initial recognition of FAS 87 for non-US Plan

[Guest buyertoday]

If a frozen accrual, non-US DB plan, which has been around for awhile, has never done FAS87 costs, how does it work if they now want to start recognizing it? Can we just start it fresh now, computing the initial net obligation/asset as of the 1st recognition date (i.e. 1/1/2002)? Are there any special rules to follow?

Thanks.

[MGB]

The answer is going to depend on "why" they haven't done it before. Were they just purchased? Was it an oversight and they really should have been doing it all along? Did they change from a company that didn't need to do it (e.g., a private firm), to a company that needs to produce US GAAP statements for the first time? Etc.

[Guest buyertoday]

I wouldn't call it an oversight, but I think it was not done solely because the plan was deemed immaterial and very small. FAS87 was done for other larger non-US Plans, but not this one. So, how does that change anything and where can I go for information?

Thanks.

[MGB]

Technically, the correct way is to recreate all numbers back to initial application of SFAS 87. The aggregate-to-date change in accrued expense is recorded as an adjustment to income from a change in accounting methodology (changing from treating it as immaterial to material). If it turns out to be significant, it is not reported as a current adjustment, but instead they must restate all prior earnings.

Note that even though it was ignored in the financial statements as immaterial, that does not negate the fact that there were numbers associated with it all along.

Assuming that a full recreation is not feasible, it is up to the auditors as to how to handle the recognition of the change in method. The "best practice" way to do it is as described above, but use estimates of what prior years would look like. If the whole situation is not material enough to even warrant that estimate, then the auditors just need to make a decision on how to move forward. Certainly, the differences in bottom-line numbers under different approaches should be one of the factors they should consider in what to do.

Beyond that, there are no specific rules out there that you can look up on how to do this within the context of SFAS 87. Instead, what you are doing here is a change in accounting method that has other rules applicable that translate into what I've said above.

[david rigby]

Note that this could lead to the establishment of a "transition" base for amortization. That should not be a problem, since the prupose of a "transition" is to respond to a change in accounting method.