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13 Cards in this Set

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The Scope of FAS 106
 all post-retirement benefits except pensions.
Results of FAS 106
 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)
FAS 106’s PROFIT AND LOSS STATEMENT TREATMENT
(“Profit and Loss Statement” means Income Statement)

Assumptions Required
(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
The Attribution Method
 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.
Accounting Amounts
 Expected Postretirement Benefit Obligation (EPBO) = APV of total post retirement costs.
 EPBO is split into three parts:
 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.
COMPUTING THE NET PERIODIC POSTRET. BENEFIT COST (NPPBC)
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
Components of the NPPBC:
(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
FAS 106’s BALANCE SHEET TREATMENT
Accrued and Prepaid Expenses
 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.
SETTLEMENTS AND CURTAILMENTS
Settlements
 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.
Curtailments
 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.
TYPES OF COVERED PLANS
 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)
REQUIRED DISCLOSURES
 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.