| Paragraph
Number |
Issued:
December, 1985 |
| 7 | Establishes standards of financial accounting and reporting for an employer that offers pension benefits to its employees. This Statement applies to any arrangement that is similar in substance to a pension plan regardless of the form or means of financing. This Statement applies to a written plan and to a plan whose existence may be implied from a well-defined, although perhaps unwritten, practice of paying post-retirement benefits. | ||
| 10 | This Statement is intended to specify accounting objectives and results rather than specific computational means of obtaining those results. If estimates, averages or computational shortcuts can reduce the cost of applying this Statement, their use is appropriate, provided the results are reasonably expected not to be materially different from the results of a detailed application. | ||
| Single-Employer Defined Benefit Pension Plans | |||
| 11 | The most significant parts of this Statement involve an employer's accounting for a single-employer defined benefit pension plan. A defined benefit pension plan is one that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service, or compensation | ||
| 12 | A pension benefit is part of the compensation paid to an employee for services. In a defined benefit pension plan, the employer promises to provide, in addition to current wages, retirement income payments in future years after the employee retires or terminates service. The amount of benefit to be paid depends on a number of future events that are incorporated in the plan's benefit formula. In most cases, services are rendered over a number of years before an employee retires and begins collecting the pension. The total amount of benefit that the employer has promised and the cost to the employer of the services rendered are not precisely determinable but can only be estimated using the benefit formula and estimates of the relevant future events, many of which the employer cannot control. | ||
| 13 | Two problems that must be dealt with when recognizing pension cost before payment of benefits to retirees: | ||
| a. | Estimates or assumptions must be made concerning the future events that will determine the amount and timing of benefit payments. | ||
| b. | Some approach to attributing the cost of pension benefits to individual years of service must be selected. | ||
| 14 | This Statement requires use of explicit assumptions, each of which individually represents the best estimate of a particular future event. | ||
| This Statement also requires use of the terms of the pension plan itself, specifically the plan's benefit formula, as a basis for attributing benefits earned and their cost to periods of employee service. | |||
| Basic Elements of Pension Accounting | |||
| 16 | Service cost component--the actuarial present value of benefits attributed by the plan's benefit formula to services rendered by employees during the period. | ||
| 17 | Projected benefit obligation--as a given date, the actuarial present value of all benefits attributed by the plan's benefit formula to employee service rendered prior to that date. | ||
| Measured using an assumption as to future compensation levels if the pension benefit formula is based on those future compensation levels. | |||
| 18 | Accumulated benefit obligation--as of a given date, the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to that date and based on current and past compensation levels. It includes no assumption about future compensation levels. | ||
| 19 | Plan assets--assets that have been segregated and restricted to provide for pension benefits. Assets not segregated in a trust or otherwise effectively restricted are not plan assets for purposes of this Statement even though it nay be intended that such assets be used to provide pensions. | ||
| Amounts accrued by the employer but not yet paid to the plan are not plan assets. | |||
| Recognition of Net Periodic Pension Cost | |||
| 20 | The following components shall be included in the net pension cost recognized for a period: | ||
| a | Service cost | ||
| b. | Interest cost | ||
| c. | Actual return on plan assets, if any | ||
| d. | Amortization of the unrecognized prior service cost, if any | ||
| e. | Gain or loss to the extent recognized | ||
| f. | Amortization of the unrecognized net obligation or unrecognized net asset existing at the date of initial application of this statement (called the transition amount-See Paragraph 77) | ||
| 21 | Service Cost--defined in paragraph 16. | ||
| 22 | Interest Cost-- the increase in the projected benefit obligation due to the passage of time. | ||
| 23 | Actual Return on Plan Assets--based on the fair value of plan assets at the beginning and end of the period, adjusted for contributions and benefit payments. | ||
| 24 | Prior Service Cost--Results from plan amendments (including initiation of a plan) that include provisions that grant increased benefits based on services rendered in prior periods. Such retroactive benefits are not required to be included in net periodic pension cost entirely in the year of amendment but are to be recognized during the future periods of those employees active at the date of the amendment who are expected to receive benefits under the plan. | ||
| 25 | The cost of retroactive benefits is the increase in the projected benefit obligation at the date of the amendment. | ||
| Prior service cost shall be amortized by assigning an equal amount to each future period of service of such employee active at the date of the amendment who is expected to receive benefits under the plan. | |||
| 26 | To reduce the complexity and detail of the computations involved, consistent use of an alternative amortization approach that more rapidly reduces the unrecognized cost of retroactive amendments is acceptable. (e.g. straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan). The alternative method used shall be disclosed. | ||
| 28 | If a plan amendment reduces, rather than increases the projected benefit obligation, such reduction shall be used to reduce any existing unrecognized prior service cost, and the excess, if any, shall be amortized on the same basis as the cost of benefit increase. | ||
| 29 | Gains and Losses--changes in the amount of either the projected benefit obligation or plan assets resulting from experiences different from that assumed and from changes in assumptions. | ||
| This statement does not require recognition of gains and losses as components of net pension cost of the period in which they arise. | |||
| 30 | Expected return on plan assets shall be determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. | ||
| Market-related value shall be either: (1) fair value or (2) a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. | |||
| 31 | Asset gains and losses are differences between the actual return on assets during a period and the expected return on assets for that period. | ||
| Asset gains and losses include both: | |||
| a. | Changes reflected in the market-related value of assets. | ||
| b. | Changes not yet reflected in the marker-related value (difference between fair value and market-related value). | ||
| 32 | As a minimum, amortization of an unrecognized net gain or loss shall be included as a component of net pension cost for a year if, as of the beginning of the year, that unrecognized net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the market related value of plan assets. | ||
| If amortization is required, the minimum amortization shall be that excess divided by the average remaining service period of active employees expected to receive benefits under the plan. If all or almost all of a plan's participants are inactive, the average remaining life expectancy of the inactive participants shall be used instead of average remaining service. | |||
| 33 | Any systematic amortization method may be used in lieu of the minimum specified in paragraph 32, provided that: | ||
| a. | the minimum is used in any period in which the minimum amortization is greater. | ||
| b. | the method is applied consistently. | ||
| c. | the method is applied similarly to both gains and losses. | ||
| d. | the method used is disclosed. | ||
| 34 | The gain or loss component of net periodic pension cost shall consist of: | ||
| a. | The difference between the actual return and expected return on plan assets. | ||
| b. | Amortization of the unrecognized net gain or loss from previous periods. | ||
| Recognition of Liabilities and Assets | |||
| 35 | A liability is recognized if net periodic pension cost exceeds amounts the employer has contributed to the plan. | ||
| An asset is recognized if net periodic pension cost is less than amounts the employer has contributed to the plan. | |||
| 36 | If the accumulated benefit obligation exceeds the fair value of plan assets, a liability at least equal to the unfunded accumulated benefit obligation should be recognized in the employer's balance sheet. | ||
| Recognition of an additional minimum liability is required if an unfunded accumulated benefit obligation exists and: | |||
| a. | an assets has been recognized as prepaid pension cost, | ||
| b. | the liability already recognized is unfunded accrued pension cost is less than the unfunded accumulated benefit obligation, or | ||
| c. | no accrued or prepaid pension cost has been recognized. | ||
| 37 | An amount equal to the additional minimum liability shall be recognized as an intangible asset, provided that the asset recognized shall not exceed the amount of unrecognized prior service cost. (For purpose of this paragraph, any transition amount is to be considered part of unrecognized prior service cost.) | ||
| If an additional liability exceeds the unrecognized prior service cost, the excess shall be reported as a reduction of equity. | |||
| 38 | When a new determination of the amount of additional liability is made to prepare a statement of financial position, the related intangible asset and separate component of equity shall be eliminated or adjusted as necessary. | ||
| 54 | Disclosures | ||
| a. | A description of the plan. | ||
| b. | The amount of net periodic pension cost for the period, showing separately the service cost component, the interest cost component, the actual return on plan assets for the period and the net total cost of other components. | ||
| c. | A schedule reconciling the funded status of the plan with amounts reported in the employer's statement of financial position, showing separately: | ||
| 1. | The fair value of plan assets. | ||
| 2. | The projected benefit obligation identifying the accumulated benefit obligation and the vested benefit obligation. | ||
| 3. | The amount of unrecognized prior service cost. | ||
| 4. | The amount of unrecognized net gain or loss (including asset gains and losses not yet reflected in market-related value). | ||
| 5. | The amount of any remaining unrecognized net obligation or net asset existing, at the date of initial application of this Statement. | ||
| 6. | The amount of any additional liability pursuant to paragraph 36 | ||
| 7. | The amount of net pension asset or liability recognized in the statement of financial position pursuant to paragraphs 35 and 36 (which is the net result of combining the preceding six items). | ||
| d. | The weighted average assumed discount rate and rate of compensation increase (if applicable) used to measure the projected benefit obligation and the weighted average expected long-term rate of return on plan assets. | ||
| e. | If applicable, the amounts and types of securities of the employer and related parties included in plan assets, and the approximate amount of annual benefits of employees and retirees covered by annuity contracts issued by the employer and related parties. Also, if applicable, the alternative amortization methods used pursuant to paragraphs 26 and 33, and the existence and nature of any commitments to make future amendments to the plan. | ||
| Transition and Effective Dates | |||
| 76 | Effective for fiscal years beginning after December 15, 1986. | ||
| 77 | For a defined benefit plan, an employer shall determine as of the measurement date for the beginning of the fiscal year in which this Statement is first applied: | ||
| the amounts of (a) the projected benefit obligation and (b) the fair value of plan assets plus previously recognized unfunded accrued pension cost or less previously recognized prepaid pension cost. The difference between those two amounts (the transition amount), whether it represents an unrecognized net obligation or an unrecognized net asset, shall be amortized on a straight line basis over the average remaining service period expected to receive benefits under the plan, except that, (a) if the average remaining service life is less than 15 years, the employer may elect to use a 15 year period and (b) if all or almost all of a plan's participants are inactive, the employer shall use the inactive participants average remaining life expectancy period. | |||