Sn 303-00, Pages 1-23 Fas 106

Front 1

The Scope of FAS 106

Back 1

 all post-retirement benefits except pensions.

Front 2

Results of FAS 106

Back 2

 force accounting change from p-a-y-g to full accrual
 accounting costs rose
 Er’s redefined and reduced benefits
(See “Tomorrow’s Retirement Plans” in SN 100)

Front 3

FAS 106’s PROFIT AND LOSS STATEMENT TREATMENT
(“Profit and Loss Statement” means Income Statement)

Assumptions Required

Back 3

(A subset of the list entitled “Actuarial Assumptions...” from SN 100)
Explicit (best-estimate) assumptions:
 termination, mortality, and retirement rates
 Age-related costs
 discount rate; ror on assets (different)
 administrative costs
 claim trends
 Medicare reimbursement /coordination
 salary increases

Front 4

The Attribution Method

Back 4

 Accrual is uniform over attribution period

Considerations in setting the attribution period:
 Normally: Date of hire through full eligibility
 But: Extended, if salary will increase a lot after full eligibility
 For front-loaded plans with fixed accrual periods, date of hire through final accrual date.

Front 5

Accounting Amounts

Back 5

 Expected Postretirement Benefit Obligation (EPBO) = APV of total post retirement costs.

Front 6

 EPBO is split into three parts:

Back 6

 EPBO is split into three parts:
(1) Accumulated Postretirement Benefit Obligation or APBO): the part attributed to prior service
(2) Service Cost: the part attributed to this year
(3) The part attributable to future years of service.

 Net Periodic Postretirement Benefit Cost (NPPBC) = the amount the plan must contribute this year.

Front 7

COMPUTING THE NET PERIODIC POSTRET. BENEFIT COST (NPPBC)

Back 7

NPPBC = Service Cost
+ Interest Cost
- Expected Return on Plan Assets
+ Amortization of Net Transition Obligation
- Amortization of Unrecognized Net Gains (losses)
+ Amortization of Unrecognized Prior Service Cost

Front 8

Components of the NPPBC:

Back 8

(See numerical examples in chapter notes.)

Interest Cost
= simple interest on:
(service cost) + (APBO) – (benefits paid out during the year).
assume mid-year

The discount rate is:
 pre-tax
 based on high-quality, long-term secs.

Expected Return on Plan Assets:
 Plan Assets means segregated trust fund assets


Amortization of Net Transition Obligation:
 from when FAS 106 was first adopted.
 straight-line; # years = average active’s remaining YOS
 amortz cannot cause NPPBC to fall below previous p-a-y-g amt.

Amortization of Unrecognized Net Gains (losses):
Must amortize:
1. Gain/(Loss) in APBO
 defined as (Expected APBO – Actual APBO)
and:
2. One-time deviations from the “substantive plan”.

 Amort of gain/loss only req’d if gain/loss > 10% * max{plan assets, APBO}
 # years = average active’s remaining YOS


Amortization of Unrecognized Prior Service Cost
 Liabilities due to plan amendments
 e.g. benefit increase, vesting change, eligibility rule change
 # years = average active’s future time until full eligibility

Front 9

FAS 106’s BALANCE SHEET TREATMENT
Accrued and Prepaid Expenses

Back 9

 Accrued Expense for post-ret benefits are when plan liabs exceed funding
 (Opposite = Prepaid Expense for post-ret benefits)

 The net of these two entries is called the Accrued Postretirement Benefit Cost.

Accrued postretirement benefit costend of this year =
Accrued postretirement benefit costend of last year
+ NPPBCduring this year
– Contributions to the fundduring this year.

 Ultimately, the Accrued Postretirement Benefit Cost will approximate the APBO.

Front 10

SETTLEMENTS AND CURTAILMENTS
Settlements

Back 10

 Irrevocable transaction that removes er’s obligation and risk.
 reduces the APBO.
 causes a gain or a loss.
 If it is a gain, it pays off the Net Transition Obligation and the Unrecognized Net Losses.

Front 11

Curtailments

Back 11

 Event that reduces expected future YOS, or eliminates future accruals
 Example: If the employer terminates a large number of employees.

 A special loss is created, equal to the portion of these two amortizations that would have accrued over the ees’ future service (if they had stayed with the er)
 Future health plan costs are lowered
 Result can be a gain or a loss.

Front 12

TYPES OF COVERED PLANS

Back 12

 The Substantive Plan includes written plan documents; current and future terms of the plan; past practice; e.g. cost-sharing
 Aggregation of plans
 Each plan must be calculated separately.
 FAS 106 also covers Multiple Employer plans and Business Combinations (mergers)

Front 13

REQUIRED DISCLOSURES

Back 13

 Breakdown of NPPBC by component
 Reconciliation of beginning to ending values of the APBO, showing:
 service cost, interest cost
 benefits paid
 plan changes, settlements, curtailments
 Reconciliation of plan assets
 assumptions
 Results “with” and “without” a new plan amendment.

Done.