FASB & Pension Rules
The Financial Accounting Standards Board is a private standards-setting institution created in 1973 in order to improve the level of financial accounting and reporting by public companies in the United States. Several of the standards that it has promulgated over the nearly four decades of its existence have a bearing upon pensions and other post-retirement income of employees of these companies.
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Defined Benefits or Defened Contributions
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According to the FASB, there are two distinct forms of benefit plan. One defines the amount of a benefit that is to be provided to the retiree, perhaps as a factor of age, years of service, level of compensation at retirement, etc. This is known as a "defined benefit pension plan." Any other pension is a "defined contribution" plan. A defined contribution plan may provide an individual account for each participant and specify how contributions to that account are to be determined. The retirement benefits will then depend on the amount contributed during the period of employment.
Statement 87
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Statements 87 and 88 establish the generally accepted accounting procedures for the pension area. The principal concerns of 87 are the present value of the pension fund's assets and the valuation of its obligations. Both must be determined at their fair value and must appear on the employer's balance sheet and income statements.
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Statement 88
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The principal concerns of 88 are settlements or curtailments of defined benefit pension plans and termination plans. It went into effect in 1988 and required the immediate recognition of certain previously unrecognized amounts when specified events or transactions take place.
A settlement under 88 is an irrevocable action that relieves the employer or the plan of primary responsibility for a pension benefit obligation and eliminates significant risks in connection with that obligation.
An appropriate net gain or loss is to be recognized at that time.
Statement 106
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Statement 106 prescribes the employers' accounting for non-pension (or "other") post-retirement employee benefits, such as legal services, tuition assistance, housing subsidies and health care. The gist of 106 is that accrual accounting is to be preferred over cash basis accounting. The obligation to provide other post-retirement employee benefits is to be recognized and measured beginning the moment the employee becomes fully eligible for the expected benefits. The employee may continue to work for years beyond the date at which he becomes eligible, but the obligations have accrued as of that time.
Discount Rate
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With regard both to pensions and to non-pension retirement benefits, one key figure is the discount rate --- the rate used for the computation of the present value of future payments. A payment of $1,000 20 years from now is of course worth a good deal less than $1,000 now. How much less depends on the discount rate. That in turn depends upon the market rate of interest on long-term debt.
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References
- Watson Wyatt: Accounting for Pensions and Other Postretirement Benefits
- Employee Benefit News: Tips for Small Employers to Comply with GASB 45
- "Labor's Capital: The Economics and Politics of Private Pensions"; Teresa Ghilarducci; 1992.
- Financial Accounting Standards Board: Summary of Statement No. 88
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