Blogging Employee Benefits

April 1, 2006

Proposed Pension/OPEB Accounting – Old Transition Balances

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 4:09 pm

Shorthand, proposed new GAAP for employers' accounting for pensions and other postemployment benefits would move unrecognized balances currently disclosed in financial statement footnotes up to the sponsor's balance sheet, effective for fiscal years ending after 12/15/2006. (See yesterday's post here for a brief overview.) For the most part, this major thrust of phase 1 of FASB's project would affect only the balance sheet through direct charges or credits to other comprehensive income, without passing through net periodic pension or OPEB cost, for which the unrecognized balances would continue to be maintained pending decisions to be made by FASB in phase 2 of its pension/OPEB accounting standards project. For remaining unrecognized transition balances remaining from implementation of the current standards, however, the proposed rule would take a slightly different approach. In fact, although the net balance sheet result as of the effective date of the new standard would be the same, some companies would need to restate income for one or more past fiscal years.

Upon implementation of the currently applicable pension accounting standard in 1987, the initial difference between a pension plan's projected benefit obligation and market value of assets was established as an unrecognized net transition asset or obligation, thereafter recognized regularly in net periodic pension costs, generally over the average remaining service period of active employees expected to receive benefits under the plan (or 15 years, if so elected by the employer for plans where the average remaining service period was less). [SFAS 87 ¶77] A similar transition rule applied beginning in 1993 for implementation of the comparable OPEB accounting standard, with employers permitted to elect immediate recognition or 20-year recognition in lieu of recognition over the remaining service period of employees expected to receive benefits. [SFAS 106 ¶110-112] Acceleration of recognition of pension/OPEB transition balances is required under current rules upon certain plan settlements or curtailments. [SFAS 88; SFAS 106 ¶90-99]

The new accounting standard proposed in FASB's new exposure draft would require immediate balance sheet recognition of unrecognized pension/OPEB amounts for employers' financial statements issued for fiscal years ending after 12/15/2006, that is, for the 12/31/2006 financial statement for a company with a calendar fiscal year. The new rules are to be applied retrospectively for all comparative balance sheet amounts that are presented on any financial statement prepared under the new GAAP, unless it is impractical to do so due to an inability to assess period-specific realizability of associated incremental deferred tax assets. For example, if a company's financial statement presents statements of changes in shareholder equity for the two most recent fiscal years ending 12/31, and if the impracticability exception does not apply, then upon implementation of the new standard on 12/31/2006, the balance sheet amounts for 12/31/2006, 12/31/2005, and 12/31/2004 reported in that 12/31/2006 financial statement would be required to follow the new standard.

As of the earliest date for which such retrospective application is applied, the opening balance of the company's retained earnings is to be adjusted by the balance of pension or OPEB unrecognized net transition asset or obligation that had been present at that time, net of tax. For any subsequent fiscal years through the date of the initial application of the new standard, the company's income is to be adjusted by any amounts that had been recognized in pension or benefit costs for those periods, net of tax, presumably including the effect of reversing out any cost recognition that had occurred upon any settlement or curtailment during those periods. For any fiscal years after the first fiscal year ending after 12/31/2006, no old transition amounts are to be recognized as a component of pension or benefit cost.

For the majority of companies that sponsor defined benefit pension plans, no old pension transition balances would have remained with respect to U.S. plans as of the earliest retrospective application date, although a later SFAS 87 effective date for non-U.S. pension plans have left remaining transition balances for those plans more common. The later effective date of SFAS 106, together with the current permissibility of 20-year recognition spreading, also make remaining transition balances more common for retiree health plans and other postemployment benefits. Even for employers that do have old transition balances as of the earliest retrospective application date, the relevant amounts tend to be insignificant relative to net pension or OPEB costs, and even more negligible relative to the total net income of the company. Still, the proposed rule for those transition balances is a specific nuance against the exposure draft's general rule that balance sheet amounts are charged or credited without affecting net income.

The following table shows some illustrative amounts under the proposed rule for transition amounts for several companies, in each case presuming retrospective application as of 12/31/2004 and 12/31/2005 for implementation of the new standard as of 12/31/2006, shown here prior to adjusting for tax, with amounts drawn from recent 10-K filings (all dollar amounts in millions). And remember, this is only the effect with respect to the unrecognized transition balances, which of course is swamped in comparison by the financial effect of the remaining rules of the proposed new standard.

  GM IBM duPont BellSouth
Pension Plans
Adjustment to 12/31/04 Retained Earnings – 43 98 18 0
Adjustment to 2005 Income 7 – 82 – 5 0
Adjustment to 2006 Income 6 – 6 – 1 0
Adjustment to 12/31/04 Retained Earnings 0 0 0 38 *
Adjustment to 2005 Income 0 0 0 80
Adjustment to 2006 Income 0 0 0 60
Pensions and OPEBs
Adjustment to 12/31/04 Retained Earnings – 43 98 18 38
Adjustment to 2005 Income 7 – 82 – 5 80
Adjustment to 2006 Income 6 – 6 – 1 60

* Note – BellSouth disclosed an OPEB net transition asset as of 12/31/2004, hence in this example would increase retained earnings (after adjusting for taxes) at that point if that were its earliest date of retrospective application. However, no doubt due to different recognition periods for different OPEB plans, the company subsequently was reporting an OPEB net transition obligation and reported net transition costs for 2005 and 2006 under existing accounting standards, hence would retrospectively increase net income (again, after adjusting for taxes) for those years under the new standard.


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