the participants, for example, the
duration of their pension benefit payments, and, therefore, it does not satisfy the criteria
for a settlement.
C9.
Q—Does the following constitute a settlement?
a.
An employer (or the pension plan) irrevocably purchases an insurance contract
that guarantees payment of those pension benefits vested as of the date of the
purchase.
FSP on Statement 158 (FSP FAS 158-1)
175
FSP FAS 158-1
b.
The purchase price of the insurance contract significantly exceeds the purchase
price of a nonparticipating annuity contract covering the same pension benefits.
c.
The insurance company receives an annual fee based on a percentage of the
actuarial present value of the covered pension benefits to compensate it for the
risk of guaranteeing those pension benefits.
d.
If a specified ratio of assets to the covered pension benefit obligation is
maintained, the employer (or the pension plan) continues to manage the assets
used to effect the purchase; however, the insurance contract requires that a certain
percentage of the assets be invested in high-quality bonds or a dedicated bond
portfolio, depending on the ratio of assets to the covered pension benefit
obligation.
e.
Upon final satisfaction of all of the pension benefit obligation covered by the
insurance contract and payment of all of the contract’s administrative fees due to
the insurance company, the insurance company will remit to the employer (or the
pension plan) any amounts remaining in the insurance contract’s account balance.
Interim withdrawals from the account by the employer (or the pension plan) are
also permitted with prior notification to the insurance company unless a
withdrawal causes the ratio of assets to the covered pension benefit obligation to
drop below a specified percentage. [3–5]
A—No. The intent of this Statement FASB Statement No. 88, Employers’ Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, is that if the substance of an insurance contract is such that the employer
remains subject to all or most of the risks and rewards associated with the covered
pension benefit obligation or the assets transferred to the insurance company, the
purchase of the contract does not constitute a settlement. Under the terms of the contract
described, the employer remains subject to those risks and rewards. Accordingly, the
insurance contract is a participating annuity contract that does not satisfy the criteria in
paragraphs 3 and 5 of Statement 88 for a settlement.
Delayed recognition of gains or losses in net periodic pension cost is permitted under
FASB Statement No. 87, Employers’ Accounting for Pensions, because, in part, past
gains or losses may be offset by future losses or gains. This Statement 88 requires
recognition in earnings of gains or losses included in accumulated other comprehensive
income when a settlement of a pension benefit obligation occurs because the basis for
generating offsetting losses or gains has been altered (that is, a pension benefit obligation
and the plan assets used to effect the settlement are eliminated).
The transaction in this situation is structured so that the plan assets and the pension
benefit obligation have substantially the same ability to generate gains (or losses to the
extent of the purchase price for the participation right and the annual fees paid to the
insurance company for the guarantee of the pension benefit obligation) both prior to and
after the insurance contract is purchased. The employer remains subject to significant
FSP on Statement 158 (FSP FAS 158-1)
176
FSP FAS 158-1
risks and rewards related to the pension benefit obligation and the plan assets and,
therefore, the purchase does not qualify for settlement accounting.
The transaction described in this question creates, in substance, a deposit administration
contract with a guarantee from the insurance company to provide for certain pension
benefits from the insurance company’s general assets, if necessary. This Statement 88
anticipated transactions such as this as evidenced by the last sentence of paragraph 5,
which prohibits settlement accounting for those transactions for which the basis of
generating offsetting losses or gains has not been substantially altered.
C10.
Q—What is the rationale for requiring settlement accounting for only certain participating
annuity contracts? [3–5]
A—One reason for requiring settlement accounting for certain participating annuity
contracts is to preclude a potential abuse. If this Statement 88 required settlement
accounting for only nonparticipating annuity contracts, then an employer could avoid
settlement accounting by purchasing what was essentially a nonparticipating annuity
contract and paying a small premium for a de minimis participation right. Another reason
is that it was thought that paying a premium for a contract including a participation right
rather than purchasing a nonparticipating annuity contract might be a sound economic
decision that should not otherwise disqualify a transaction from settlement accounting,
providing the transaction transferred the requisite level of risks and rewards from the
employer to the insurance company. The Board agreed, however, that if the terms of the
participating annuity contract were such that the employer had the same or much of the
same exposure to gains or losses with regard to the pension benefit obligation or the plan
assets before and after the transaction, then settlement accounting should not be
permitted.
C11.
Q—Are there quantitative criteria that can be used to determine whether the purchase of a
participating annuity contract qualifies for settlement accounting? [3–5]
A—No. Whether the purchase of a participating annuity contract qualifies for settlement
accounting depends on the particular facts and circumstances. There are no generic,
quantitative criteria that can be used—each transaction should be evaluated on its own
merits given the general criteria provided in paragraphs 3 and 5 of Statement 88.
C12.
Q—If a parent company’s wholly owned subsidiaries, Subsidiaries A and B, have
separate pension plans and Subsidiary B purchases nonparticipating annuity contracts
from Subsidiary A (which is an insurance company) to provide the vested pension
benefits under Subsidiary B’s pension plan, does that constitute a settlement in the parent
company’s consolidated financial statements? Does the transaction constitute a
settlement in the separately issued financial statements of Subsidiary B? [3–5]
A—The transaction described does not constitute a settlement in the parent company’s
consolidated financial statements.
Footnote 1 of this Statement 88 excludes from
settlement accounting the purchase of annuity contracts from an insurance company
FSP on Statement 158 (FSP FAS 158-1)
177
FSP FAS 158-1
controlled by the employer. One of the criteria for a settlement is that significant risks
related to a pension benefit obligation and the plan assets used to effect the settlement are
eliminated. Therefore, if significant risks related to a pension benefit obligation and the
plan assets remain with the employer (which is the economic entity comprising the parent
company and its subsidiaries), a settlement does not occur.
Assuming the other criteria for a settlement are satisfied, the purchase of the
nonparticipating annuity contracts does constitute a settlement in the separately issued
financial statements of Subsidiary B because significant risks related to a pension benefit
obligation and the plan assets used to effect the settlement have been assumed by another
company that is not controlled by Subsidiary B. Disclosure of the related party nature of
the settlement should be made pursuant to paragraph 2 of FASB Statement No. 57,
Related Party Disclosures.5
____________________
5
FASB Statement No. 57, Related Party Disclosures.
C13.
Q—Is the relative cost of the participation right (10 percent) used in Illustration 2,
Example 2C, of this Statement 88 intended to be an indication of a criterion that could be
used to determine whether the purchase of a participating annuity contract qualifies for
settlement accounting? [3–5, 9, 10, 57]
A—No. The facts assumed in the example were selected only to illustrate the application
of paragraphs 9 and 10 of Statement 88. No other purpose was intended. Refer to the
question in paragraph C11Question 11.
C14.
Q—If an employer terminates its pension plan, settles a pension benefit obligation,
withdraws excess plan assets, and establishes a successor pension plan that has the same
pension benefit formula, do both a settlement and a curtailment occur? [3, 4, 6, 7]
A—No. A settlement occurs but a curtailment does not. Although employees no longer
accrue pension benefits under the terminated pension plan, they do accrue pension
benefits under the successor pension plan. From an accounting viewpoint, those two
pension plans are viewed as one pension plan since, in substance, the pension plan has
not been terminated. The only transactions requiring accounting recognition in the
employer’s financial statements are the settlement and the withdrawal of excess plan
assets. Paragraph 7 of Statement 88 states:
If an employer purchases nonparticipating annuity contracts for vested
benefits and continues to provide defined benefits for future service, either
in the same plan or in a successor plan, a settlement has occurred but not a
curtailment. [Emphasis added.]
If the successor pension plan provides (reduced) increased pension benefits for all years
of employees’ future service, that change in the benefit formula is accounted for as a
(negative) pension plan amendment. Refer to the questions in paragraphs C23, C24, and
C26Questions 23, 24, and 26.
FSP on Statement 158 (FSP FAS 158-1)
178
FSP FAS 158-1
C15.
Q—If as part of the sale of a component of an entity (refer to the question in paragraph
C37Question 37) there is a transfer of a pension benefit obligation to the purchaser (that
is, the purchaser assumes the pension benefit obligation for specific employees), do both
a settlement and a curtailment occur? [3, 4, 6] [Revised 9/01.]
A—A settlement occurs if the criteria in paragraph 3 of Statement 88 are satisfied (that is,
the transfer of the pension benefit obligation is an irrevocable action that relieves the
employer or the pension plan of primary responsibility for the pension benefit obligation
and eliminates significant risks and rewards related to the pension benefit obligation and
the plan assets used to effect the settlement). If there is any reasonable doubt that the
purchaser will meet the pension benefit obligation assumed under the sales agreement
and the seller remains contingently liable for that pension benefit obligation, a settlement
does not occur. A curtailment occurs if the sale significantly reduces the expected years
of future service of present employees covered by the employer’s pension plan. Even if a
curtailment does not occur, the effects of the reduction in the work force should be
considered for purposes of determining the gain or loss on the sale. Refer to the question
in paragraph C25Question 25.
C16.
Q—Are annuity contracts defined differently in Statements 87 and this Statement88? If
so, how are the definitions different, and why? [5]
A—Yes. Annuity contracts are defined differently in Statements 87 and this Statement88.
Footnote 1 of this Statement 88 excludes from settlement accounting those annuity
contracts purchased from an enterprise that is controlled by the employer, whereas
footnote 14 of Statement 87 excludes from annuity contracts those purchased from a
captive insurer.96 Therefore, an employer who purchases annuity contracts from an
insurance company that it controls should not recognize any settlement gain or loss
associated with the transaction (that is, the transaction does not qualify for settlement
accounting under this Statement 88). For purposes of applying Statement 87,107 however,
unless the insurance company is a captive insurer, the pension benefits covered by the
annuity contracts should be excluded from the projected benefit obligation and the
contracts (except for any participation rights) should be excluded from plan assets.
In this Statement 88, the Board decided that the circumstances under which an employer
should recognize in earnings any of the previously unrecognized net gain or loss included
in accumulated other comprehensive income should be limited and that such recognition
should not occur if the settlement transaction is between an employer and an entity that it
controls. In the Board’s view, such a transaction merely shifts the risks from one part of
the entity to another part of the same entity. Prior to issuing the guidance in this
Statement 88, the Board proposed to treat such contracts as plan assets. However, the
Board was persuaded by constituents’ views that the cost incurred to treat those contracts
as plan assets and to include the related benefits in the measurement of the projected
benefit obligation was too high to justify that accounting unless the contracts were with a
captive insurer. The Board then concluded that disclosure of the approximate amount of
annual pension benefits covered by annuity contracts issued by the employer and related
parties should be required. [Revised 5/03.]
FSP on Statement 158 (FSP FAS 158-1)
179
FSP FAS 158-1
____________________
96
A captive insurer is an entity that does business primarily with related entities.
107
Paragraph 60 of Statement 87 states that pension benefits covered by annuity contracts shall be excluded
from the projected benefit obligation and the accumulated benefit obligation, and except for participation
rights, annuity contracts shall be excluded from plan assets.
C17.
Q—If nonparticipating annuity contracts are purchased from a less-than-majority-owned
investee that is not controlled by the employer and the criteria for a settlement are
satisfied, is the resulting settlement gain or loss subject to partial recognition (that is,
should it be reduced to reflect the employer’s ownership)? [5, 9]
A—No. The employer’s noncontrolling ownership interest in the insurance company that
issues the nonparticipating annuity contracts does not affect the accounting for the
settlement. Therefore, the entire settlement gain or loss should be recognized in earnings.
The treatment of this intercompany transaction is acknowledged to be a departure from
traditional accounting under the equity method and is not intended to be a precedent for
nonpension intercompany transactions.
C18.
Q—Is there a specific threshold for determining if an event results in (a) a significant
reduction of expected years of future service of present employees covered by a pension
plan or (b) an elimination of the accrual of pension benefits for some or all future services
of a significant number of employees covered by a pension plan? [6]
A—No. The Board decided not to include a threshold for determining what is significant
but instead decided that judgment should be applied for each pension plan (the unit of
accounting) based on the facts and circumstances.
C19.
Q—If an employer has a pension plan covering employees in several divisions and the
employer terminates employees in one of those divisions, does a curtailment occur if the
expected years of future service of present employees in that division are reduced
significantly but the reduction is not significant in relation to the expected years of future
service of all employees covered by the pension plan? [6]
A—No. This Statement 88 should be applied on an overall basis for each individual
pension plan. Because the event involves an insignificant reduction of expected years of
future service of present employees covered by the pension plan, a curtailment does not
occur. The results of the event are a gain or loss as described in paragraph 29 of
Statement 87 that is subject to the recognition requirements of paragraphs 32 and 33 of
that Statement.
C20.
Q—Can a curtailment occur if an employer either (a) temporarily lays off a significant
number of present employees covered by a pension plan or (b) temporarily suspends a
pension plan so that employees covered by the pension plan do not earn additional
pension benefits for some or all of their future services? [6]
A—Yes. If a layoff significantly reduces the expected years of future service of present
employees covered by a pension plan, a curtailment occurs even if the layoff is expected
FSP on Statement 158 (FSP FAS 158-1)
180
FSP FAS 158-1
to be temporary. Likewise, if a pension plan suspension eliminates significant pension
benefit accruals for some or all of present employees’ future services, a curtailment
occurs even if the pension plan suspension is expected to be temporary. Refer to the
question in paragraph C49Question 49.
C21.
Q—If unrelated, individually insignificant reductions of expected years of future service
of employees covered by a pension plan accumulate over a single year or more than one
year to a significant reduction, does that constitute a curtailment? [6]
A—No. Each of the reductions results in a gain or loss as described in paragraph 29 of
Statement 87 that is subject to the recognition requirements of paragraphs 32 and 33 of
that Statement. Refer to the question in paragraph C22Question 22.
C22.
Q—Does a curtailment occur if individually insignificant reductions of expected years of
future service of employees covered by a pension plan are caused by one event, such as a
strike, or are related to a single plan of reorganization and those reductions accumulate
during more than one fiscal year to a significant reduction? [6, 7]
A—Yes. The fact that the reductions occur over a period of time does not affect the
determination that an event giving rise to a curtailment has occurred.
C23.
Q—Does a curtailment occur if an employer terminates a pension plan and establishes a
successor pension plan that provides additional but reduced pension benefits for all years
of employees’ future service? [6, 7]
A—No. If the successor pension plan provides incremental but reduced pension benefits
for all years of employees’ future service, the substance of the transactions is to maintain
the same pension plan but with reduced pension benefits. Accordingly, the reduction in
pension benefits is accounted for as a negative pension plan amendment. (Refer to the
question in paragraph E28 Question 28 of the Implementation Guide on Statement 87.)
Paragraph 6 of Statement 88 states that a curtailment is an event that eliminates for a
significant number of employees the accrual of pension benefits for some or all of their
future services. In this situation, pension benefits are reduced but not eliminated since
employees continue to accrue pension benefits for all years of future service. Refer to the
question in paragraph C26Question 26. [Revised 5/03.]
C24.
Q—Can a curtailment occur if a pension plan is terminated and replaced by a successor
pension plan? [6, 7]
A—Yes. A curtailment occurs if the successor pension plan eliminates for a significant
number of employees the accrual of defined pension benefits for some or all of their
future services. Examples include:
a.
A successor pension plan that covers only half of the employees118 previously
covered by the terminated pension plan
FSP on Statement 158 (FSP FAS 158-1)
181
FSP FAS 158-1
b.
A successor pension plan that does not provide for the accrual of additional
defined pension benefits for certain years of future services.
To illustrate example (b), assume a pension plan provides a flat benefit of $1,500 per year
of service. At the end of 20X0, the employer terminates that pension plan and establishes
a successor pension plan that provides a flat benefit of $1,000 per year for all years of
service, including service under the terminated pension plan. Pension benefits earned
under the successor pension plan are reduced by the pension benefits earned under the
terminated pension plan. At the end of 20X0, Employee A with 5 years of service has an
accumulated pension benefit of $7,500 per year under the terminated pension plan
($1,500 × 5 years of service). For years 20X1, 20X2, and the first half of 20X3,
Employee A will accrue no additional pension benefits. The accrual of additional
pension benefits will commence in the second half of 20X3. If a significant number of
employees will not accrue additional pension benefits for some or all of their future
services (as is the situation for Employee A), a curtailment occurs. [Revised 12/98.]
____________________
118
The reference to half of the employees in this example is for illustrative purposes only and is not
intended to be indicative of the minimum coverage necessary to qualify a pension plan as a successor
pension plan. Refer to the question in paragraph C26Question 26.
C25.
Q—If an employer disposes of a component of an entity (refer to the question in
paragraph C37Question 37) that results in a termination of some employees’ services
earlier than expected but does not significantly reduce the expected years of future
service of present employees covered by the pension plan, should the effects of the
reduction in the work force on the pension plan be measured in the same manner as a
curtailment (paragraphs 12 and 13 of Statement 88) to determine the gain or loss on the
disposal pursuant to paragraph 43 of FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets?9 [6, 12] [Revised 12/98; 9/01.]
A—Yes. Although the reduction in the work force does not result in a significant
reduction in the expected years of future service of present employees covered by the
pension plan and, therefore, a curtailment (as defined in this Statement 88) does not
occur, measuring the effects of the reduction in the work force in the same manner as a
curtailment (paragraphs 12 and 13 of Statement 88) is appropriate for purposes of
determining the gain or loss on the disposal.
____________________
9
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
C26.
Q—What is considered a successor pension plan1210 for purposes of applying this
Statement 88? [7]
A—A new pension plan that is established by an employer, or one or more existing
pension plans that are amended by the employer, to provide for the accrual of defined
pension benefits for the future services of present employees that were previously
covered by another pension plan (old plan) sponsored by that employer should be
FSP on Statement 158 (FSP FAS 158-1)
182
FSP FAS 158-1
considered a successor pension plan unless (a) the new plan’s pension benefit formula or
the amendment(s) to the existing pension plan(s) provides for accrual of only
insignificant defined pension benefits for those employees or (b) the new or existing
pension plan(s) covers only an insignificant number of employees previously covered by
the old plan.
This Statement 88 does not apply to an employer’s withdrawal from a multiemployer
pension plan as defined in Statement 87. Accordingly, if the employer withdraws from a
multiemployer pension plan and establishes a pension plan for its employees, that
pension plan is not a successor pension plan. Any obligation as a result of the withdrawal
from the multiemployer pension plan should be accounted for pursuant to paragraph
701311 of Statement 87.
____________________
1210
Paragraph 7 of Statement 88 states that if a pension plan is terminated (that is, the obligation is settled
and the pension plan ceases to exist) and not replaced by a successor pension plan, both a settlement and a
curtailment have occurred (whether or not the employees continue to work for the employer).
1311
Paragraph 70 of Statement 87 states, in part: “In some situations, withdrawal from a multiemployer
plan may result in an employer’s having an obligation to the plan for a portion of its unfunded benefit
obligations. If withdrawal under circumstances that would give rise to an obligation is either probable or
reasonably possible, the provisions of FASB Statement No. 5, Accounting for Contingencies, shall apply.”
C27.
Q—If settlement of the pension benefit obligation as part of a pension plan termination
(and there is no successor pension plan) occurs in a financial reporting period that differs
from the period in which the effects of the curtailment resulting from the pension plan
termination ordinarily would be recognized, should both the effects of the settlement and
the curtailment be recognized in the same financial reporting period? [7, 9, 14, 16]
A—No. Unless the answer to the question in paragraph C28 Question 28 applies, the
effects of the settlement and the effects of the curtailment that result from a pension plan
termination should be recognized in accordance with paragraphs 9 and 14 of this
Statement 88, respectively, which may result in the effects of those events being
recognized in different periods. Refer to Illustration 1 below. [Revised 9/01.]
FSP on Statement 158 (FSP FAS 158-1)
183
FSP FAS 158-1
Illustration 1—Accounting for a Pension Plan Termination without a Successor Pension Plan [Revised 12/98.]
On July 20, 20X1, an employer formally amends its pension plan to provide for its termination. Employees cease to accrue additional
pension benefits as of November 30, 20X1 (the effective date of the pension plan termination), and pension benefits are not to be
provided under a successor pension plan. On January 30, 20X2, upon receipt of the appropriate regulatory approvals for termination
of the pension plan, nonparticipating annuity contracts are purchased to settle the accumulated benefit obligation of $1,650,000 as of
that date (nonvested pension benefits become vested upon termination of the pension plan), and the employer withdraws excess plan
assets. The pension plan ceases to exist.
The portion of the projected benefit obligation at July 20, 20X1 based on future compensation levels beyond November 30, 20X1 is
$400,000. As a result, the employer recognizes a curtailment gain of $400,000 as of July 20, 20X1, the date of the pension plan
amendment. The employer recognizes a settlement gain of $550,000 as of January 30, 20X2, the date of the settlement. Tables 1 and
2 indicate the determination of the effects of the curtailmenta and the settlement (in thousands), respectively:
____________________
a
Because the effect of the curtailment is a gain, that gain is recognized pursuant to paragraph 14 of Statement 88 when the pension plan amendment is adopted
(July 20, 20X1) and is based on plan assets and the projected benefit obligation measured as of that date. Refer to the question in paragraph C56Question 56.
[Revised 12/98.]
FSP on Statement 158 (FSP FAS 158-1)
184
FSP FAS 158-1
Table 1
Before
Curtailment
Assets and obligations:
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
$(1,480)
(420)
(1,900)
2,100
$ 200
Items not yet recognized in earnings:
Unrecognized nNet gain recognized
in accumulated other comprehensive
income
$(500)
(Accrued) prepaid pension cost
$ (300)
July 20, 20X1
Effect of
Curtailment
$400b
400
$400
After
Curtailment
$(1,480)
(20)
(1,500)
2,100
$ 600
$(500)
$400
$
100
____________________
bThe effect of future compensation levels beyond November 30, 20X1 ceases to be part of the projected benefit obligation when the amendment to terminate the
pension plan is adopted. Pursuant to paragraph 13 of Statement 88, the gain (that is, the decrease in the projected benefit obligation) resulting from the
curtailment is first offset against any existing unrecognized net loss included in accumulated other comprehensive income. Because the previously unrecognized
amount included in accumulated other comprehensive income is a gain of $500, the $400 gain from the curtailment is recognized in earnings. The journal entry
to account for the curtailment is:
Accrued/prepaid pension cost
400
Pension asset
400
Gain from curtailment
400
[Revised 12/98.]
FSP on Statement 158 (FSP FAS 158-1)
185
FSP FAS 158-1
Table 2
Before
Settlement
Assets and obligations:
Projected benefit obligation
(equals accumulated and
vested benefit obligation)
Plan assets at fair value
Funded status and recognized asset
Items not yet recognized in earnings:
Unrecognized nNet gain recognized
in accumulated other comprehensive
income
Prepaid pension cost
$
After
Settlement
$0
650
$1,650c
(1,650)c
(650)d
$ (650)
$(550)
$550e
$0
$ (100)
$0
$(1,650)
2,300
$
January 30, 20X2
Effects of
Settlement
100
0
$0
____________________
cThe vested benefit obligation of $1,650 is settled by using plan assets of an equal amount to purchase nonparticipating annuity contracts.
dPlan assets in excess of the amount used to settle the vested benefit obligation are withdrawn from the pension plan.
eA pro rata amount of the maximum gain of $550 is recognized in earnings due to a settlement. The projected benefit obligation is reduced from $1,650 to $0, a
reduction of 100 percent. Accordingly, 100 percent of the maximum gain is recognized in earnings. The journal entry to account for the settlement and
withdrawal of excess plan assets is:
Cash
650
Other comprehensive income—net gain
550
Prepaid pension cost
100
Gain from settlement
550
Pension asset
650
FSP on Statement 158 (FSP FAS 158-1)
186
FSP FAS 158-1
C28.
[This question has been deleted. See Status page.]
Q—If a gain or loss from a settlement or curtailment occurs after the pension plan’s
measurement date12 but prior to the employer’s fiscal year-end,12a should the employer
include that gain or loss in determining that fiscal year’s results of operations? [Revised
5/03.] [7, 9, 14, 16]
A—Generally, no. The gain or loss should be recognized in the financial statements for
the subsequent fiscal year. However, if the gain or loss results from the employer’s
terminating the pension plan and not establishing a successor pension plan, the effect of
the settlement and curtailment should be recognized in the current fiscal year. [Revised
9/01.]
If the gain or loss is not recognized in the current fiscal year and the employer’s financial
position or results of operations would have been materially affected had it been
recognized, then disclosure of the event, its consequences, and when recognition will
occur should be made in the financial statements for the current fiscal year. Generally,
not recognizing events after the pension plan’s measurement date is consistent with other
accounting requirements for certain events that occur after a subsidiary’s fiscal year-end
but prior to the parent company’s fiscal year-end. Paragraph 32 of Statement 5214
requires that a subsidiary’s financial statements not be adjusted for an exchange rate
change that occurs after the subsidiary’s balance sheet date but prior to the parent’s
balance sheet date. [Revised 9/01; 5/03.]
____________________
12
Statement 87 defines measurement date as the date as of which the plan assets and the projected benefit
obligation are measured.
12a
Paragraph 52 of Statement 87 permits the use of a measurement date not more than three months prior to
the date of the financial statements if used consistently from year to year. [Added 5/03.]
14
FASB Statement No. 52, Foreign Currency Translation.
C29.
Q—If in terminating its pension plan (old plan) an employer settles the pension benefit
obligation and withdraws excess plan assets and then contributes and allocates those
assets to participants’ accounts in a new defined contribution pension plan, may the
employer combine any net gain or loss from the settlement and curtailment of the old
plan with the net periodic pension cost from the contribution to the defined contribution
pension plan and thereby report both on a net basis for purposes of classification in the
income statement or disclosure in accompanying footnotes? [7]
A—No. Two separate events have occurred that require separate accounting recognition:
(a) a pension plan termination resulting in recognition in earnings of all previously
unrecognized net pension amounts included in accumulated other comprehensive income
and (b) a contribution of assets to a defined contribution pension plan resulting in
recognition of net periodic pension cost equal to the amount contributed and allocated.
Therefore, netting the results of the separate events is inappropriate. [Revised 12/98.]
FSP on Statement 158 (FSP FAS 158-1)
187
FSP FAS 158-1
C30.
Q—If a market-related value of plan assets other than fair value is used for purposes of
determining the expected return on plan assets, is that basis also to be used in determining
the maximum gain or loss subject to pro rata recognition in earnings when a pension
benefit obligation is settled? [9]
A—No. The fair value of plan assets as of the date of settlement should be used.
C31.
Q—As of what date should plan assets and the projected benefit obligation be measured
in determining the accounting for a settlement? [9]
A—Plan assets and the projected benefit obligation should be measured as of the date the
settlement occurs (that is, as of the date that the criteria for a settlement are met and
settlement accounting becomes appropriate) to determine (a) the maximum gain or loss
subject to pro rata recognition in earnings and (b) the percentage reduction in the
projected benefit obligation. The effects of a settlement can be reliably measured only if
based on measures of plan assets and the projected benefit obligation as of the date of the
settlement because intervening events (such as investment gains or losses, or gains or
losses from changes in interest rates) subsequent to a prior measurement date could
change the relevant amounts.
C32.
Q—If the interest rates implicit in the purchase price of nonparticipating annuity contracts
used to effect a settlement are different from the assumed discount rates used to
determine net periodic pension cost, should the employer measure the portion of the
projected benefit obligation being settled (and the remaining portion, if appropriate) using
the implicit annuity interest rates and include any resulting gain or loss in the maximum
gain or loss subject to pro rata recognition in earnings? [9]
A—Yes. As indicated in the answer to the question in paragraph C31Question 31, both
plan assets and the projected benefit obligation are measured as of the date of a
settlement. The measurement of the portion of the projected benefit obligation being
settled is the purchase price of the nonparticipating annuity contracts. Any gains or
losses resulting from measuring the projected benefit obligation and the plan assets are
included in the maximum gain or loss subject to pro rata recognition in earnings before
the settlement gain or loss to be recognized is determined. Refer to the question in
paragraph C33Question 33.
C33.
Q—If a settlement occurs in the circumstances described in the question in paragraph
C32 Question 32 and the interest rates implicit in the purchase price of nonparticipating
annuity contracts used to effect the settlement are different from the assumed discount
rates used to determine net periodic pension cost, is it appropriate to measure the
unsettled portion of the projected benefit obligation using the implicit annuity interest
rates? [9]
A—Consideration should be given to the demographics of the participants related to the
settled and unsettled portions of the projected benefit obligation. If (a) the demographics
are similar and, therefore, there is a similar length of time until payments are due and (b)
FSP on Statement 158 (FSP FAS 158-1)
188
FSP FAS 158-1
the implicit annuity interest rates reflect the best estimate of the rates at which the
unsettled portion could be effectively settled (as discussed in paragraphs 44 and 44A of
Statement 87), then it is appropriate to measure the unsettled portion of the projected
benefit obligation using those rates. If use of those rates is not appropriate, then rates as
of the date of the settlement that do satisfy the requirements of paragraphs 44 and 44A of
Statement 87 should be used to measure the unsettled portion of the projected benefit
obligation.
C34.
Q—If an employer settles a pension benefit obligation and withdraws excess plan assets
as part of terminating its pension plan, should the settlement gain or loss determined
pursuant to paragraph 9 of Statement 88 be adjusted to eliminate any unrealized gains or
losses included in accumulated other comprehensive income relating to securities issued
by the employer if those securities are included in the plan assets withdrawn? [9]
A—No. Statement 87 includes in the determination of net periodic pension cost gains or
losses on transferable securities issued by the employer and included in plan assets. In
this situation, the settlement of a pension benefit obligation, not the withdrawal of plan
assets, is the event that requires the employer to recognize in earnings any of the
previously unrecognized net gain or loss included in accumulated other comprehensive
income. Further, withdrawal of plan assets does not affect the determination of the
settlement gain or loss. Likewise, the nature of the plan assets withdrawn does not affect
that determination. Whether the securities are sold by the pension plan and the employer
repurchases them in the market with cash withdrawn from the pension plan or whether
the securities are withdrawn should not affect the determination of the settlement gain or
loss.
C35.
Q—If the remaining unrecognized net asset at transition transition asset remaining in
accumulated other comprehensive income is reduced when a settlement gain is
recognized, how is any remaining balance of the unrecognized net asset at transition
transition asset remaining in accumulated other comprehensive income amortized in
future periods? [9]
A—The remaining balance of the unrecognized net asset at transition transition asset
remaining in accumulated other comprehensive income should be amortized on a
straight-line basis over the remainder of the amortization period determined at transition.
[Revised 12/98.]
Illustration 2 [This illustration has been deleted. See Status page.][Illustration deleted 12/98
because the effective date of Statement 88 has passed.]
C36.
Q—If a negative pension plan amendment adopted shortly before the date of initial
application of Statement 87 is the reason that an unrecognized net asset exists at
transition a transition asset exists in accumulated other comprehensive income, should
any portion of the unrecognized net asset at transition remaining transition asset
remaining in accumulated other comprehensive income as of the date of a settlement be
included in the maximum gain or loss subject to pro rata recognition in earnings? [9]
FSP on Statement 158 (FSP FAS 158-1)
189
FSP FAS 158-1
A—Yes. Regardless of its composition, any unrecognized net asset at transition
remaining transition asset remaining in accumulated other comprehensive income as of
the date of a settlement is included in the maximum gain or loss subject to pro rata
recognition in earnings.
C37.
Q—If an employer sells a component of an entity as defined in paragraph 41 of Statement
144 and the employer settles a pension benefit obligation related to the employees
affected by the sale, should the settlement gain or loss, recognized pursuant to paragraphs
9–11 of Statement 88, be classified separately in discontinued operations? [9–11]
[Revised 12/98; 9/01.]
A—Statement 144 indicates that a settlement is directly related to the disposal transaction
if there is a demonstrated cause-and-effect relationship and the settlement occurs no later
than one year following the disposal transactions, unless it is delayed by events or
circumstances beyond an entity’s control. In a disposal of a component of an entity, the
timing of a settlement may be at the discretion of the employer. If the employer simply
chooses to settle a pension benefit obligation at the time of the sale, the resulting
coincidence of events is not, in and of itself, an indication of a cause-and-effect
relationship and, therefore, paragraphs 9–11 of Statement 88 apply. However, a direct
cause-and-effect relationship can be demonstrated if, for example, settlement of a pension
benefit obligation for those employees affected by the sale is a necessary condition of the
sale. [Revised 12/98; 9/01.]
C38.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
C39.
Q—How should an employer determine and report a gain or loss from a settlement or a
curtailment that occurs as a direct result of a disposal of a component of an entity? [9,
10, 12, 13] [Revised 12/98; 9/01.]
A—Paragraph 14 of Statement 88 requires that a curtailment loss be recognized in
earnings when it is probable that the curtailment will occur and related amounts are
reasonably estimable. Therefore, although a reporting entity may not have satisfied all
the criteria under Statement 144 necessary to classify the operations of the component as
discontinued operations, a curtailment loss (determined in accordance with paragraphs 12
and 13 of Statement 88) should be recognized if it is probable that the disposal will occur
and the amount of the curtailment loss is reasonably estimable. Further, paragraph 14
requires that a curtailment gain be recognized in earnings when the related employees
terminate or the plan suspension or amendment is adopted. The curtailment gain or loss
should be classified in income from continuing operations until the reporting entity
satisfies those criteria in Statement 144 for reporting discontinued operations. [Revised
12/98; 9/01; 5/03.]
A settlement gain or loss is recognized in earnings at the time that the settlement occurs.
If a pension obligation associated with the disposal group is settled upon or subsequent to
meeting the criteria for reporting discontinued operations in Statement 144, the related
FSP on Statement 158 (FSP FAS 158-1)
190
FSP FAS 158-1
gain or loss (determined in accordance with paragraphs 9 and 10 of Statement 88) should
be recognized in earnings in the period in which the settlement occurs and classified in
discontinued operations provided that the settlement is directly related to the disposal
transaction (see footnote 25 to paragraph 44(c) of Statement 144). [Revised 5/03.]
If a curtailment loss results from the disposal of a component of an entity, it is likely that
the curtailment loss will be recognized earlier than the settlement gain or loss, if any, is
recognized. As previously mentioned, the curtailment loss (if reasonably estimable)
should be recognized when the disposal is probable. The settlement gain or loss (if any),
however, should be recognized when the settlement occurs. Refer to Illustration 3,
Scenario 1 below. Also refer to Illustration 3, Scenario 2 below which demonstrates the
less likely scenario in which the effects of the curtailment and the settlement are
recognized in the same reporting period.
FSP on Statement 158 (FSP FAS 158-1)
191
FSP FAS 158-1
Illustration 3—Accounting for a Settlement and Curtailment That Occur as a Direct Result of a Sale of a Component of an
Entity [Revised 12/98; 9/01; 12/03.]
Scenario 1
On January 1, 20X1, an employer adopts a retroactive pension plan amendment that results in $800,000 of prior service cost.
During the second quarter of 20X2, the employer determines that it is probable that it will sell a component of the entity. The
employer estimates that the sale will occur by year-end. However, all the criteria under Statement 144 necessary to report
discontinued operations are not satisfied during the second quarter. The employer estimates that the unrecognized prior service cost
included in accumulated other comprehensive income related to the pension plan amendment of January 1, 20X1 and associated with
the previously expected years of service of the terminated employees that will not be rendered is a loss of $160,000. That estimate
needs no revision on December 31, 20X2.
During the third quarter of 20X2, the employer enters into an agreement with a December 31, 20X2 closing date to sell the
component. On December 31, 20X2 (disposal date), the employer sells the component at a $100,000 profit before considering the
following pension-related effects. In connection with the sale, (a) certain employees cease to be employed by the selling employer,
which results in a significant reduction in the number of present employees accumulating pension benefits under the selling
employer’s pension plan (Plan A), (b) the terminated employees are hired by the acquiring employer, (c) the acquiring employer,
through its pension plan (Plan B), agrees to assume the accumulated benefit obligation ($200,000) related to the terminated
employees, and (d) plan assets of $250,000 ($200,000 for the settlement of the accumulated benefit obligation and $50,000 as an
excess contribution) are transferred from Plan A to Plan B.
The portion of the projected benefit obligation based on future compensation levels of the terminated employees is $75,000.
FSP on Statement 158 (FSP FAS 158-1)
192
FSP FAS 158-1
The sum of the pension-related effects resulting from the sale is a net loss of $26,000 recognized in earnings as follows:
Curtailment net loss (recognized in earnings during second quarter of 20X2):
Unrecognized prior service cost associated with terminated employees
Prior service cost included in accumulated other comprehensive income
associated with terminated employees
Reduction in projected benefit obligation
Settlement gain (recognized in earnings on December 31, 20X2):
Portion of remaining unrecognized net asset at transition
Portion of transition asset remaining in accumulated other comprehensive income
Portion of unrecognized net gain subsequent to transition
Portion of net gain included in accumulated other comprehensive income
Transfer of plan assets in excess of the accumulated benefit obligation
(recognized in earnings on December 31, 20X2)
$160,000
(75,000)
$ 85,000
(82,000)
(27,000)
(109,000)
50,000
$ 26,000
Tables 1 and 2 indicate the determination of the effects of the curtailment and settlement (in thousands), respectively.
FSP on Statement 158 (FSP FAS 158-1)
193
FSP FAS 158-1
Table 1
Because the employer determined in the second quarter of 20X2 that it was probable that the component would be sold, the
curtailment loss should be recognized in earnings in that quarter. However, because the employer had not satisfied all the criteria
under Statement 144 for reporting discontinued operations in that quarter, the curtailment loss would be reclassified to discontinued
operations as part of restating the second quarter. Appropriate disclosures should be made regarding the plan curtailment in
accordance with FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.
Before Sale
Assets and obligations:
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
$(1,500)
(500)
(2,000)
2,400
$ 400
CurtailmentRelated
Effects Resulting
from Sale
$ 75b
75
$ 75
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net
asset at transition
Transition asset
$ (790)
Unrecognized prior service cost
Prior service cost
651
$(160)c
Unrecognized net gain subsequent
to transition
Net gain
(261)
$ (400)0
$(160)(85)d
Accrued pension cost
FSP on Statement 158 (FSP FAS 158-1)
After
Curtailment
$(1,500)
(425)
(1,925)
2,400
$ 475
$ (790)
491
(261)
$(560)(85)
194
FSP FAS 158-1
____________________
b
Pursuant to paragraph 13 of Statement 88, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any
existing unrecognized net loss included in accumulated other comprehensive income. Because the previously unrecognized that amount is a gain of $1,051 ($261
unrecognized net gain included in accumulated other comprehensive incomesubsequent to transition plus the $790 remaining unrecognized net asset at
transitiontransition asset remaining in accumulated other comprehensive income), the $75 gain from the curtailment is recognized in earnings.
c
The reduction of unrecognized prior service cost included in accumulated other comprehensive income (which relates to the pension plan amendment of January 1,
20X1) associated with the previously expected years of service of the terminated employees that will not be rendered is $160.
d
The journal entry to account for the curtailment is:
Loss from curtailment
85
Pension asset
75
Other comprehensive income—prior service cost
160
Accrued pension cost
85
FSP on Statement 158 (FSP FAS 158-1)
195
FSP FAS 158-1
Table 2
Because the settlement occurred on December 31, 20X2, the gain from the settlement is recognized in earnings on that date and
classified in discontinued operations. Appropriate disclosures should be made regarding the settlement of the pension obligation in
accordance with Statement 132(R).
December 31, 20X2
SettlementRelated
Effects
After
Resulting
Curtailment from Sale
After Sale
Assets and obligations:
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net asset at transition
Transition asset
Unrecognized prior service cost
Prior service cost
Unrecognized net gain subsequent to transition
Net gain
Accrued pension cost
FSP on Statement 158 (FSP FAS 158-1)
$200e
$(1,500)
(425)
(1,925)
2,400
$ 475
200
(250)e
$ (50)
$(1,300)
(425)
(1,725)
2,150
$ 425
$ (790)
$ 82f
$ (708)
491
(261)
$(85560)
491
27f
$59109
(234)
$(26451)
196
FSP FAS 158-1
____________________
e
The accumulated benefit obligation of $200 is settled by transferring plan assets of an equal amount to the acquiring employer. In addition, the selling employer agrees
to transfer an additional $50 of plan assets. The journal entry to account for the transfer of plan assets and the accumulated benefit obligation to Plan B as part of the sale
is:
Gain on sale
Pension asset
Accrued pension cost
50
50
50
Plan A’s journal entry to account for the transfer of plan assets and the accumulated benefit obligation to Plan B is:
Accumulated benefit obligation
200
Withdrawal of excess plan assets
50
Plan assets
250
f
A pro rata amount of the maximum gain of $1,051 ($261 unrecognized net gain subsequent to transition net gain included in accumulated other comprehensive income
plus the $790 remaining unrecognized net asset at transitiontransition asset remaining in accumulated other comprehensive income) is recognized in earnings due to the
settlement. The projected benefit obligation is reduced from $1,925 ($2,000 less the $75 curtailment gain) to $1,725, a reduction of 10.4 percent (rounded) due to the
settlement. Accordingly, 10.4 percent of the maximum gain ($109 rounded) is recognized in earnings. The journal entry to account for the settlement is:
Accrued pension cost
Other comprehensive income—transition asset
Other comprehensive income—net gain
Gain from settlement
FSP on Statement 158 (FSP FAS 158-1)
109
82
27
109
197
FSP FAS 158-1
Scenario 2
Assume the same fact as Scenario 1 except that prior to the fourth quarter of 20X2, the employer did not expect to sell or otherwise
dispose of the component of the entity.
In Scenario 2, the determination of the curtailment loss and the settlement gain is the same as that presented in Tables 1 and 2 in
Scenario 1. However, both the curtailment loss and the settlement gain should be recognized in earnings in the fourth quarter of 20X2
and reported in discontinued operations pursuant to Statement 144.
FSP on Statement 158 (FSP FAS 158-1)
198
FSP FAS 158-1
C40.
Q—If an employer incorporates a division of its operations and subsequently spins it off
to owners of the enterprise and also transfers to the new entity’s pension plan either (a) a
pension benefit obligation related to the employees transferred as part of the spinoff or
(b) plan assets, how should the employer and the new entity account for the transaction?
[9, 12–14]
A—APB Opinion No. 29, Accounting for Nonmonetary Transactions,1418 does not permit
gain or loss recognition for the spinoff of nonmonetary assets to owners of an enterprise.
That prohibition also should apply to pension-related assets or obligations transferred in a
spinoff. The (a) remaining unrecognized net asset or net obligation at transition transition
asset or obligation remaining in accumulated other comprehensive income and (b)
unrecognized net gain or loss subsequent to transition net gain or loss included in
accumulated other comprehensive income should be allocated to each pension plan in
proportion to the projected benefit obligations of the two pension plans. Unrecognized
prior service cost Prior service cost included in accumulated other comprehensive income
should be allocated to the pension plans based on the applicable individuals included in
the employee groups covered. Refer to the question in paragraph E81Question 81 of
Statement 87of A Guide to Implementation of Statement 87 on Employers’ Accounting for
Pensions, which addresses the division of a pension plan. (The accounting treatment for
a spinoff that involves a division of a pension plan should be similar to that for a spinoff
involving a pension plan that was previously part of a larger pension plan.)
Refer to Illustration 4 below for examples of how an employer should account for the
transfer of a pension benefit obligation or plan assets to a spun-off entity’s new pension
plan. In Case 1, only a pension benefit obligation is transferred to the pension plan
established by the new entity. In Case 2, both plan assets and a pension benefit
obligation are transferred.
____________________
1418
Paragraph 23 of APB Opinion No. 29, Accounting for Nonmonetary Transactions, states, in part:
“Accounting for the distribution of nonmonetary assets to owners of an enterprise in a spin-off . . . should
be based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value) of
the nonmonetary assets distributed. A pro rata distribution to owners of an enterprise of shares of a
subsidiary or other investee company that has been or is being consolidated or that has been or is being
accounted for under the equity method is to be considered to be equivalent to a spin-off.” (See related
guidance in footnote 17 of Statement 144.) [Revised 5/03.]
FSP on Statement 158 (FSP FAS 158-1)
199
FSP FAS 158-1
Illustration 4—Accounting for Transfers to a Spun-Off Entity’s New Pension Plan [Revised 5/03.]
Case 1—Accounting for a Transfer of a Pension Benefit Obligation to a Spun-off Entity’s New Pension Plan
An employer (Company A) incorporates a division (Company B) and subsequently spins it off to the owners of the enterprise. The
new entity assumes Company A’s projected benefit obligation under its pension plan (Old Plan) for the employees that are transferred
as part of the spinoff. The accumulated benefit obligation for those employees ($30,000) is fully vested at the date of the spinoff. The
portion of the projected benefit obligation attributable to the future compensation levels for those employees is $6,000. No plan assets
are transferred to the new entity’s pension plan (New Plan).
The following is the funded status of the pension plans immediately before and after the spinoff:
Before Spinoff
Old Plan
Assets and obligations:
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset (liability)
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net asset at transition
Transition asset
Unrecognized prior service cost
Prior service cost
Unrecognized net gain subsequent to transition
Net gain
(Accrued) prepaid pension cost
FSP on Statement 158 (FSP FAS 158-1)
After Spinoff
Old Plan
New Plan
$(72,000)
(18,000)
(90,000)
160,000
$ 70,000
$ (42,000)
(12,000)
(54,000)a
160,000b
$106,000
$(30,000)
(6,000)
(36,000)a
0b
$(36,000)
$(40,000)
$(24,000)c
$(16,000)c
25,000
17,500d
7,500d
(55,000)
$(70,000)
0
(33,000)c
$(39,500)
66,500
(22,000)c
$(30,500)
(66,500)
200
FSP FAS 158-1
____________________
a
Allocation based on individual employees covered by each pension plan.
b
Allocation determined by Company A. (Illustration assumes that no regulatory requirements apply.)
c
Allocation based on percentage of total projected benefit obligation ($90,000) assumed by each pension plan, which is 60 percent and 40 percent for the Old Plan and
New Plan, respectively.
d
Allocation based on prior service associated with the future years of service of the individual employees covered by each pension plan.
FSP on Statement 158 (FSP FAS 158-1)
201
FSP FAS 158-1
Journal Entries
The journal entries to account for the spinoff are:
Company A
Prepaid pension cost
Pension asset
Accumulated other comprehensive income—transition asset
Accumulated other comprehensive income—net gain
Stockholders’ equitye
Accumulated other comprehensive income—prior service cost
66,500
36,000
16,000
22,000
66,500
7,500
To record the transfer of a pension benefit obligation and net deferred amounts from Company A to Company B
Company B
Stockholders’ equitye
Accumulated other comprehensive income—prior service cost
Pension liability
Accumulated other comprehensive income—transition asset
Accumulated other comprehensive income—net gain
Accrued pension cost
66,500
7,500
36,000
16,000
22,000
66,500
To record the receipt of a pension benefit obligation and net deferred amounts from Company A (Company B should not
recognize the effects of assuming the pension benefit obligation as the cost of either a pension plan amendment or an
initiation of a pension plan that is subject to amortization.)
____________________
e
The accounting within stockholders’ equity is not addressed (other than for components of accumulated other comprehensive income). The equity accounts are those
used to account for all assets and liabilities transferred or received as part of the spinoff. No gain or loss results from the spinoff.
FSP on Statement 158 (FSP FAS 158-1)
202
FSP FAS 158-1
Case 2—Accounting for a Transfer of a Pension Benefit Obligation and Plan Assets to a Spun-off Entity’s New Pension Plan
The same facts as in Case 1 are assumed except that plan assets ($28,000) are also transferred to the New Plan. The following is the
funded status of the pension plans immediately before and after the spinoff:
Before Spinoff
Old Plan
Assets and obligations:
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset (liability)
$(72,000)
(18,000)
(90,000)
160,000
$ 70,000
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net asset at transition
Transition asset
$(40,000)
Unrecognized prior service cost
Prior service cost
25,000
Unrecognized net gain subsequent to transition
Net gain
(55,000)
(Accrued) prepaid pension cost
$ (70,000)
0
After Spinoff
Old Plan
New Plan
$(42,000)
(12,000)
(54,000)a
132,000b
$ 78,000
$(30,000)
(6,000)
(36,000)a
28,000b
$ (8,000)
$(24,000)c
$(16,000)c
17,500d
7,500d
(33,000)c
$(39,500)
38,500
(22,000)c
$(30,500)
(38,500)
____________________
a
Allocation based on individual employees covered by each pension plan.
b
Allocation determined by Company A. (Illustration assumes that no regulatory requirements apply.)
c
Allocation based on percentage of total projected benefit obligation ($90,000) assumed by each pension plan, which is 60 percent and 40 percent for the Old Plan and
New Plan, respectively.
d
Allocation based on prior service cost associated with the future years of service of the individual employees covered by each pension plan.
FSP on Statement 158 (FSP FAS 158-1)
203
FSP FAS 158-1
Journal Entries
The journal entries to account for the spinoff are:
Company A
Prepaid pension cost
38,500
8,000
Pension asset
Accumulated other comprehensive income—transition asset
16,000
Accumulated other comprehensive income—net gain
22,000
Stockholders’ equitye
Accumulated other comprehensive income—prior service cost
38,500
7,500
To record the transfer of plan assets, a pension benefit obligation, and net deferred amounts from Company A to
Company B
Company B
Stockholders’ equitye
Accumulated other comprehensive income—prior service cost
Pension liability
Accumulated other comprehensive income—transition asset
Accumulated other comprehensive income—net gain
Accrued pension cost
38,500
7,500
8,000
16,000
22,000
38,500
To record the receipt of plan assets, a pension benefit obligation, and net deferred amounts from Company A (Company B
should not recognize (a) the effects of assuming the pension benefit obligation as the cost of either a pension plan
amendment or an initiation of a pension plan that is subject to amortization or (b) the receipt of cash as a gain subject to
amortization.)
____________________
e
The accounting within stockholders’ equity is not addressed (other than for components of accumulated other comprehensive income). The equity accounts are those
used to account for all assets and liabilities transferred or received as part of the spinoff. No gain or loss results from the spinoff.
FSP on Statement 158 (FSP FAS 158-1)
204
FSP FAS 158-1
C41.
Q—What is the proper sequence of events to follow in measuring the effects of a
settlement and a curtailment that are to be recognized at the same time? [9, 13, 47]
A—Although the sequence selected can affect the determination of the aggregate gain or
loss recognized, the Board concluded that selection of the event to be measured first
(settlement or curtailment) is an arbitrary decision and that neither order is demonstrably
superior to the other. However, the Board also concluded that once an employer has
selected an approach, the employer should consistently follow that approach in
determining the effects of subsequent settlements and curtailments that are to be
recognized at the same time.
C42.
Q—Because the amount of the accumulated benefit obligation settled and the amount of
plan assets used to purchase nonparticipating annuity contracts are equal in Illustrations 1
and 2 of this Statement 88, is it appropriate to conclude that no gains or losses occurred
when the projected benefit obligation and the plan assets were measured as of the date of
the settlement? [Revised 5/03.] [9, 57]
A—No. The “Before” columns in the illustrations reflect the plan assets and the projected
benefit obligation as of the date of the settlement and include any gains or losses that
arose from the measurements as of that date. Refer to the question in paragraph
C31Question 31.
C43.
Q—Is the method in Illustration 2, Examples 2B and 2C, of this Statement 88 that
allocates an amount equal to the settlement gain on a pro rata basis to the remaining
unrecognized net asset at transition transition asset remaining in accumulated other
comprehensive income and the unrecognized net gain subsequent to transition net gain
included in accumulated other comprehensive income the only method of allocation
permitted under those circumstances by this Statement 88? [9, 57]
A—No. An amount equal to the settlement gain could be allocated initially to (a) the
remaining unrecognized net asset at transition transition asset remaining in accumulated
other comprehensive income or (b) the unrecognized net gain subsequent to transition net
gain included in accumulated other comprehensive income, provided the approach
selected is applied consistently from year to year. However, because the allocation
method can affect the determination of subsequent periods’ net periodic pension cost,
allocation on a pro rata basis is recommended because it is an unbiased approach.
C44.
Q—Is the method in Illustration 2, Example 2C, of this Statement 88 that determines the
maximum gain subject to pro rata recognition in earnings by first reducing the
unrecognized net gain subsequent to transition net gain included in accumulated other
comprehensive income by the cost of the participation right the only method of allocation
permitted under those circumstances by this Statement 88? [10, 57]
A—No. In determining the maximum gain subject to pro rata recognition in earnings, an
amount equal to the cost of the participation right could be allocated (a) initially to the
remaining unrecognized net asset at transition transition asset remaining in accumulated
FSP on Statement 158 (FSP FAS 158-1)
205
FSP FAS 158-1
other comprehensive income, (b) initially to the unrecognized net gain subsequent to
transition net gain included in accumulated other comprehensive income, or (c) on a pro
rata basis to the remaining unrecognized net asset at transition transition asset remaining
in accumulated other comprehensive income and the unrecognized net gain subsequent to
transition net gain included in accumulated other comprehensive income, provided the
approach selected is applied consistently from year to year. However, because the
allocation method can affect the determination of subsequent periods’ net periodic
pension cost, allocation on a pro rata basis (alternative (c)) is recommended because it is
an unbiased approach.
C45.
Q—May an employer adopt an accounting policy that requires recognition in earnings of
gains or losses from all settlements during the year for a pension plan if the cost of those
settlements exceeds the service cost component of net periodic pension cost for that
pension plan for the year? [11]
A—Yes. Paragraph 11 of Statement 88 requires recognition in earnings of gains or losses
from settlements if the cost of all settlements during a year is greater than the sum of the
service cost and interest cost components of net periodic pension cost for the pension
plan for the year. If the cost of all settlements during a year is below that threshold, gain
or loss recognition in earnings is permitted, but not required. The accounting policy
adopted for recognition in earnings of gains or losses from settlements should be applied
consistently from year to year.
C46.
Q—If an employer’s accounting policy is not to recognize in earnings a gain or loss from
a settlement if the cost of all settlements during the year does not exceed the sum of the
service cost and interest cost components of net periodic pension cost for the pension
plan for the year, how should the employer account for the following situation: (a) it is
estimated at the beginning of the year that the cost of all settlements during the year will
not exceed the threshold amount described above, (b) a pension benefit obligation is
settled during the first quarter and a settlement gain or loss is not recognized, and (c) in
the second quarter and subsequent to the issuance of the first quarter’s interim report, it is
determined that the cost of all settlements during the year will exceed the threshold
amount? [11]
A—The settlement gain or loss should be recognized in the second quarter consistent with
the accounting for a change in accounting estimate as required by paragraph 19 of FASB
Statement No. 154, Accounting Changes and Error Corrections,15 and paragraph 26 of
APB Opinion No. 28, Interim Financial Reporting.19 [Revised 5/03; 3/05.]
____________________
1519
Paragraph 31 of APB Opinion No. 20, Accounting Changes, states that “. . . the effect of a change in accounting
estimate should be accounted for in (a) the period of change if the change affects that period only or (b) the period
of change and future periods if the change affects both. A change in an estimate should not be accounted for by
restating amounts reported in financial statements of prior periods or by reporting pro forma amounts for prior
periods.” (Footnote reference omitted.)Paragraph 19 of Statement 154 states: “A change in accounting estimate
shall be accounted for in (a) the period of change if the change affects that period only or (b) the period of change
and future periods if the change affects both. A change in accounting estimate shall not be accounted for by
FSP on Statement 158 (FSP FAS 158-1)
206
FSP FAS 158-1
restating or retrospectively adjusting amounts reported in financial statements of prior periods or by reporting pro
forma amounts for prior periods.”
C47.
Q—How should an employer determine the amount of unrecognized prior service cost
included in accumulated other comprehensive income that should be recognized in
earnings in the event of a curtailment if the employer amortizes unrecognized prior
service cost on a straight-line basis over the average remaining service period of
employees expected to receive the related pension benefits? [12]
A—As noted in paragraph 12 of Statement 88, the unrecognized prior service cost
included in accumulated other comprehensive income associated with years of service no
longer expected to be rendered should be recognized in earnings in the event of a
curtailment. That basic approach should be retained even if the employer uses an
amortization method permitted by paragraph 26 of Statement 87 (such as straight-line
amortization over average remaining service period, as described in this situation) rather
than the approach described in paragraph 25 of Statement 87. In that situation, the ability
to associate unrecognized prior service cost included in accumulated other
comprehensive income with years of service no longer expected to be rendered is more
difficult and the result may be less precise. Use of the percentage reduction of years of
service subsequent to the curtailment may be necessary. For example, if the future years
of service determined as of the immediately preceding measurement date for those
employees covered under a prior pension plan amendment are reduced by 50 percent due
to a curtailment, the employer would recognize in earnings 50 percent of the remaining
unrecognized prior service cost included in accumulated other comprehensive income.
C48.
Q—If a curtailment occurs because an employer terminates or suspends a pension plan
(so that employees do not earn additional pension benefits for future service) but the
employees continue to work for the employer, should any unrecognized prior service cost
included in accumulated other comprehensive income associated with the employees
affected by the pension plan termination or suspension be included in determining the net
gain or loss to be recognized for the curtailment? [12]
A—Yes. One reason that Statement 87 provides for delayed recognition in net periodic
pension cost of prior service cost is the likelihood of future economic benefits to the
employer as a result of a retroactive pension plan amendment. Those pension benefits
are associated with the future services of those employees at the date of the pension plan
amendment who are expected to receive pension benefits under the pension plan.
Because a pension plan termination (or suspension) eliminates the accrual of pension
benefits for all (or some) of those future services, it raises sufficient doubt about the
continued existence of the future economic benefits of the retroactive pension plan
amendment to justify recognition in earnings of any unrecognized prior service cost
included in accumulated other comprehensive income. Further, upon termination of a
pension plan (without the establishment of a successor pension plan), all remaining
unrecognized items included in accumulated other comprehensive income are recognized
in earnings.
FSP on Statement 158 (FSP FAS 158-1)
207
FSP FAS 158-1
C49.
Q—If a curtailment is due to a pension plan suspension that may be only temporary (for
example, the pension plan suspension will end as soon as the employer’s financial
condition sufficiently improves), how is the net gain or loss from the curtailment
determined? [12, 13]
A—The net gain or loss from the curtailment should be determined based on the
probable1620 duration of the pension plan suspension. If that duration is a range of years
and no single period in that range is a better estimate than any other period, then the
determination should be based on the estimate of duration within that range that results in
the minimum net gain or loss from the curtailment.
____________________
1620
The term probable is used in this answer consistent with its use in FASB Statement No. 5, Accounting
for Contingencies, to mean that a transaction or event is likely to occur.
C50.
Q—If the remaining unrecognized net asset or net obligation at transition transition asset
or obligation remaining in accumulated other comprehensive income is reduced as part of
the accounting for a curtailment, how is any remaining balance of the unrecognized net
asset or net obligation at transition amortized in future periods? [12, 13]
A—The balance of the unrecognized net asset or net obligation at transition transition
asset or obligation remaining in accumulated other comprehensive income should be
amortized on a straight-line basis over the remainder of the amortization period
determined at transition. Refer to the question in paragraph C35Question 35.
C51.
Q—If a curtailment occurs causing almost all of the pension plan’s participants to
become permanently inactive, should the employer continue to amortize any remaining
balance1721 of the unrecognized net asset or net obligation at transition transition asset or
obligation included in accumulated other comprehensive income using the amortization
period determined at transition? [12, 13]
A—Yes. The employer should continue to amortize any remaining balance of the
unrecognized net asset or net obligation at transition transition asset or obligation
remaining in accumulated other comprehensive income using the remainder of the
amortization period determined at transition. Refer to the question in paragraph
C35Question 35.
____________________
1721
The remaining balance of the unrecognized net asset or net obligation at transition transition asset or
obligation included in accumulated other comprehensive income is the amount remaining after the
employer accounts for the curtailment as required by paragraphs 12 and 13 of Statement 88.
C52.
Q—If both a remaining unrecognized net asset at transition transition asset remaining in
accumulated other comprehensive income and a larger (smaller) unrecognized net loss
subsequent to transition net loss included in accumulated other comprehensive income
exist at the date of a curtailment that decreases (increases) the projected benefit
FSP on Statement 158 (FSP FAS 158-1)
208
FSP FAS 158-1
obligation, how should the effects of the curtailment be applied to those previously
unrecognized pension amounts? [13]
A—Paragraph 13 of Statement 88 describes the determination of any curtailment gain or
loss. However, the intent of that paragraph is not to provide a mechanism for (a)
offsetting an unrecognized net loss subsequent to transition a net loss included in
accumulated other comprehensive income against any remaining unrecognized net asset
at transition transition asset remaining in accumulated other comprehensive income or (b)
increasing an unrecognized net loss subsequent to transitiona net loss included in
accumulated other comprehensive income. Therefore, the decrease (increase) in the
projected benefit obligation that is not recognized as a curtailment gain (loss) should be
offset against the unrecognized net loss subsequent to transition net loss included in
accumulated other comprehensive income (remaining unrecognized net asset at
transitiontransition asset remaining in accumulated other comprehensive income). There
should be no further offsetting. Refer to Illustration 5 below.
FSP on Statement 158 (FSP FAS 158-1)
209
FSP FAS 158-1
Illustration 5—Accounting for a Curtailment
An employer has an unrecognized net asset at transitiona transition asset remaining in accumulated other comprehensive income. On
July 1, 20X0, the employer decides to terminate a significant number of employees as part of a plan to reduce its operations. The
effects of the terminations are reasonably estimable at that date. The termination of employees occurs on August 29, 20X0.
Case 1—Remaining Unrecognized Net Asset at Transition Transition Asset Remaining in Accumulated Other Comprehensive
Income Is Less Than Unrecognized Net Loss Subsequent to TransitionNet Loss Included in Accumulated Other Comprehensive
Income
The projected benefit obligation based on future compensation levels and the nonvested accumulated benefit obligation related to the
terminated employees decrease by $90,000 and $20,000, respectively. The curtailment is accounted for as of August 29, 20X0a as
follows (in thousands):
Before
Curtailment
Assets and obligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized asset (liability)
$(1,550)
(250)
(1,800)
(400)
(2,200)
2,100
$ (100)
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net asset at transition
Transition asset
$ (200)
Unrecognized net loss subsequent to transition
Net loss
300
Prepaid pension cost
$ 0100
FSP on Statement 158 (FSP FAS 158-1)
August 29, 20X0
Effects of
Curtailment
$ 20
20
90
110b
$ 110
After
Curtailment
$(1,550)
(230)
(1,780)
(310)
(2,090)
2,100
$
10
$ (200)
$(100)b
$(100)10
$
200
100
210
FSP FAS 158-1
____________________
a
For the situation described, paragraph 14 of Statement 88 requires that if the sum of the effects resulting from the curtailment is a net gain, that gain is recognized in
earnings when the related employees terminate (August 29, 20X0) and is based on plan assets and the projected benefit obligation measured as of that date.
b
Pursuant to paragraph 13 of Statement 88, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any
existing unrecognized net loss included in accumulated other comprehensive income. Because the previously unrecognized that amount is a loss of $100 ($300
unrecognized net loss subsequent to transition net loss included in accumulated other comprehensive income less the $200 remaining unrecognized net asset at
transitiontransition asset remaining in accumulated other comprehensive income), the $110 decrease in the projected benefit obligation is initially offset against the loss,
resulting in a $10 net gain from the curtailment. The journal entry to account for the curtailment is:
Prepaid pension cost
10
Pension asset
10
Pension liability
100
Gain from curtailment
10
Other comprehensive income—net loss
100
FSP on Statement 158 (FSP FAS 158-1)
211
FSP FAS 158-1
Case 2—Remaining Unrecognized Net Asset at Transition Transition Asset Remaining in Accumulated Other Comprehensive
Income Exceeds Unrecognized Net Loss Subsequent to TransitionNet Loss Included in Accumulated Other Comprehensive
Income
The net change in the projected benefit obligation for the terminated employees is an increase of $110,000. There is an increase of
$220,000 for supplemental early retirement benefits and a decrease of $110,000 relating to future compensation levels ($90,000) and
nonvested accumulated pension benefits ($20,000). As a result, the curtailment is accounted for as of July 1, 20X0a as follows (in
thousands):
Before
Curtailment
Assets and obligations:
Vested benefit obligation
Nonvested benefits
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
$(1,550)
(250)
(1,800)
(400)
(2,200)
2,100
$ (100)
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net asset at transition
Transition asset
$ (200)
Unrecognized net loss subsequent to transition
Net loss
100
Accrued pension cost
$(200100)
FSP on Statement 158 (FSP FAS 158-1)
July 1, 20X0
Effects of
Curtailment
$(220)
20
(200)
90
(110)b
After
Curtailment
$(110)
$(1,770)
(230)
(2,000)
(310)
(2,310)
2,100
$ (210)
$ 100b
$ (100)
$ 100(10)
$
100
0(210)
212
FSP FAS 158-1
____________________
a
Pursuant to paragraph 14 of Statement 88, if the sum of the effects resulting from a curtailment is a net loss, that loss is recognized when it is probable that the
curtailment will occur and the effects are reasonably estimable.
b
Pursuant to paragraph 13 of Statement 88, the loss (that is, the increase in the projected benefit obligation) resulting from the curtailment is first offset against any
existing unrecognized net gain included in accumulated other comprehensive income. Because the previously unrecognized that amount is a gain of $100 ($100
unrecognized net loss subsequent to transition net loss included in accumulated other comprehensive income plus the $200 remaining unrecognized net asset at
transitiontransition asset remaining in accumulated other comprehensive income), the $110 increase in the projected benefit obligation is initially offset against the gain,
resulting in a $10 net loss from the curtailment. The journal entry to account for the curtailment is:
Loss from curtailment
Other comprehensive income—transition asset
Pension liability
Accrued pension cost
FSP on Statement 158 (FSP FAS 158-1)
10
100
110
10
213
FSP FAS 158-1
C53.
Q—If both a remaining unrecognized net asset at transition transition asset remaining in
accumulated other comprehensive income and an unrecognized net gain subsequent to
transition a net gain included in accumulated other comprehensive income exist at the
date of a curtailment that increases the projected benefit obligation, should the effects of
the curtailment be offset (a) initially against the remaining unrecognized net asset at
transition asset remaining in accumulated other comprehensive income, (b) initially
against the unrecognized net gain subsequent to transitionnet gain included in
accumulated other comprehensive income, or (c) against both on a pro rata basis? [13]
A—Any of the identified approaches may be used, provided it is applied consistently
from year to year. However, for the reason noted in the answer to the question in
paragraph C43 Question 43 on settlement accounting, the recommended approach is to
offset both on a pro rata basis (alternative (c)).
C54.
Q—How should (a) the liability and the losses from employees’ acceptance of an offer of
special termination benefits and (b) the change in the projected benefit obligation due to
the related curtailment be determined? [13, 15]
A—The liability and the loss from the acceptance of the offer of special termination
benefits is the difference as of the date the employees accept the offer between (a) the
actuarial present value of the respective employees’ accumulated pension benefits
without considering the special termination benefits and (b) the actuarial present value of
their accumulated pension benefits considering the special termination benefits. The
change in the projected benefit obligation due to the curtailment is the difference between
the projected benefit obligation for the respective employees before their acceptance of
the offer and the projected benefit obligation determined for those employees by applying
the normal pension plan formula and assuming no future service because of their
termination. Refer to Illustration 6 below.
FSP on Statement 158 (FSP FAS 158-1)
214
FSP FAS 158-1
Illustration 6—Accounting for a Curtailment When Termination Benefits Are Offered to Employees
An employer’s pension plan has an unrecognized net obligation at transitiona transition obligation remaining in accumulated other
comprehensive income, and there are no retroactive pension plan amendments after that date. On May 11, 20X0, the employer offers
for a short period of time (until June 13, 20X0) special benefits to its employees in connection with their voluntary termination of
employment (special termination benefits). An additional 5 years of service will be credited, and eligibility for early retirement
benefits will be granted for employees who are age 50 or older with more than 20 years of service and who elect to retire. Normal
early retirement is at age 55. The special termination benefits (increased pension benefits) together with the employee’s regular
pension benefits will be paid directly from plan assets.
On June 13, 20X0, employees representing 15 percent of the work force accept the offer of special termination benefits. For those
employees, the actuarial present value of their accumulated pension benefits assuming they terminated at that date without the special
termination benefits is $525,000, and the actuarial present value of their accumulated pension benefits with the special termination
benefits is $625,000. None of the employees accepting the offer of special termination benefits are otherwise eligible for early
retirement benefits under the pension plan.
The portion of the projected benefit obligation based on the future compensation levels of the terminated employees is $80,000, and
all terminated employees are fully vested in their accumulated pension benefits.
The portion of the unrecognized net obligation at transition transition obligation remaining in accumulated other comprehensive
income assigned to the years of service no longer expected from the terminated employees is $150,000.
FSP on Statement 158 (FSP FAS 158-1)
215
FSP FAS 158-1
As a result, the employer recognizes as of June 13, 20X0, a loss of $170,000 that includes the cost of the special termination benefits
and the net lossa from the curtailment determined as follows (in thousands):
June 13, 20X0
Before
Employee
Terminations
Assets and obligations:
Vested benefit obligation
Employees accepting offer
Other employees
Nonvested benefits
Accumulated benefit obligation
Effect of future compensation levels
Projected benefit obligation
Plan assets at fair value
Funded status and recognized liability
Items not yet recognized in earnings:
Amounts recognized in accumulated other comprehensive income:
Remaining unrecognized net obligation at transition
Transition obligation
Unrecognized net gain subsequent to transition
Net gain
Accrued pension cost
FSP on Statement 158 (FSP FAS 158-1)
$
After
Effects of
Employee
Terminations Terminations
$(100)b
(525)
(775)
(200)
(1,500)
(500)
(2,000)
1,400
$ (600)
$ (20)
$ (625)
(775)
(200)
(1,600)
(420)
(2,020)
1,400
$ (620)
$
$ (150)d
$
$
800
(300)
500(100)
(100)
80c
(20)
$(150)(170)e $
650
(300)
350(270)
216
FSP FAS 158-1
____________________
a
Pursuant to paragraph 14 of Statement 88, if the sum of the effects resulting from a curtailment is a net loss, that loss is recognized in earnings when it is probable that
the curtailment will occur and the effects are reasonably estimable. In this example, the effects resulting from the curtailment are not reasonably estimable until June 13,
20X0, the acceptance date for the offer of special termination benefits.
b
The loss from acceptance of the special termination benefits is $100 ($625 – $525).
c
Pursuant to paragraph 13 of Statement 88, the gain (that is, the decrease in the projected benefit obligation) resulting from the curtailment is first offset against any
existing unrecognized net loss included in accumulated other comprehensive income. Because the previously unrecognized that amount is a gain of $300 (the
unrecognized net gain subsequent to transitionnet gain included in accumulated other comprehensive income), the $80 gain from the curtailment is recognized in
earnings.
d
An unrecognized net obligation at transition A transition obligation remaining in accumulated other comprehensive income is treated as unrecognized prior service cost
included in accumulated other comprehensive income for purposes of applying this Statement 88. The reduction of unrecognized prior service cost included in
accumulated other comprehensive income associated with the previously expected years of service of the terminated employees is $150.
e
The loss recognized in earnings is $170, which includes the cost of the special termination benefits of $100, the gain related to the absence of future compensation of
$80, and the recognition of a portion of the unrecognized net obligation at transition transition obligation remaining in accumulated other comprehensive income of $150.
The journal entry to account for the employee terminations is:
Loss on employee terminations
Other comprehensive income—transition obligation
Pension liability
Accrued pension cost
FSP on Statement 158 (FSP FAS 158-1)
170
150
20
170
217
FSP FAS 158-1
C55.
Q—If (a) an employer adopts a plan to terminate employees that will significantly reduce
the expected years of future service of present employees covered by a pension plan and
(b) the sum of the effects of the resulting curtailment identified in paragraphs 12 and 13
of Statement 88 is expected to be a net gain, should that gain be recognized in earnings
when the related employees terminate or when the plan is adopted? [14]
A—The net gain from the curtailment should be measured and recognized when the
related employees terminate.
C56.
Q—If (a) an employer amends its pension plan to provide for its termination (or
suspension) and thereby eliminates for a significant number of employees the accrual of
all (or some) of the pension benefits for their future services after a subsequent date (that
is, the effective date of the pension plan termination or suspension is subsequent to the
amendment date) and (b) the sum of the effects of the resulting curtailment identified in
paragraphs 12 and 13 of Statement 88 is a net gain, should that gain be recognized in
earnings when the employer amends its pension plan or when the pension plan
termination (or suspension) is effective? [14]
A—The net gain from the curtailment should be measured and recognized when the
employer amends its pension plan.
C57.
Q—If an employer’s offer of special termination benefits results in a curtailment, is it
possible that the offer of termination benefits could be recognized in a reporting period
different from the period in which the curtailment is recognized? [14, 15]
A—Yes. It is possible for the recognition of the two events to occur in different reporting
periods because (a) a net loss from a curtailment (as defined in paragraph 14 of Statement
88) is recognized when it is probable that a curtailment will occur and the effects are
reasonably estimable and (b) the cost of special termination benefits is not recognized
until employees accept the offer and the amount can be reasonably estimated.
C58.
[This question and its related Illustration 7 have been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
Illustration 7—[Illustration deleted 12/98 because the effective date of Statement 87 has
passed.]
C59.
Q—If an employer sponsors a pension plan that provides supplemental early retirement
benefits, should those pension benefits be accounted for as contractual termination
benefits? [15]
A—No. Contractual termination benefits are those benefits payable because of the
occurrence of a specific event that causes employees’ services to be terminated
involuntarily. Supplemental early retirement benefits should be accounted for as part of
net periodic pension cost pursuant to the attribution approach described in paragraphs 40–
42 of Statement 87.
FSP on Statement 158 (FSP FAS 158-1)
218
FSP FAS 158-1
C60.
Q—Should termination indemnities1822 that are associated with preretirement termination
of employment be accounted for as contractual termination benefits? [15, 16]
A—Plans providing termination indemnities should be assessed on a case-by-case basis.
If benefits are paid only for involuntary termination of employment due to the occurrence
of a specific event, they qualify as contractual termination benefits, and a liability and a
loss should be recognized when it is probable that employees will receive benefits and the
amount can be reasonably estimated.1923 However, if a plan is, in substance, a pension
plan (for example, if benefits are paid for virtually all terminations), the plan is subject to
the provisions of Statement 87.
____________________
1822
Termination indemnities are arrangements usually or more frequently encountered outside the United
States. They are also referred to as termination allowances or severance indemnities. Termination
indemnities are amounts payable to eligible employees upon termination of employment. Eligibility may be
determined by law, by local custom, by the employer’s policy, or by contract with the employer. Plans
may or may not be in writing. Termination indemnities are normally, but not exclusively, associated with
preretirement severance of employment. They are usually payable as a lump sum, or occasionally, in a few
payments over a short period of time.
1923
If payment of the benefits results directly from a sale or disposal of a component of an entity, the cost of
those benefits should be recorded and recognized pursuant to paragraph 43 of Statement 144. [Revised
12/98; 9/01; 5/03.]
C61.
Q—If an employer offers for a short period of time special termination benefits to
employees, may the employer recognize a loss at the date the offer is made based on the
estimated acceptance rate? [15]
A—No. Paragraph 15 of Statement 88 requires that the employer recognize a liability and
a loss for special termination benefits when the employees accept the offer and the
amount can be reasonably estimated. [Revised 12/98; 9/01.]
C62.
[This question has been deleted. See Status page.]
[Question deleted because the effective date of Statement 87 has passed.]
C63.
Q—Would a gain or loss from a settlement or curtailment or the cost of termination
benefits normally be classified as an extraordinary item? [48]
A—No. The determination of whether a gain or loss from a settlement or curtailment or
the cost of termination benefits should be classified as an extraordinary item requires
judgment based on the facts and circumstances. Paragraph 48 of Statement 88 states that
only when the criteria found in paragraphs 20–22 of APB Opinion No. 30, Reporting the
Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,26 are met
should a gain or loss from a settlement or curtailment or the cost of termination benefits
be classified as an extraordinary item. Paragraph 48 states further that for many
employers a gain or loss from a settlement or curtailment or the cost of termination
benefits generally does not result from the type of unusual and infrequently occurring
event or transaction required by Opinion 30 to be reported as an extraordinary item.
FSP on Statement 158 (FSP FAS 158-1)
219
FSP FAS 158-1
____________________
26
Paragraphs 20–22 of Opinion 30 state the following:
20. Extraordinary items are events and transactions that are distinguished by their unusual
nature and by the infrequency of their occurrence. Thus, both of the following criteria should be
met to classify an event or transaction as an extraordinary item:
a. Unusual nature—the underlying event or transaction should possess a high degree of
abnormality and be of a type clearly unrelated to, or only incidentally related to, the
ordinary and typical activities of the entity, taking into account the environment in
which the entity operates. (See discussion in paragraph 21.)
b. Infrequency of occurrence—the underlying event or transaction should be of a type that
would not reasonably be expected to recur in the foreseeable future, taking into account
the environment in which the entity operates. (See discussion in paragraph 22.)
21. Unusual Nature. The specific characteristics of the entity, such as type and scope of
operations, lines of business, and operating policies should be considered in determining ordinary
and typical activities of an entity. The environment in which an entity operates is a primary
consideration in determining whether an underlying event or transaction is abnormal and
significantly different from the ordinary and typical activities of the entity. The environment of an
entity includes such factors as the characteristics of the industry or industries in which it operates,
the geographical location of its operations, and the nature and extent of governmental regulation.
Thus, an event or transaction may be unusual in nature for one entity but not for another because
of differences in their respective environments. Unusual nature is not established by the fact that
an event or transaction is beyond the control of management.
22. Infrequency of Occurrence. For purposes of this Opinion, an event or transaction of a type
not reasonably expected to recur in the foreseeable future is considered to occur infrequently.
Determining the probability of recurrence of a particular event or transaction in the foreseeable
future should take into account the environment in which an entity operates. Accordingly, a
specific transaction of one entity might meet that criterion and a similar transaction of another
entity might not because of different probabilities of recurrence. The past occurrence of an event
or transaction for a particular entity provides evidence to assess the probability of recurrence of
that type of event or transaction in the foreseeable future. By definition, extraordinary items occur
infrequently. However, mere infrequency of occurrence of a particular event or transaction does
not alone imply that its effects should be classified as extraordinary. An event or transaction of a
type that occurs frequently in the environment in which the entity operates cannot, by definition,
be considered as extraordinary, regardless of its financial effect.
C64.
Q—Do any of the following meet the “unusual nature and infrequency of occurrence”
criteria of Opinion 30, thereby causing any resulting gain or loss to be classified as
extraordinary? [48]
a.
An employer terminates its only pension plan and does not establish a successor
pension plan.
b.
An employer terminates its only pension plan, withdraws excess plan assets, and
establishes a successor pension plan, but because of current regulatory guidelines is
prohibited from effecting the same series of transactions for 15 years.
c.
An employer terminates one of its foreign pension plans, withdraws excess plan
assets, and establishes a successor pension plan. The employer has never effected
this series of transactions in the past and has no intention of repeating those actions
in the future.
FSP on Statement 158 (FSP FAS 158-1)
220
FSP FAS 158-1
d.
An employer terminates an underfunded pension plan, and a regulatory agency
takes over the pension plan and initiates a lien against 30 percent of the employer’s
net worth.
A—No. Items (a)–(d) do not satisfy both of the criteria in paragraph 20 of Opinion 30.
Notwithstanding the infrequency of occurrence of the event as it relates to a particular
employer, terminating a pension plan is an occurrence that is a consequence of customary
and continuing business activities. Terminations of pension plans occur frequently in the
current economic environment. Therefore, the criterion of unusual nature is not met. As
noted in paragraph 22 of the Opinion 30, “. . . mere infrequency of occurrence of a
particular event or transaction does not alone imply that its effects should be classified as
extraordinary. An event or transaction of a type that occurs frequently in the
environment in which the entity operates cannot, by definition, be considered as
extraordinary, regardless of its financial effect.”27 Unless the pension plan termination is
directly related to an event that qualifies as unusual in nature and infrequent in
occurrence, any resulting gain or loss would not qualify for classification as an
extraordinary item.
____________________
27
Paragraph 22 of Opinion 30.
C65.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
C66.
Q—If an employer withdraws excess plan assets from its pension plan and is subject to an
excise tax, is the excise tax an expense in the period of the withdrawal or should it be
accounted for under FASB Statement No. 109, Accounting for Income Taxes,28 as an
income tax and deferred if there will be related gains (such as a settlement gain)
recognized for financial reporting purposes in subsequent periods? [20] [Revised 12/98.]
A—Statement 109 defines income taxes as “[d]omestic and foreign federal (national),
state, and local (including franchise) taxes based on income.” Therefore, since the excise
tax is independent of taxable income, that is, it is a tax due on a specific transaction
regardless of whether there is any taxable income for the period in which the transaction
occurs, it is not an income tax and the employer should recognize it as an expense (not
classified as income taxes) in the period of the withdrawal. [Revised 12/98.]
____________________
28
FASB Statement No. 109, Accounting for Income Taxes. [Revised 12/98.]
C67.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
C68.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
FSP on Statement 158 (FSP FAS 158-1)
221
FSP FAS 158-1
C69.
[This question and its related Illustration 8 have been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
Illustration 8—[Illustration deleted 12/98 because the effective date of Statement 87 has
passed.]
C70.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 87 has passed.]
FSP on Statement 158 (FSP FAS 158-1)
222
FSP FAS 158-1
Amendments to the Questions and Answers Issued for Statement 106
10.
FASB Special Report, A Guide to Implementation of Statement 106 on Employers’
Accounting for Postretirement Benefits Other Than Pensions, is superseded, and the questions
and answers contained in that Special Report are amended and incorporated into Statement 106
as Appendix F as follows: [Added text is underlined and deleted text is struck out.]
Appendix F
ADDITIONAL IMPLEMENTATION GUIDANCE
Note: This appendix contains additional implementation guidance for applying the provisions of
this Statement. Numbers in brackets refer to the paragraphs in this Statement to which the
question and answer relate. To simplify the illustrations, the effects of income taxes have been
ignored.
Scope
F1.
Q—Does this StatementFASB Statement No. 106, Accounting for Postretirement Benefits
Other Than Pensions, apply to long-term disability benefits paid to former employees on
disability retirement under an employer’s postretirement benefit plan? [6, 11, 136, 137]1
A—Yes. This Statement 106 applies to postretirement benefits expected to be provided to
disabled employees, whether in cash or in kind, for example, disability medical benefits.
Paragraphs 136 and 137 of the Statement contain additional discussion of this issue.
Disability benefits paid to former or inactive employees not on disability retirement
should be accounted for under FASB Statement No. 112, Employers’ Accounting for
Postemployment Benefits. Disability income benefits paid pursuant to a pension plan
should be accounted for under FASB Statement No. 87, Employers’ Accounting for
Pensions. Thus, which Statement applies depends on the type of plan that pays the
benefits and on how the employer defines retirement in administering its plan(s).
____________________
1
Numbers in brackets refer to the paragraphs in Statement 106 to which the question and answer relate.
F2.
Q—If some employees at retirement voluntarily elect under the provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), as amended, to
continue their health care coverage provided through the active employee health care plan
and the cost to the employer of their continuing coverage exceeds the retirees’
contributions, should the employer account for that cost under this Statement 106? [6]
A—No. The right to continue health care coverage under COBRA does not constitute a
postretirement benefit plan per se because an employee need not be a retiree to receive
that benefit. It is a right generally available upon termination of employment. The
employer should account for the excess cost in accordance with Statement 112.
FSP on Statement 158 (FSP FAS 158-1)
223
FSP FAS 158-1
F3.
Q—A collectively bargained defined benefit postretirement health care plan of a single
employer may stipulate that benefits will be provided for the duration of the collectivebargaining agreement or may imply or explicitly state that benefits are subject to
renegotiation upon the expiration of the current collective-bargaining agreement. Past
negotiations have resulted in the continuation of the plan, although the plan has been
amended at various times. Should the accumulated postretirement benefit obligation
(APBO) be measured based only on benefits expected to be paid during the period the
current agreement will be in force? [8, 23]
A—No. The APBO should be measured assuming that benefits will be provided beyond
the period covered by the current collective-bargaining agreement. Paragraph 8 of
Statement 106 states, “Absent evidence to the contrary, it shall be presumed that an
employer that has provided postretirement benefits in the past or is currently promising
those benefits to employees will continue to provide those future benefits.” Thus, like
accounting for the substantive plan, the practice of providing postretirement benefits
creates a presumption that postretirement benefits will continue to be provided in the
future. Unless the most recently negotiated collective-bargaining agreement explicitly
states for the first time that the payment of postretirement benefits will be discontinued
upon the contract’s expiration and that is the expectation of the parties to the agreement,
the presumption of an ongoing plan is not overcome by the presence of an expiration date
for the present collective-bargaining agreement.
Deferred Compensation Contracts
F4.
Q—How should an employer account for a deferred compensation contract that does not
provide a vested benefit for the employee’s prior service at the date the contract is
entered into? For example, an employee must render 30 years of service to receive
benefits under a deferred compensation contract and has rendered 16 years of service at
the date of entering into the contract. Credit is granted for that prior service in
determining eligibility for the benefit to be provided. Should the total obligation be
accrued over the remaining 14 years of service, or should the employer immediately
recognize the portion related to the 16 years of service already rendered? [9, 13]
A—In this example, the employer should accrue the total obligation under the deferred
compensation contract in a systematic and rational manner over the employee’s future
service period to the date full eligibility for the benefits is attained, that is, over the next
14 years, pursuant to paragraph 6 of APB Opinion No. 12, Omnibus Opinion—1967, as
amended by this Statement 106. If the employee is eligible to receive a portion of the
benefits without regard to future service, that is, the credit for prior service results in a
vested benefit, the obligation for that benefit should be fully accrued at the time the
contract is entered into.
FSP on Statement 158 (FSP FAS 158-1)
224
FSP FAS 158-1
F5.
Q—An employee becomes fully eligible for benefits under a deferred compensation
contract five years after entering into the contract. The contract states, however, that if
the employee dies or becomes disabled, benefits will be payable immediately. The
contract is not one of a group of contracts that possess the characteristics of a pension
plan. What is the attribution period? [9, 13]
A—If the employee is expected to render service over the next five years, benefits should
be attributed over that service period. If death or disability unexpectedly occurs during
the five-year period, the benefit obligation should be remeasured and any previously
unrecognized amount should be immediately recognized at the date of the event. If the
employee is expected to terminate service within the next five years, an accrual is
normally not required because the employee is not expected to receive benefits under the
plan. However, in the rare situation that it is probable that death or disability will occur
during the five-year period, the benefit should be accrued over the relevant service
period.
Substantive Plan
F6.
Q—Can future amendments to a written postretirement health care plan that change the
amount of a defined dollar cap be anticipated as part of the substantive plan? [17, 23–25]
A—Yes, if the conditions in paragraphs 24 and 25 of Statement 106 are satisfied. A
defined dollar cap is part of an employer’s cost-sharing arrangement under which the
employer limits the amount it will spend for retiree benefits by defining the maximum
dollar amount for each retiree or the retiree group to be applied by the employer toward
the cost of retiree benefits. For example, a plan with a defined dollar cap may stipulate
that the employer will pay for all retiree health care costs in a year up to a specified dollar
limit. A past practice of regular increases (or decreases) in that defined dollar cap may
indicate that the cost-sharing provisions of the substantive plan differ from the extant
written plan.
F7.
Q—Is a postretirement health care plan with a defined dollar cap considered to be a plan
that provides benefits defined in terms of monetary amounts as discussed in paragraph
26? [16, 17, 26]
A—No. Changes in monetary benefits provided by one plan or changes in the amount of
a defined dollar cap on cost sharing for a different plan may need to be anticipated as part
of determining what are the substantive plans. However, the nature of the promises for
the two plans differs. Benefits for the first plan are defined in monetary amounts, for
example, a stipulated dollar amount of life insurance coverage, whereas benefits offered
under the defined dollar capped plan are not defined in monetary amounts. Although the
cap on the employer’s contribution is defined in monetary terms, the benefits are the
specified eligible medical claims with payment by the employer being no greater than the
amount of that cap. Changes in the types of benefits or the types of health care costs
covered by a plan cannot be anticipated.
FSP on Statement 158 (FSP FAS 158-1)
225
FSP FAS 158-1
Measurement Assumptions
F8.
Q—Should the assumed discount rates used to measure an employer’s postretirement
benefit obligation be the same rates used to measure its pension benefit obligation under
Statement 87? [31, 31A, 186–188]
A—The rates may be the same, or they may not be for various reasons. Similar to the
provisions in Statement 87, the assumed discount rates under this Statement 106 should
reflect the rates at which an amount invested at the measurement date in a portfolio of
high-quality debt instruments would provide the necessary future cash flows to pay
benefits when due. However, differences could occur between the discount rates used to
measure the pension benefit obligation and the discount rates used to measure the
postretirement benefit obligation. For example, the expected timing of postretirement
benefit payments may differ from the expected timing of pension benefit payments.
Those differences could occur particularly if the participants in each plan are different.
In addition, rates implicit in current prices of annuity contracts might be used to measure
the pension benefit obligation, and no similar contracts may be available to settle the
postretirement benefit obligation. (Refer to the question in paragraph F40Question 40.)
F9.
Q—An employer sponsors a health care plan that provides benefits to both active
employees and pre-age-65 retirees. The plan requires active employees and retirees to
contribute to the plan. Can the contributions of active employees ever be used to reduce
the employer’s cost of providing benefits to retirees? [35]
A—Yes, but only if the amount contributed by active employees over their service
periods exceeds the cost of providing their health care benefits while they are employed
and the employer has no obligation to refund that excess. In that case, the excess would
be applied to reduce the cost of the retirees’ benefits. If active employee contributions do
not exceed the cost of active benefits, the full amount of the active employees’
contributions should be applied to the cost of their active benefits. The cost of providing
health care benefits to active employees should be measured assuming only active
employees are covered by the plan.
F10.
Q—An employer has a contributory health care plan covering active employees and
retirees under which retirees pay 100 percent of the average cost of benefits determined
based on the combined experience of active employees and retirees. The employer pays
all of the remaining cost. The active employees do not contribute to the plan. Under this
arrangement, does the employer have an obligation under this Statement 106? [35]
A—Yes, if the actual cost of providing benefits to the retirees is greater than their
contributions. In that case, the employer is subsidizing a portion of the cost of the
retirees’ benefits. Footnote 14 to paragraph 35 states:
In some cases, retiree contributions are established based on the average
per capita cost of benefit coverage under an employer’s health care plan that
provides coverage to both active employees and retirees. However, the
medical cost of the retirees may cause the average per capita cost of benefit
FSP on Statement 158 (FSP FAS 158-1)
226
FSP FAS 158-1
coverage under the plan to be higher than it would be if only active employees
were covered by the plan. In that case, the employer has a postretirement
benefit obligation for the portion of the expected future cost of the retiree
health care benefits that are not recovered through retiree contributions,
Medicare, or other providers of health care benefits.
Thus, the employer would have an obligation for the difference between the expected
cost of providing the retirees’ benefits and the retirees’ expected contributions, whether
those contributions are established at 100 percent of the average cost or at a lesser
amount.
F11.
Q—Are there any circumstances in which an employer may measure its postretirement
health care benefit obligation by projecting the cost of premiums for purchased health
care insurance? [36–39]
A—Yes. For a plan that stipulates that the benefit to be provided is the payment of
certain health insurance premiums for retirees rather than the payment of their health care
claims, the employer should project the cost of those future premiums in measuring its
benefit obligation. That projection requires an assessment of how future health care costs
will affect future premiums.
For a plan that stipulates that the benefit to be provided is the payment of retirees’ health
care claims, the cost of premiums for insurance that an employer expects to purchase to
finance its obligation may be used to measure the obligation if it produces a reasonable
estimate of the future cost of benefits covered by the plan. In some situations, such as in
a community-rated insurance plan that provides the type of benefits covered by the
employer’s plan and in which the premium cost to the employer is based on the
experience of all participating employers, the claims experience of a single employer
generally will have little impact on its premiums. Accordingly, in those situations a
projection of future premiums based on the current premium structure and expected
changes in the general level of health care costs may provide a reasonable estimate of the
employer’s obligation. However, if premiums are adjusted for the actual claims
experience or the age and sex of the plan’s participants (an experience-rated plan), the
foregoing projection of the employer’s obligation may not produce a reasonable estimate
of the future cost of the underlying benefits of the plan.
F12.
Q—If an employer has measured its postretirement health care benefit obligation by
projecting the cost of premiums for purchased health care insurance, does that reduce or
eliminate the applicability of any provisions of this Statement 106, for example,
calculating and disclosing service and interest cost? [6, 46]
A—No. The employer should follow this Statement 106 in its entirety including
calculating and disclosing the components of net periodic postretirement benefit cost,
which would still include service cost for active employees and interest cost.
F13.
Q—Should employers assume a trend of decreasing (or increasing) Medicare
reimbursement rates if Medicare has consistently reduced (or increased) the portion of
FSP on Statement 158 (FSP FAS 158-1)
227
FSP FAS 158-1
benefits it will cover? For example, certain health care costs may have increased by 15
percent last year but Medicare may have only covered a smaller increase, which
increased the employer’s or retirees’ share of the cost of benefits. Should an employer
assume that such a reduction in Medicare coverage would continue when determining its
postretirement benefit obligation? [40]
A—Changes in Medicare coverage should be projected only if those changes result from
currently enacted legislation or regulations. For instance, to the extent that certain
coverage under Medicare changes as a result of applying a legislated formula or historical
administrative practice, an employer should consider the effects of those changes in
projecting Medicare coverage in future years. Doing so may result in a higher or lower
amount of coverage. Future legislation that would change the portion of costs covered by
Medicare should not be anticipated even though a historical trend of those changes may
be apparent.
Attribution
F14.
Q—An employer modifies the eligibility requirements under its postretirement benefit
plan by changing the plan’s credited service period from “25 years of service after age
40” to “15 years of service after both (a) reaching age 50 and (b) rendering 10 years of
service.” What is the beginning of the attribution period? [44]
A—The attribution period begins at the date of hire because the plan has an undefined
credited service period. The amended plan still requires 25 years of credited service.
However, it grants credit for 10 years of service before age 50 and those years of service
are not defined. The effect of the change in eligibility requirements is to lengthen the
attribution period for employees hired prior to age 40.
F15.
Q—An employer provides retiree health care and life insurance benefits under one plan.
Employees are eligible for health care and death benefits upon attaining age 55 and
having rendered 20 years of service; however, the life insurance benefits are based on
final pay. Does basing the life insurance benefits on final pay extend the full eligibility
date to a plan participant’s expected retirement date? For example, if an employee is
expected to fulfill the 20-year service requirement before age 55 and is expected to retire
at age 62 with salary increases in all years of service, is the employee’s full eligibility
date the date he or she reaches age 62? [21, 44]
A—Yes, provided the incremental increase in the life insurance benefits offered under the
plan for an employee’s service after age 55 is not trivial in relation to the total benefits
expected to be received by the employee under that plan. The full eligibility date is
defined as the date at which an employee has rendered all of the service necessary to have
earned the right to receive all of the benefits expected to be received by that employee
under the plan. Paragraph 21 states that “determination of the full eligibility date is
affected by plan terms that provide incremental benefits expected to be received by or on
behalf of an employee for additional years of service, unless those incremental benefits
are trivial” (emphasis added). The plan described has an indefinite credited service
FSP on Statement 158 (FSP FAS 158-1)
228
FSP FAS 158-1
period, since the qualifying 20-year period is unspecified. Accordingly, the attribution
period for that plan begins at the date of hire and ends on the full eligibility date.
F16.
Q—Would the answer to the question in paragraph F15 Question 15 be different if the
benefits are provided and accounted for under two separate plans, one providing life
insurance benefits and the other providing health care benefits? [21, 44, 76]
A—Yes. If the life insurance and health care benefits are provided and accounted for
under two separate plans, the full eligibility date for participants in the life insurance plan
would not influence the determination of the full eligibility date for participants in the
health care plan.
F17.
Q—If the terms of the plan in the question in paragraph F15 Question 15 specified which
20-year service period constituted the credited service period, for example, the first 20
years after date of hire, or the first 20 years of service after age 35, would basing life
insurance benefits on final pay still extend the full eligibility date to the expected date of
retirement? [21, 43, 44]
A—Yes, assuming the incremental life insurance benefits after the defined 20 years of
service are nontrivial. If the plan formula specifies the first 20 years as the credited
service period, the employer needs to assess whether that results in a frontloaded benefit
as described in paragraph 43. If that provision results in a frontloaded benefit, the benefit
obligation should not be attributed ratably to each year of service in the attribution period
but should be attributed in accordance with the plan’s benefit formula.
F18.
Q—Under what conditions would a plan be considered a frontloaded plan? [43, 44, 412]
A—A plan with a benefit formula that attributes all or a disproportionate share of the
expected postretirement benefit obligation (EPBO) to employees’ early years of service
in the credited service period is frontloaded. For that type of plan, the EPBO should not
be attributed ratably to each year of service in the credited service period but should be
attributed in accordance with the benefit formula. Whether a plan is frontloaded is
determined by considering the active participants as a group rather than applying the
benefit formula to each individual participant. Paragraph 412 of Statement 106 contains
an example of a benefit formula that results in a frontloaded benefit for a plan that
provides only postretirement death benefits.
A frontloaded plan may provide two or more benefits, such as health care and life
insurance benefits, that are earned under different benefit formulas. For example, assume
the typical participant covered by the plan described in the question in paragraph F15
Question 15 is an individual hired at age 20 who is expected to retire at age 62 with 42
years of service. If the EPBO at age 40 for that employee is $39,405 ($28,500 for health
care benefits and $10,905392 for life insurance benefits), a ratable (1/42) allocation of the
EPBO to each year of service would result in an accumulated postretirement benefit
obligation (APBO) of $18,764403 ($13,571414 for health care benefits and $5,193425 for
life insurance benefits) at the end of the 20th year. However, if the plan’s benefit
formulas for both health care and life insurance benefits stipulate that employees are not
FSP on Statement 158 (FSP FAS 158-1)
229
FSP FAS 158-1
required to render additional service after their first 20 years in order to receive those
benefits, the aggregate benefits under the plan may be frontloaded, even though life
insurance benefits increase for additional years of service beyond the 20th year.
If the combined values of both health care and life insurance benefits earned based on
their respective benefit formulas after 20 years are significantly greater than the APBO
that would result from a ratable allocation of the EPBO, a disproportionate share of the
EPBO is attributable under the benefit formulas to the employee’s early years of service.
In that case, the attribution of the obligation for both benefits under the plan should
follow their respective benefit formulas. Following the benefit formulas in this example,
the APBO for health care and for life insurance benefits for the hypothetical employee at
the end of 20 years is $28,500 and $3,728,436 respectively. Accordingly, the APBO for
that employee at the end of the first 20 years of service should be $32,228 rather than
$18,764; that is, the plan is frontloaded and benefits should be attributed following the
benefit formula.
____________________
392
$10,905 equals the actuarial present value of life insurance benefits based on final pay, assuming the
employee was hired at a salary of $15,000 that increases by 5 percent annually, a life expectancy of 75
years, and a discount rate of 7 percent.
403
20/42 × $39,405 = $18,764.
414
20/42 × $28,500 = $13,571.
425
20/42 × $10,905 = $5,193.
436
Assumed life insurance benefit equal to year 20 salary of $39,799 discounted at 7 percent for 35 years =
$3,728.
F19.
Q—An employer has a retiree health care plan that bases benefits on length of service and
requires employees to render a minimum of 10 years of service after attaining age 45 to
be eligible for any benefits. However, upon attaining age 45, employees receive credit
for 3 percent of the maximum benefit for each year of service before age 45. For
example, at age 45 an employee hired at age 25 receives credit for 60 percent (3 percent ×
20 years) of the plan’s postretirement health care benefits. When does the credited
service period begin? [44]
A—The credited service period begins at the date of hire because the amount of total
benefits is based on the years of service rendered after that date.
F20.
Q—An employer requires an employee to participate in its contributory active health care
plan in order to be eligible to participate in its retiree health care plan. An employee can
join the active plan at any time prior to retirement but must have worked 10 years and
attained age 55 while in service to be eligible for benefits under the retiree plan. When
does the attribution period begin? [44]
A—The attribution period for an employee who is or is expected to be a participant in the
active plan begins at the date of hire because the plan’s eligibility requirements do not
specify which 10 years of service must be rendered in exchange for the benefits. That an
employee must participate in the contributory active plan does not affect the
determination of the attribution period. However, an employee would not be considered
FSP on Statement 158 (FSP FAS 158-1)
230
FSP FAS 158-1
a plan participant if the employer expects that the employee will never contribute to the
active plan and, therefore, will not be eligible to participate in the retiree plan.
F21.
Q—Should an employer’s annual accrual for the service cost component of net periodic
postretirement benefit cost relate to only those employees who are in their credited
service periods? [44, 47]
A—Generally, yes. However, if the credited service period begins later than the date of
hire and is considered nominal relative to the employees’ average total expected years of
service to full eligibility, employees expected to receive benefits under the retiree plan
should be considered plan participants at the date of hire, and the expected obligation for
their benefits should be accrued from that date.
F22.
Q—In determining the attribution period, what is considered a nominal credited service
period? [44]
A—Judgment is required to determine whether a credited service period is nominal.
Generally, a nominal credited service period is a period that is very short compared to
employees’ average total expected years of service prior to full eligibility.
Negative Plan Amendments and Curtailments
F23.
Q—An employer’s previous accounting for postretirement benefits has considered the
written plan to be the substantive plan. On July 1, 20X1, its board of directors approves a
negative plan amendment (that is, an amendment that reduces benefits attributable to
prior service) that will be effective on January 1, 20X3. The employer intends to
announce the negative plan amendment to plan participants on July 1, 20X2. When
should the effects of the negative plan amendment be considered for accounting
purposes? [23, 55]
A—The effects of the negative plan amendment should be accounted for as of July 1,
20X2 when it is communicated to plan participants and not as of July 1, 20X1, the date of
the board’s approval. The effects of a plan amendment, whether positive or negative,
should be considered at the date the amendment is adopted only if it is communicated to
plan participants at that time or within a reasonable period of time thereafter; that is,
within the time period that would ordinarily be required to prepare information about the
amendment and disseminate it to employees and retirees. The amendment in this
instance will not be communicated within a reasonable period of time after its adoption.
Therefore, the extant unamended written plan continues to be the substantive plan that
should be accounted for because it represents the last plan whose terms were mutually
understood by the employer and the plan participants.
F24.
Q—Is it important to distinguish between a reduction in the accumulated postretirement
benefit obligation (APBO) caused by a negative plan amendment and a reduction caused
by a curtailment? [55, 98, 99]
A—Yes. Unless the plan is being terminated, a reduction in the APBO caused by a
negative plan amendment that exceeds any unrecognized transition obligation or prior
FSP on Statement 158 (FSP FAS 158-1)
231
FSP FAS 158-1
service cost included in accumulated other comprehensive income is not immediately
recognized as a reduction of current postretirement benefit costs. On the other hand, a
reduction in the APBO caused by a curtailment is potentially recognizable as a current
component of income.
F25.
Q—What is the difference between a negative plan amendment and a curtailment that
reduces the accumulated postretirement benefit obligation (APBO)? [55, 96, 98, 99]
A—A negative plan amendment is a change in existing plan terms that reduces or
eliminates benefits attributed to employee services already rendered. A curtailment is an
event that significantly reduces the expected years of future service of active plan
participants, such as a plant closing, or eliminates future accruals of additional benefits
for some or all of the future services of a significant number of active plan participants.
If a curtailment reduces the expected postretirement benefit obligation, the associated
reduction in the APBO is potentially recognizable as a current component of income.
The following examples illustrate the difference between a negative plan amendment and
a curtailment. The answer to the question in paragraph F30 Question 30 provides
additional illustrations.
FSP on Statement 158 (FSP FAS 158-1)
232
FSP FAS 158-1
Example 1—Negative Plan Amendment
On December 31, 20X1, Company A changes the terms of its retiree health care plan to
require current and future retirees to contribute $100 per month toward the cost of
benefits provided by the plan. The plan was previously noncontributory. As a result of
the change, the APBO for both active employees and retirees at December 31, 20X1
decreases by $500,000. That reduction is a negative plan amendment because the change
in plan terms has reduced the benefits under the plan attributed to employee service
already rendered. A curtailment has not occurred because there has been no reduction in
the expected years of future service of active plan participants and the plan continues to
provide additional benefits for future services.
Example 2—Curtailment
On December 31, 20X1, Company B changes the terms of its retiree life insurance plan
for future retirees from a death benefit equal to 5 percent of final pay for each year of
service to a death benefit equal to 5 percent of the pay rate in effect at December 31,
20X1 for each year of service prior to that date. Because Company B switched the terms
under which benefits are based to provide benefits only for services rendered prior to
December 31, 20X1, the company will no longer provide benefits for future service and
there will be no increases in retiree life insurance for any employee services rendered
after that date. That change constitutes a curtailment because accruals of death benefits
for future employee service are no longer required (that is, the change eliminates the need
for future accruals of death benefits for all of the future services of the active plan
participants). However, the change in plan terms does not result in a termination of the
plan because there is a continuing obligation to pay the future death benefits already
earned by employees and current retirees. Only the accrual of additional death benefits
for employees’ future services has been eliminated.
Because this plan was previously a final-pay plan, the APBO at December 31, 20X1
before the amendment included an amount based on projected future employee pay
levels. In this case, that amount equaled $400,000. Thus, the APBO at December 31,
20X1 decreases by $400,000 as a result of the plan amendment because increases in
employees’ future pay levels will no longer increase their death benefits under the plan.
That reduction is potentially a currently recognizable curtailment gain.
F26.
Q—Why is the $400,000 in Example 2 of the question in paragraph F25 Question 25
“potentially” a currently recognizable curtailment gain? [97–99]
FSP on Statement 158 (FSP FAS 158-1)
233
FSP FAS 158-1
A—Whether any or all of the $400,000 should be recognized currently as a component of
net periodic postretirement benefit cost depends on the existence and amount of any
previously unrecognized net loss included in accumulated other comprehensive income
that must be offset before that curtailment gain can be recognized. Any unrecognized
prior service cost or unrecognized transition obligation included in accumulated other
comprehensive income also will enter into determining the net curtailment gain or loss.
(Refer to the question in paragraph F27Question 27.)
F27.
Q—Should the accounting for a curtailment always consider any unrecognized prior
service cost or unrecognized transition obligation included in accumulated other
comprehensive income? [97]
A—Yes. A reduction of the expected years of future service of the work force, for
example, termination of active plan participants who are not yet eligible for benefits or
elimination of future accruals of defined postretirement benefits for a significant number
of active plan participants, raises doubt about the continued existence of the future
economic benefits of unrecognized prior service cost included in accumulated other
comprehensive income. Accordingly, this Statement 106 requires recognition in net
periodic postretirement benefit cost of any related unrecognized prior service cost
included in accumulated other comprehensive income. For purposes of accounting for a
curtailment, any remaining unrecognized transition obligation remaining in accumulated
other comprehensive income is considered to be unrecognized prior service cost.
F28.
Q—Does a curtailment result only from events that occur outside a postretirement benefit
plan? [55, 96–99]
A—No. Although many curtailments may result from events that occur outside a plan,
such as closing a plant, discontinuing a component of an entity, or otherwise terminating
employees, a curtailment also can result from a plan amendment (including a negative
plan amendment) that has the effect of eliminating the accrual of defined benefits for
some or all of the future services of a significant number of active plan participants.
(Refer to the question in paragraph F25Question 25, Example 2.) If such an amendment
occurs, accounting for a curtailment should be applied to (a) any decrease in the
accumulated postretirement benefit obligation (APBO) representing the reduction or
elimination of benefits attributable to future service, which may result in a curtailment
gain, (b) any increase in the APBO resulting from employees retiring earlier than
expected as a result of the amendment, which may result in a curtailment loss, and (c) any
previously unrecognized prior service cost or any unrecognized transition obligation
remaining in accumulated other comprehensive income attributable to the future years of
service of the employee group for which future accrual of benefits has been eliminated.
Accounting for a curtailment is not applied to any newly created prior service cost.
(Refer to the question in paragraph F30Question 30, Example 3 and footnote i to
Example 5.) [Revised 9/01; 5/03.]
FSP on Statement 158 (FSP FAS 158-1)
234
FSP FAS 158-1
F29.
Q—Does a gain result if at the time of a curtailment there exists unrecognized negative
prior service cost included in accumulated other comprehensive income due to a previous
plan amendment that reduced benefits under the plan? [55, 97]
A—Yes. Under paragraph 55, unrecognized negative prior service cost included in
accumulated other comprehensive income that results from an amendment that reduces
benefits under the plan is treated the same as unrecognized prior service cost that results
from an amendment that improves benefits. For purposes of measuring the effect of a
curtailment, unrecognized prior service cost included in accumulated other
comprehensive income includes any unrecognized negative prior service cost from a
prior plan amendment. Thus, the previously unrecognized negative prior service cost
included in accumulated other comprehensive income associated with the future years of
service that are affected by the curtailment is a gain. That gain, to the extent it is not
offset by any other effects of the curtailment, is currently recognized as a component of
income.
F30.
Q—What are examples of the accounting for a negative plan amendment that results in a
curtailment? [55, 96–99]
A—The following examples illustrate the accounting in three different situations.
Example 3 illustrates the accounting for a negative plan amendment that results in a
curtailment gain. Example 4 illustrates the accounting for a negative plan amendment
that results in a curtailment loss. Example 5 illustrates the accounting for a negative plan
amendment and a curtailment that results in recognition as a component of net periodic
postretirement benefit cost of unrecognized prior service cost included in accumulated
other comprehensive income.
FSP on Statement 158 (FSP FAS 158-1)
235
FSP FAS 158-1
Example 3—Negative Plan Amendment and Curtailment Gain
Company A sponsors an unfunded postretirement benefit plan whose only benefit is life insurance coverage equal to an employee’s
final pay. On December 31, 20X1, Company A amends its plan to eliminate that benefit for active employees who are not 40 years of
age or older, which is a significant portion of its work force. The resulting reduction in the accumulated postretirement benefit
obligation (APBO) consists of two components: $150,000 represents benefits based on past pay and service already rendered by
employees under age 40 (a negative plan amendment), and $250,000 represents that portion of the APBO based on a projection of
those employees’ future pay. Because the change in plan terms eliminates the accrual of additional benefits for those employees, the
$250,000 is potentially a currently recognizable curtailment gain.
APBO (recognized liability)
Before
Negative Plan
Amendment
$(750,000)
Amounts recognized in accumulated
other comprehensive income:
Items not yet recognized in earnings:
Unrecognized pPrior service cost $ 50,000
Unrecognized tTransition obligation 70,000
Unrecognized nNet loss
100,000
Negative prior service cost
________
$220,000
Accrued postretirement benefit cost
$(530,000)
December 31, 20X1
After
Negative Plan
Negative Plan
Amendment
Amendment
Curtailment
$150,000
$(600,000)
$250,000
a
$ (50,000)
a
(70,000)
(30,000)
$(150,000)
$
0
0
0
100,000
(30,000)
$70,000
After
Curtailment
$(350,000)
$
$(530,000)
$(100,000)b
________
$(100,000)
$(30,000)
$(30,000)
$ 150,000
$(380,000)
The journal entry to record the negative plan amendment is:
Postretirement benefit liability
Other comprehensive income
FSP on Statement 158 (FSP FAS 158-1)
$150,000
$150,000
236
FSP FAS 158-1
The journal entry to record the curtailment gain is:
Accrued postretirement benefit cost
Postretirement benefit liability
Other comprehensive income
Curtailment gain
$150,000
$250,000
$100,000
150,000c
____________________
a
The decrease in the APBO due to a negative plan amendment is used first to reduce any existing unrecognized prior service cost recognized in accumulated
other comprehensive income, then to reduce any remaining unrecognized transition obligation recognized in accumulated other comprehensive income.
b
The decrease in the APBO due to a curtailment is used first to reduce any unrecognized net loss recognized in accumulated other comprehensive income at the
date of the curtailment.
c
The curtailment gain is not a component of net periodic postretirement benefit cost and should be disclosed separately.
The negative plan amendment results in negative prior service cost because it reduces the APBO by an amount that exceeds the
previously unrecognized prior service cost and the remaining unrecognized transition obligation included in accumulated other
comprehensive income. The negative prior service cost of $30,000 is recognized in net periodic postretirement benefit cost by
amortizing it over future periods beginning January 1, 20X2d in accordance with paragraph 52. Only those participants who are active
at the date of the amendment and who are not yet fully eligible for benefits (that is, participants who are 40 years of age or older) are
considered in applying paragraph 52 to the net negative prior service cost that results from this plan amendment.
____________________
d
If Company A had instead amended the plan on October 31, 20X1 and it had a calendar-year fiscal year-end, the effects of the negative plan amendment in
determining net periodic postretirement benefit cost for 20X1 would be recognized prospectively starting from November 1, 20X1. The net periodic
postretirement benefit cost for the first 10 months of the year would reflect the terms of the plan prior to the plan amendment.
FSP on Statement 158 (FSP FAS 158-1)
237
FSP FAS 158-1
Example 4—Negative Plan Amendment and Curtailment Loss
Company B sponsors an unfunded postretirement health care benefit plan covering employees at five locations. On December 1,
20X1, Company B amends its plan so that any employee at location X who does not retire by the end of 20X1 will not be entitled to
receive benefits. Those employees at location X who retire by December 31, 20X1 will receive benefits under the plan terms.
Employees at the other four locations are not affected by the amendment and will continue to earn benefits.
As a result of the amendment, Company B’s APBO is reduced by $400,000, representing the elimination of benefits attributable to
years of service already rendered by active employees who are not eligible to retire and those eligible employees who choose not to
retire (a negative plan amendment). The remaining employees at location X decide to take early retirement on December 31, 20X1 (a
curtailment). The unexpected early retirements cause a $200,000 increase in the APBO that is accounted for as part of the
curtailment.447 The previously expected remaining years of service associated with all employees at location X who were plan
participants at the date of transition represent 20 percent of the previously expected remaining years of service of all plan participants
at the date of transition. As a result, $100,000 (20 percent × $500,000) is recognized representing accelerated amortization of the
remaining unrecognized transition obligation remaining in accumulated other comprehensive income. Because the previously
unrecognized prior service cost included in accumulated other comprehensive income is eliminated by the negative plan amendment,
it does not enter into the accounting for the curtailment.
____________________
447
Unlike the terms of the plan described in Example 3, benefits under this plan are not pay related. Thus, the accounting for the curtailment does not include any
gain for the elimination of the effects of a projection of final pay.
FSP on Statement 158 (FSP FAS 158-1)
238
FSP FAS 158-1
APBO (recognized liability)
Before
Negative Plan
Amendment
$(950,000)
Amounts recognized in accumulated
other comprehensive income:
Items not yet recognized in earnings:
Unrecognized pPrior service cost $100,000
Unrecognized tTransition obligation 800,000
Unrecognized nNet gain
(150,000)
$750,000
Accrued postretirement benefit cost
$(200,000)
December 31, 20X1
After
Negative Plan
Negative Plan
Amendment
Amendment
Curtailment
$400,000
$(550,000)
$(200,000)
e
$(100,000)
e
(300,000)
$(400,000)
$
0
After
Curtailment
$(750,000)
$
0
500,000
(150,000)
$350,000
$(100,000)
150,000f
$50,000
$400,000
0
$400,000
$(200,000)
$(150,000)
$(350,000)
The journal entry to record the negative plan amendment is:
Postretirement benefit liability
Other comprehensive income
$400,000
$400,000
The journal entry to record the curtailment loss is:
g
Curtailment loss
$150,000
Other comprehensive income
50,000
Accrued pPostretirement benefit liabilitycost
$200,000 150,000
____________________
e
Refer to footnote a.
f
The increase in the APBO due to a curtailment is used first to reduce any unrecognized net gain recognized in accumulated other comprehensive income at the
date of the curtailment.
g
The curtailment loss is not a component of net periodic postretirement benefit cost and should be disclosed separately.
FSP on Statement 158 (FSP FAS 158-1)
239
FSP FAS 158-1
Example 5—Negative Plan Amendment and Curtailment That Results in Recognition of Unrecognized Prior Service Cost as a
Component of Net Periodic Postretirement Benefit Cost
Company C sponsors an unfunded postretirement health care benefit plan. Benefits under the plan are not pay related; thus, no
assumption is required about employees’ future pay levels in measuring the APBO. When it adopted this Statement 106, Company C
immediately recognized its transition obligation in net income. On December 31, 20X1, the company changes the plan’s eligibility
requirements from the attainment of age 65 while in service and 20 years of service to 20 years of service to be rendered after attaining
age 45. The new credited service period is not deemed to be nominal in relation to employees’ average total years of service prior to
their full eligibility dates. This change reduces the APBO for benefits attributable to past service (a negative plan amendment) by
$300,000 for employees hired before age 45.
Because a significant number of employees previously expected to receive benefits under the plan are under age 45, the change in plan
terms also meets the definition of a curtailment because it eliminates those employees as active participants under the plan. Their
remaining years of expected service represent 15 percent of the previously expected remaining years of service of all plan participants
at the date of a prior plan amendment that increased benefits. Because no portion of the APBO includes any amounts attributed to
future pay levels, the impact of accounting for the curtailment is limited to accelerating the recognition in net periodic postretirement
benefit cost of the portion of remaining unrecognized prior service cost included in accumulated other comprehensive income (15
percent × $100,000) related to those employees’ future years of service.
FSP on Statement 158 (FSP FAS 158-1)
240
FSP FAS 158-1
APBO (recognized liability)
Amounts recognized in accumulated
other comprehensive income:
Items not yet recognized in earnings:
Unrecognized pPrior service cost
Accrued postretirement benefit cost
Before
Negative Plan
Amendment
$(850,000)
$400,000
$400,000
$(450,000)
December 31, 20X1
After
Negative Plan
NegativePlan
Amendment
Amendment
Curtailment
$300,000
$(550,000)
$(300,000) h
$(300,000)
$
0
After
Curtailment
$(550,000)
$100,000
$100,000
$(15,000)i
$(15,000)
$85,000
$85,000
$(450,000)
$(15,000)
$(465,000)
The journal entry to record the negative plan amendment is:
Postretirement benefit liability
Other comprehensive income
$300,000
$300,000
The journal entry to record the curtailment loss is:
Curtailment loss
Other comprehensive incomeAccrued
postretirement benefit cost
$15,000
$15,000
____________________
h
Refer to footnote a.
A portion of prior service cost is recognized as a component of net periodic postretirement benefit cost because the net balance of $100,000 arose from a previous amendment and
the current employees under age 45 who were participants at the date of the previous amendment are no longer participants. Accordingly, their future service has been eliminated
as a basis for delayed recognition of the prior service cost as a component of net periodic postretirement benefit cost. If the negative prior service cost from the new amendment
exceeded the unrecognized prior service cost recognized in accumulated other comprehensive income from the previous amendment, none of the net negative prior service cost
would be recognized as a component of net periodic postretirement benefit cost currently. The net negative prior service cost would be amortized over active participants’
expected future service periods to full eligibility.
i
FSP on Statement 158 (FSP FAS 158-1)
241
FSP FAS 158-1
F31.
Q—An employer adopts an amendment to its postretirement health care plan that has the
dual effect of expanding the plan’s coverage and increasing the deductible. Should the
increase in the deductible be measured and recognized separately from the benefit
improvement? [51–53, 55]
A—No. When a plan amendment results in numerous changes to a plan that both increase
and decrease benefits attributed to prior service, the net effect of all those changes should
be considered at the same time to determine whether there has been a net positive or
negative plan amendment. If the combined effect of all the changes is a net increase in
benefits (a positive plan amendment), the resulting prior service cost should be
amortizedaccounted for in accordance with paragraph 52 or 53. If the combined effect is
a net decrease in benefits (a negative plan amendment), the effect should be
recognizedaccounted for in accordance with paragraph 55.
Gains and Losses
F32.
Q—In applying the provisions of paragraph 59 or 60 for the recognition of gains and
losses as a component of net periodic postretirement benefit cost, is it appropriate for an
employer to elect annually a new method of amortization of unrecognized gains and
losses included in accumulated other comprehensive income? [59, 60]
A—No. An employer should select an amortization method and apply it consistently
from period to period as long as the resulting amortization equals or exceeds the
minimum amortization specified by paragraph 59. Any change in the method selected
would be subject to FASB Statement No. 154, Accounting Changes and Error
Corrections. To satisfy the requirements of Statement 154, the preferability of the
change in accounting would need to be demonstrated. [Revised 3/05.]
F33.
Q—An employer sponsors a contributory postretirement health care plan that has an
annual limitation on the dollar amount of the employer’s share of the cost of benefits (a
defined dollar capped plan). The cap on the employer’s share of annual costs and the
retirees’ contribution rates are increased 5 percent annually. Any amount by which
incurred claims costs exceed the combined employer and retiree contributions is initially
borne by the employer but is passed back to retirees in the subsequent year through
supplemental retiree contributions for that year. In 20X1, incurred claims costs exceed
the combined employer and retiree contributions requiring a supplemental retiree
contribution in 20X2. If the employer decides in 20X2 to absorb the excess that arose in
20X1 rather than pass it on to the retirees, when should the employer recognize as a
component of net periodic postretirement benefit cost the loss due to that temporary
deviation from the substantive plan? [61]
A—The employer should recognize the loss as a component of net periodic postretirement
benefit cost in 20X2 when it makes the decision to deviate from the substantive plan.
F34.
Q—If an employer previously projected that health care costs under a defined dollar
capped plan would exceed the cap in 20X1 but actual claims in that year do not exceed
the cap, does that result in a gain that should be recognized immediately as a component
FSP on Statement 158 (FSP FAS 158-1)
242
FSP FAS 158-1
of net periodic postretirement benefit cost in 20X1 in accordance with paragraph 61?
[56, 61]
A—No. The change in the accumulated postretirement benefit obligation due to
experience different from that assumed results in a gain or loss that should be recognized
in accumulated other comprehensive income in accordance with paragraph 56. Paragraph
61 addresses the recognition of a temporary deviation from provisions of the substantive
plan that increases or decreases the employer’s share of the benefit costs incurred in the
current or past periods. A situation that would result in a gain or loss that should be
recognized immediately as a component of net periodic postretirement benefit cost is one
in which an employer has a past practice of changing the cap to reduce its share of
expenses such that that practice constitutes the cost-sharing provision of the substantive
plan. If, as a result of perceived economic adversity affecting the retiree population, the
employer decides in 20X1 and for that year alone not to change the cap to further reduce
its share of expenses in 20X1 as had been anticipated in the substantive plan, that action
would give rise to a loss that would be required to be recognized immediately as a
component of net periodic postretirement benefit cost in 20X1.
F35.
Q—What situation would result in a gain that would be recognized immediately as a
component of net periodic postretirement benefit cost in accordance with paragraph 61?
[61]
A—A gain that would be recognized immediately as a component of net periodic
postretirement benefit cost would occur if participants voluntarily agreed to bear a onetime higher share of costs for a past or current period. For example, if retirees agreed to
make a contribution to the plan in one year that is larger than the contribution amount
called for by the plan and future contributions would comply with the existing terms of
the plan, the employer would recognize immediately as a component of net periodic
postretirement benefit cost a one-time gain for the excess of the new retiree contribution
amount over the old retiree contribution amount.
Plan Assets
F36.
Q—May an employer include in plan assets the assets of a “rabbi trust” (so named
because the first grantor trust to receive a favorable ruling from the Internal Revenue
Service was one formed for a rabbi)? [63, 64]
A—No. The assets of a rabbi trust do not qualify as plan assets because they are
explicitly available to the employer’s creditors in the event of bankruptcy. Under this
Statement 106, assets must be segregated and restricted (usually in a trust) to be used for
the payment of benefits in order to qualify as plan assets. Assets not segregated in a trust,
or otherwise effectively restricted, so that they cannot be used by the employer for other
purposes are not plan assets, even though it may be the employer’s intent to use those
assets to provide postretirement benefits. In EITF Issue No. 93-3, “Plan Assets under
FASB Statement No. 106,” the Emerging Issues Task Force reached a consensus that it is
not necessary to determine that a trust is bankruptcy-proof for the assets of the trust to
qualify as plan assets under this Statement 106. The Task Force also reached a consensus
FSP on Statement 158 (FSP FAS 158-1)
243
FSP FAS 158-1
that assets held in a trust that explicitly provides that such assets are available to the
general creditors of the employer in the event of the employer’s bankruptcy would not
qualify as plan assets under this Statement 106.
F37.
Q—An insurance contract458 with a captive insurance company does not qualify as a plan
asset. However, can an investment contract with a captive insurance company qualify as
a plan asset if it meets the criteria in paragraph 63? [63, 64, 67]
A—Yes. To qualify as a plan asset, an investment contract469 with a captive insurance
company must be segregated and restricted for the payment of postretirement benefits. In
addition, because a plan’s investment contract with a captive insurance company
represents an obligation of the employer to pay cash to be used to pay benefits and
because amounts accrued by the employer to pay benefits are not plan assets, that
contract should be considered an employer debt security for purposes of this Statement
106 and, therefore, must be currently transferable to be included in plan assets. (Refer to
the question in paragraph F38Question 38.)
____________________
458
An insurance contract is defined in this Statement 106 as follows:
A contract in which an insurance company unconditionally undertakes a legal
obligation to provide specified benefits to specific individuals in return for a fixed
consideration or premium. An insurance contract is irrevocable and involves the transfer
of significant risk from the employer (or the plan) to the insurance company. If the
insurance company providing the contract is a captive insurer, or if there is any
reasonable doubt that the insurance company will meet its obligations under the contract,
the contract is not an insurance contract for purposes of this Statement.
469
Paragraphs 7 and 8 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, describe
investment contracts:
Long-duration contracts that do not subject the insurance enterprise to risks arising
from policyholder mortality or morbidity are referred to in this Statement as investment
contracts. A mortality or morbidity risk is present if, under the terms of the contract, the
enterprise is required to make payments or forgo required premiums contingent upon the
death or disability (in the case of life insurance contracts) or the continued survival (in
the case of annuity contracts) of a specific individual or group of individuals. A contract
provision that allows the holder of a long-duration contract to purchase an annuity at a
guaranteed price on settlement of the contract does not entail a mortality risk until the
right to purchase is executed. If purchased, the annuity is a new contract to be evaluated
on its own terms.
Annuity contracts may require the insurance enterprise to make a number of payments
that are not contingent upon the survival of the beneficiary, followed by payments that
are made if the beneficiary is alive when the payments are due (often referred to as lifecontingent payments). Such contracts are considered insurance contracts under this
Statement and Statement 60, [Accounting and Reporting by Insurance Enterprises] unless
(a) the probability that life-contingent payments will be made is remote or (b) the present
value of the expected life-contingent payments relative to the present value of all
expected payments under the contract is insignificant. [Footnote references omitted.]
FSP on Statement 158 (FSP FAS 158-1)
244
FSP FAS 158-1
F38.
Q—If an employer issues its own debt or equity securities directly to its postretirement
benefit trust, may those securities be included in plan assets under this Statement 106?
[63]
A—Yes, provided the securities are currently transferable. To be transferable the
securities held by the postretirement benefit trust must be legally and unconditionally
transferable to unrelated third parties at any time, for any reason, and without economic
penalties. Thus, the trustee of the postretirement benefit trust must have the unilateral
right and ability to legally and unconditionally sell, transfer, or otherwise dispose of the
securities. Securities that are not transferable in their present state do not meet the
transferability requirement even though they can be converted into securities that are
transferable or can otherwise be made transferable through other means, such as through
future registration of the securities for trading in a public market. For example, if an
employer issues to its postretirement benefit trust nontransferable convertible preferred
stock that can be converted into transferable common stock of the employer, the
convertible preferred stock would not meet the criterion of currently transferable and,
thus, would not be included in plan assets.
Disclosures
F39.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F40.
Q—Should an employer’s disclosure of the weighted average of the assumed discount
rates for its postretirement benefit obligation be the same as that disclosed for its pension
benefit obligation?
A—Not necessarily, for reasons stated in the answer to the question in paragraph
F8Question 8. Even if the assumed discount rates are the same, the weighted average of
those rates that is disclosed for the postretirement benefit obligation may not be the same
as that disclosed for the pension benefit obligation because the weighted average is
influenced by the timing and pattern of benefits to be provided, which can differ between
a pension and a postretirement benefit plan. For example, pension benefits are usually
paid in fixed amounts throughout retirement. On the other hand, postretirement health
care benefits tend to increase during retirement because retirees generally require more
health care services as they age, although the net cost to employers after retirees reach
age 65 is reduced by Medicare. If, as a result of the expected cost of health care, the
timing or pattern of postretirement benefits differs from that for pension benefits, that
difference should be reflected in the weighting of the assumed discount rates. [Revised
12/98.]
Employers with Two or More Plans
F41.
Q—An employer has two legally separate postretirement benefit plans. Both plans are
unfunded defined benefit plans covering the same employees. One plan provides
postretirement medical care and the other provides postretirement dental care. May the
employer account for the two plans as one plan? [76]
FSP on Statement 158 (FSP FAS 158-1)
245
FSP FAS 158-1
A—Yes. The first sentence of paragraph 76 states, “The data from all unfunded [defined
benefit] postretirement health care plans may be aggregated for measurement purposes if
(a) those plans provide different benefits to the same group of employees or (b) those
plans provide the same benefits to different groups of employees.” Thus, an employer
that has two or more such plans is permitted, but not required, to account for those plans
as a single plan. The last sentence of paragraph 76 reinforces the criterion that the plans
must be unfunded: “However, a plan that has plan assets (as defined herein) shall not be
aggregated with other plans but shall be measured separately.”
F42.
Q—When is it appropriate for the employer in the question in paragraph F41 Question 41
to change from one-plan accounting to two-plan accounting; that is, to accounting for
each plan separately? [76]
A—The change would be appropriate if the conditions of paragraph 76 are no longer
satisfied. If the change is elective (that is, it is made even though the conditions of
paragraph 76 are still satisfied), the employer would have to demonstrate the preferability
of the change in accounting to satisfy the requirements of Statement 154, and its effects
would be accounted for in accordance with that Statement. [Revised 3/05.]
Multiemployer Plans
F43.
Q—An employer that has a single-employer postretirement benefit plan decides to
provide health care benefits to its retirees through participation with several unrelated
employers in a group postretirement health care benefit arrangement that does not result
from collective bargaining. The arrangement is administered by an independent board of
trustees and provides a uniform level of benefits to all retirees by utilizing group medical
insurance contracts. Each participating employer is assessed an annual contribution for
its share of insurance premiums, plus administrative costs, and may require its respective
retirees to pay a portion of the annual assessment. Retirees whose former employer
discontinues paying the annual assessment have the right to continue participation if they
assume the cost of the annual premiums needed to maintain their existing benefits.
Should the employer account for this arrangement as a multiemployer plan? [79, 84]
A—No. A characteristic of a multiemployer plan is that its obligation to retirees
continues even if a former employer discontinues its participation in the plan. That
characteristic is not present in the arrangement described.
F44.
Q—May a multiemployer plan be considered a substantially equivalent replacement plan
(a successor plan)4710 for an employer that terminates its single-employer defined benefit
postretirement plan such that acceleration of the recognition as a component of net
periodic postretirement benefit cost of unrecognized prior service cost included in
accumulated other comprehensive income is not required? [79, 97, 100]
____________________
4710
The question in paragraph C26 Question 26 in Appendix C of FASB Statement No. 88, Employers’
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, of FASB Special Report, A Guide to Implementation of Statement 88 on Employers’ Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, provides
further discussion of a successor plan.
FSP on Statement 158 (FSP FAS 158-1)
246
FSP FAS 158-1
A—No. The characteristics and the accounting for a multiemployer plan are sufficiently
different from a single-employer plan that neither plan can be a successor plan for the
other. The nature of the employer’s promise is different in each plan. In a singleemployer plan, the employer promises to provide defined benefits. In a multiemployer
plan, the employer promises to make a defined contribution. That employees continue to
render service is important only if the accounting for a defined benefit plan is being
applied, which includes the deferred recognition in earnings of certain items. Because
the unit of account is the individual plan, the termination of a single-employer defined
benefit plan without replacing it with a successor defined benefit plan concludes the
employer’s ability to apply defined benefit plan accounting. Therefore, to continue to
recognize the prior service cost as a component of net periodic postretirement benefit cost
over future periods for the terminated plan in this situation is not appropriate.
Business Combinations
F45.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
Settlements
F46.
Q—An employer that immediately recognized its transition obligation in income upon
adopting this Statement 106 subsequently amends its plan to eliminate its obligation for
postretirement benefits and partially compensates affected participants by increasing their
pension benefits. How should those events be accounted for? [90, 93, 100]
A—The employer has terminated its postretirement benefit plan and effectively settled its
remaining postretirement benefit obligation by increasing its obligation to pay pension
benefits. Because the cost to the employer of settling its postretirement benefit obligation
is the increase in the obligation for pension benefits, the gain on the termination of the
plan must be measured taking into account the cost of the pension benefit increase. That
increase should be accounted for as an increase in accrued pension costa pension liability
(or a decrease in prepaid pension costa pension asset). The previously recognized
obligation for postretirement benefits should be eliminated. The difference is a gain on
plan termination that should be recognized pursuant to FASB Statement No. 88,
Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits.
Special Termination Benefits
F47.
Q—What is the intent of paragraph 102 on special termination benefits? [102]
A—The intent of paragraph 102 is that an employer measure and account for the
postretirement benefit incentive to be received by employees in exchange for early
termination.
F48.
Q—How should an employer measure the postretirement benefit incentive to be received
by employees in exchange for early termination? [102]
FSP on Statement 158 (FSP FAS 158-1)
247
FSP FAS 158-1
A—That incentive is generally measured as the difference between the actuarial present
value of (a) the accrued benefits for employees terminating with the enhanced benefits
and (b) the accrued benefits for those employees assuming they terminated without the
enhancements.
The following simplified examples address situations involving (a) a typical
postretirement benefit plan under which participants become eligible for benefits upon
attaining age 55 while in service and rendering 10 years of service and (b) a plan under
which benefits are based on years of service. To simplify the examples further,
discounting and health care cost trends have been ignored.
Example 6—A Typical 55 and 10 Plan
Under Company X’s postretirement health care benefit plan, the annual cost of coverage
is estimated to be $4,500 for retirees under age 65 and $1,500 for those 65 and older.
The probability of employees retiring is 40 percent at age 57, 50 percent at age 62, and 10
percent at age 65. There is a 100 percent probability that retirees will die at age 75.
Employees that retire on or after attaining age 55 while in service and rendering 10 or
more years of service receive full employer-paid postretirement benefit coverage.
As part of an incentive package to encourage employees to retire early, Company X
offers for a short period of time to add three years of age and three years of service to an
employee’s age and accumulated service credits to determine eligibility for
postretirement benefits. Two employees, A and B, accept the offer. A is age 57 and has
rendered 20 years of service. B is age 52 and has rendered 12 years of service.
The expected postretirement benefit obligation (EPBO) for A and B prior to the offer is
$36,150 each, determined as follows:
Retirement
Age
57
62
65
Benefits
Pre-Age 65
Age 65 to 75
Probability
of Retirement
($4,500 × 8 yrs) + ($1,500 × 10 yrs) ×
($4,500 × 3 yrs) + ($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
FSP on Statement 158 (FSP FAS 158-1)
40%
50
10
EPBO
$20,400
14,250
1,500
$36,150
248
FSP FAS 158-1
The accumulated postretirement benefit obligation (APBO) for A and B prior to the offer
is $36,150 and $28,920, respectively, determined as follows:
Employee
A
B
Years of Service
Rendered
to Total Required
EPBO
$36,150
36,150
$72,300
×
×
18/ a
18
12/ b
15
APBO
=
=
$36,150
28,920
$65,070
___________________
a
A was hired at age 37 and, therefore, after 18 years of service has rendered the required 10 years of service
and attained age 55 while in service to be fully eligible for benefits.
b
B must render 3 more years of service to attain age 55 while in service to be fully eligible for benefits.
FSP on Statement 158 (FSP FAS 158-1)
249
FSP FAS 158-1
The special termination postretirement benefit is measured as the difference between the
following two amounts:
a.
The benefits attributed to past service based on what A and B receive if they retire
at the earliest date at which they could retire and receive postretirement benefits
under the plan, ignoring the special termination benefits. That date would be
immediately for A and in 3 years (upon attaining age 55) for B.
The benefits A and B receive if they accept the special termination benefits offer
and retire immediately.
b.
The calculation of those two amounts follows.
Accrued Benefits Ignoring Special Termination Benefits and Assuming A Retires
Immediately and B Retires at Age 55
Employee
A
B
Benefits
Pre-Age 65
Age 65 to 75
($4,500 × 8 yrs) +
($4,500 × 10 yrs) +
($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
Portion
Earned
Accrued
Benefits
18/
18 =
12/
15 =
$51,000
48,000
$99,000
Accrued Benefits That Reflect Special Termination Benefits Assuming A and B Retire
Immediately
Employee
A
B
Benefits
Pre-Age 65
Age 65 to 75
($4,500 × 8 yrs) +
($4,500 × 13 yrs) +
Portion
Earned
($1,500 × 10 yrs) × 100%
($1,500 × 10 yrs) × 100
Accrued
Benefits
=
=
$51,000
73,500
$124,500
Thus, the cost of the special termination postretirement benefits is $25,500 ($124,500 –
$99,000). If A and B represent a significant portion of Company X’s work force, the
increase in the APBO attributable solely to their early retirement, $33,930 ($99,000 –
$65,070, both calculated without regard to the special termination benefits), would be
accounted for as a curtailment. Otherwise, the $33,930 would be an experience loss.
Example 7—Benefits Based on Years of Service
The facts are the same as in Example 6 except that under the plan’s terms retiring
employees receive 2½ percent coverage for each year of service. Thus, prior to the
acceptance of special termination benefits, the full eligibility dates for A and B would be
their expected retirement dates.
FSP on Statement 158 (FSP FAS 158-1)
250
FSP FAS 158-1
The APBO for A and B prior to accepting the offer is $28,920, determined as follows:
At Retirement
Years
Age of Service
Benefits
Pre-Age 65
Age 65 to 75
Service
to Date/
Service to
Retirement
Probability
of
Retirement
Benefit
Coverage
APBO
Employee A
57
62
65
20
25
28
($4,500 × 8 yrs) +
($4,500 × 3 yrs) +
($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
50%
62½
70
×
×
×
40%
50
10
×
×
×
20/20
($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
($1,500 × 10 yrs) ×
42½% ×
55
×
62½
×
40%
50
10
×
×
×
20/25
=
=
20/28
=
12/17
12/22
=
=
12/25
=
$10,200
7,125
750
18,075
Employee B
57
62
65
17
22
25
($4,500 × 8 yrs) +
($4,500 × 3 yrs) +
FSP on Statement 158 (FSP FAS 158-1)
6,120
4,275
450
10,845
$28,920
251
FSP FAS 158-1
The special termination postretirement benefit is measured in the same manner as in
Example 6.
Accrued Benefits Ignoring Special Termination Benefits and Assuming A Retires
Immediately and B Retires at Age 55
Benefits
Employee
A
B
Pre-Age 65
Age 65 to 75
($4,500 × 8 yrs) +
($4,500 × 10 yrs) +
Benefit
Coverage
($1,500 × 10 yrs) × 50%
($1,500 × 10 yrs) × 37½
Portion
Earned
×
×
Accrued
Benefits
20/20 =
12/15 =
$25,500
18,000
$43,500
Accrued Benefits That Reflect Special Termination Benefits Assuming A and B Retire
Immediately
Benefits
Employee
A
B
Pre-Age 65
($4,500 × 8 yrs) +
($4,500 × 13 yrs) +
Age 65 to 75
Benefit
Coverage
Portion
Earned
($1,500 × 10 yrs) × 57½% × 100%
($1,500 × 10 yrs) × 37½ × 100
Accrued
Benefits
=
=
$29,325
27,563
$56,888
Thus, the cost of the special termination postretirement benefits is $13,388 ($56,888 –
$43,500), and $14,580 ($43,500 – $28,920) would be accounted for as a curtailment or an
experience loss.
Defined Contribution Plans
F49.
Q—An employer has two legally separate postretirement benefit plans—a defined benefit
plan and a defined contribution plan. The terms of the defined benefit plan specify that
the employer’s obligation under that plan is reduced to the extent that a participant’s
account balance in the defined contribution plan shall be used to pay incurred health care
costs covered by the defined benefit plan. Should those plans be considered a single plan
or two plans for purposes of applying this Statement 106? [104]
A—Two plans. The defined benefit plan is commonly described as a “floor-offset” plan.
As participants’ account balances in the defined contribution plan grow, the employer’s
obligation under the defined benefit plan diminishes. However, the nature of the
employer’s obligation under each plan, how that obligation is satisfied, the availability of
plan assets to pay benefits, and the accounting for a defined benefit versus a defined
contribution plan are sufficiently dissimilar for the two plans that they cannot be
considered a single plan for purposes of applying this Statement 106.
F50.
Q—If there are any assets of the defined contribution plan described in the question in
paragraph F49 Question 49 that have not yet been allocated to participants’ individual
FSP on Statement 158 (FSP FAS 158-1)
252
FSP FAS 158-1
accounts, do they reduce the accumulated postretirement benefit obligation of the defined
benefit plan? [63, 104]
A—No. The terms of the defined benefit plan require the payment of benefits that exceed
those payable using participants’ individual account balances in the defined contribution
plan. Pursuant to those terms, assets of a defined contribution plan that have not yet been
allocated to participants’ individual accounts do not reduce the employer’s present
obligation under the defined benefit plan. Although an employer’s intent may be to
allocate the unallocated assets in the future so that participants can use those assets to pay
health care costs, that intent is insufficient to offset the present defined benefit plan
obligation. When the unallocated assets in the defined contribution plan are allocated,
the benefits payable under that plan are increased and the obligation of the defined
benefit plan is reduced. That reduction is recognized immediately in determining the net
periodic postretirement benefit cost for the defined benefit plan.
Because the two plans are legally separate and, thus, the assets of one plan are not
available to pay the benefits of the other, neither the allocated nor the unallocated assets
of the defined contribution plan would be considered plan assets of the defined benefit
plan.
Effective Date
F51.
[This question has been deleted. See Status page.]
Q—Company A has a minority investment in Company B, which it accounts for on the
equity method. Company A has a September 30 year-end, and Company B has a
December 31 year-end. Company B is required to adopt Statement 106 on January 1,
1993. Company A is not required to adopt Statement 106 until October 1, 1993.
a.
b.
c.
May Company A adjust Company B’s earnings to eliminate the effects of adopting
Statement 106 when it includes Company B’s results in its financial statements for
the year ending September 30, 1993?
Must Company A adopt Statement 106 early (that is, in its fiscal year beginning
October 1, 1992) so that its accounting method for postretirement benefits is the
same as its investee’s accounting method?
May Company A and Company B adopt Statement 106 using different methods of
recognizing the transition obligation? [108, 110]
A—a. No. Making that adjustment would be inappropriate for both conceptual and
practical reasons. Conceptually, it would be inappropriate because that
adjustment would involve the investor’s changing the investee’s accounting for
postretirement benefits from a generally accepted accounting principle (GAAP)
to a non-GAAP method (presumably the cash basis) after the investee has
adopted the Statement. Statement 106 does not allow an employer to reverse the
effects of adoption after the Statement is applied and switch to a non-GAAP
method to account for postretirement benefits. Because the investee is not
permitted to make that adjustment, it would be inappropriate for an investor to do
FSP on Statement 158 (FSP FAS 158-1)
253
FSP FAS 158-1
so in applying the equity method. Further, making that change would cause the
investor to account for a different transition obligation (or asset) than that
determined by the investee. In determining the investor’s share of the investee’s
earnings, accounting for the effects of that difference initially and over time, for
example, the recognition of gains or losses, could be complex.
b. No. There is no requirement that an investor adopt a Statement early if an equity
method investee has adopted that Statement.
c. Yes. Although it may be desirable that investors and investees use the same
methods of accounting, it is not required.
F52.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F53.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F54.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
Transition
F55.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F56.
[This question has been deleted. See Status page.]
Q—A parent company has a postretirement benefit plan covering employees at some of
its subsidiaries, and one subsidiary has its own separate postretirement benefit plan. The
parent elects to adopt Statement 106 early and immediately recognize the transition
obligation. May the transition obligation of the subsidiary with its own plan be
recognized on a delayed basis in the consolidated financial statements of the parent and
its subsidiaries? [108, 110]
A—No. In the consolidated financial statements, the employer is the consolidated group.
The employer must make one election for all plans within the consolidated group.
Paragraph 110 discusses the elections available to the employer. However, in the
separate financial statements of the subsidiary with its own plan, the employer is the
subsidiary. For its separate financial statements, a subsidiary-employer can elect delayed
recognition of the transition obligation for its separate plan, even though that subsidiary’s
transition obligation is recognized immediately in the consolidated financial statements.
It should be noted, though, that this would require maintaining two separate calculations
for the subsidiary’s postretirement benefit plan.
F57.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F58.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
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254
FSP FAS 158-1
F59.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F60.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F61.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F62.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F63.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
F64.
[This question has been deleted. See Status page.]
[Question deleted 12/98 because the effective date of Statement 106 has passed.]
FSP on Statement 158 (FSP FAS 158-1)
255
FSP FAS 158-1
Other Amendments and Technical Corrections
11.
The following amendments represent other conforming changes to reflect the provisions of
Statement 158 or technical corrections to Statement 158. [Added text is underlined and deleted
text is struck out.]
12.
Statement 106 is amended as follows:
a. Footnote 6:
6
Two Special Reports prepared by the FASB staff, A Guide to Implementation
of Statement 87 on Employers’ Accounting for Pensions, and A Guide to
Implementation of Statement 88 on Employers’ Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits, Appendix E of Statement 87 and Appendix C of Statement 88
provide accounting guidance on implementation questions raised in
connection with those Statements 87 and 88. Many of the provisions in this
Statement are the same as or are similar to the provisions of Statements 87 and
88. Consequently, the guidance provided in those appendixesSpecial Reports
should be useful in understanding and implementing many of the provisions
of this Statement.
13.
FASB Statement No. 130, Reporting Comprehensive Income, is amended as follows:
a. Paragraph 132:
This Statement requires that an enterprise determine reclassification
adjustments for each classification of other comprehensive income, except
minimum pension liability adjustments. An enterprise may display
reclassification adjustments on the face of the financial statement in which
comprehensive income is reported, or it may disclose reclassification
adjustments in the notes to the financial statements.
FSP on Statement 158 (FSP FAS 158-1)
256
FSP FAS 158-1
14.
Statement 158 is amended as follows:
a. Paragraph A15(a):
Adjust the beginning balances of retained earnings, accumulated other
comprehensive income, pension liability, and deferred tax accounts for the
amortization of prior service cost and the service cost, interest cost, and
expected return on plan assets (see paragraph A13):
Retained earnings
Deferred tax asset ($40 × 40%)
Deferred tax benefit—accumulated other comprehensive
income ($30 × 40%)
Deferred tax benefit—retained earnings ($70 × 40%)
Accumulated other comprehensive income
Liability for pension benefits
70
16
12
28
30
40
b. Paragraph A20(a):
Adjust retained earnings, accumulated other comprehensive income, pension
liability, and deferred tax accounts for three-fifteenths of the net periodic
pension cost projected for the 15-month period from October 1, 2007, to
December 31, 2008 (see paragraph A19):
Retained earnings
Deferred tax assets ($35 × 40%)
Deferred tax benefit—accumulated other comprehensive
income ($25 × 40%)
Deferred tax benefit—retained earnings ($60 × 40%)
Accumulated other comprehensive income
Liability for pension benefits
60
14
10
24
25
35
c. Paragraph A28(a):
Adjust retained earnings, accumulated other comprehensive income, pension
liability, and deferred tax accounts for the net periodic pension cost for the 2month period from October 1, 2007, to November 30, 2007, and onethirteenth of the net periodic pension cost projected for the 13-month period
from December 1, 2007, to December 31, 2008 (see paragraph A27):
Retained earnings
Deferred tax assets ($35 × 40%)
Deferred tax benefit—accumulated other comprehensive
income ($30 × 40%)
Deferred tax benefit—retained earnings ($65 × 40%)
Accumulated other comprehensive income
Liability for pension benefits
FSP on Statement 158 (FSP FAS 158-1)
65
14
12
26
30
35
257