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MGB

Financial Accounting for Cash Balance

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MGB    0

The Emerging Issues Task Force of the FASB reached a conclusion at their meeting two weeks ago that the only proper attribution method for a cash balance plan is traditional unit credit.

Up until now, there has been a wide variance in approaches to applying SFAS 87 to a cash balance plan. The other very common method is to project out all salary and interest credits and then prorate on service. This is no longer allowed.

All measurements after today must use traditional unit credit. Any change in PBO due to methodology should go through the gain/loss (this was in the EITF minutes).

At the end of the EITF meeting, Jules Cassel made the following "observation" (if an observation is included in the EITF minutes, it carries the same weight as a published staff Q&A). For plans that use a market-based rate to credit the account balance, the discount rate must be that same rate. This was included in the EITF minutes.

EITF minutes must be ratified by the Board. At today's Board meeting, the observation about the discount rate was dropped from the minutes prior to ratification. The FASB staff was directed to write up a more comprehensive position paper on the specific circumstances that a discount rate other than corporate bonds would be used. This may end up as a staff position paper (similar to Q&As) or be sent through the EITF. In any event, this is expected to be completed fairly soon. By the end of this year, many cash balance plans may be required to use a different discount rate than they are currently using.

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Guest Keith N   
Guest Keith N

Are you interpreting this to mean that for a "typical" cash balance plan that credits the accounts w/ the 417(e) rate,

1) PBO should equal the ABO

2) ABO should equal the sum of the cash balance accounts and

3) Service Cost should equal the amount credited to the accounts each year?

4) Discount Rate should equal the current 417(e) rate?

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MGB    0

It depends.

If Jules Cassel's observation is completed as another pronouncement, and it applies to your plan, then, yes.

If it doesn't apply, then, no.

The effect of applying his observation is to project at the interest crediting rate and then discounting at the same rate, resulting in ABO=PBO=account balance.

However, if you discount at anything else (e.g., a high-quality corporate bond rate), then you will not get that result (ABO and PBO will most likely be less than the account balance).

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Guest Steve C   
Guest Steve C

MGB,

I'm interested in the EITF position that attribution for a cash balance plan should be based on Traditional Unit Credit. While I don't disagree with that stance, I note that it conflicts with Q&A 50 of the FAS87 Implementation Guidelines (which requires Projected Unit Credit for all pay-related plans).

Has there been any rethinking of attribution methods for other pay-related accumulation plans (other than cash balance, that is)?

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MGB    0

The entire issue, as discussed, was completely focused on Q&A 50. Many of us involved with the process wanted them to just rescind Q&A 50. Instead, their response was that Q&A 50 should only be applied to the facts presented there and not necessarily be carried over to other fact situations (like cash balance). The real issue in Q&A 50 is whether or not a certain design is non-pay-related (the wording from paragraph 18). If the plan is non-pay-related, then the ABO and PBO are the same, or, in other words, traditional unit credit applies. The EITF decision was that a cash balance plan is non-pay-related (which has been reported as their decision being that traditional unit credit applies, but that is a consequence of their decision, not the actual decision).

The distinction with the true career-average plan in Q&A 50 is that it is "so close" to a final-pay plan with a large number of years of service in its average, that they distinguish it as being pay-related.

I know, it doesn't make sense. It would have been much cleaner to rescind Q&A 50.

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MGB    0

The FASB staff have asked various actuaries to get the word out on the following because they do not plan on making a formal pronouncement:

The earlier decision about cash balance accounting should, at this time, be construed to only apply to the exact facts of the situation before the EITF last month. What that means is that the traditional unit credit method decision only applies to cash balance plans that provide for a fixed interest rate credit. For plans (which most are) that use a market-based crediting rate (e.g., a government bond yield), the EITF decision does not apply.

If the accounting is changed at this time for plans that are not fixed interest credit style plans, it does not fall under the transitional guidance which would provide for any change due to methodology flowing through the gain and loss. Instead, it would be a change in accounting method that must use general rules of applying it retroactively under APB 20. However, future guidance may provide for transitional rules that are similar to the ones provided in the recent EITF decision.

Further guidance on what the proper attribution method and discount rate are for a market-based interest crediting rate will be forthcoming.

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Guest Mike Melnick   
Guest Mike Melnick

MGB - Thanks for posting these announcements. Can you describe any of the other facts in the specific cash balance plan that the EITF reviewed, besides the use of a fixed interest credit?

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