FASB 87

[Guest RSNOW]

Can someone give me a good def'n of the Additional Minimum LIaibility added to the accrued (pre-paid) pension cost at the end of the FASB 87/132 report ? Can I think of it as an adjustment to recognize the unfunded accumulated benefit obligation in situations where combined events would otherwise show both an unfunded ABO and a "pre-paid" pension cost ? Perhaps because of this apparent conflict (unfunded benefits but pre-paid cost) it is then triggered ? I know, that's pretty rough and maybe not accurate.

[mwyatt]

It's Friday night, and the work computer is far away. However, the adjustment is basically a "balance" item to make sure that the costs to the employer equals the difference between assets and ABO.

[david rigby]

.... when there is an unfunded ABO.

if the assets exceed the ABO at disclosure date, you don't create a balancing item the other way.

[mwyatt]

Thanks Pax for correcting my ommission - that entry only comes into play if ABO > Assets (basically if that situation exists, the Additional Charge is the balance item with other items to ensure that the unfunded liability goes on the books). Of course, we won't talk about the fact that ABO has actually nothing to do with the actual termination liability facing the plan. How exactly did we let accountants get ahold of pension accounting anyway? I remember back in the late 80s talking to a friend fresh out of Tuck who was working for Shearson Lehman in M&A; they were trolling for takeover candidates (obviously pre 50% excise tax) with overfunded plans. Had to let him know that the numbers contained in the financial statement weren't exactly "reliable" for his nefareous purposes .

[MGB]

RSNOW:

It is irrelevant whether there is a prepaid or accrued pension cost on the balance sheet; that has nothing to do with whether or not an additional minimum liability is triggered. As was already stated, the "minimum liability" that must be shown on the books is just the (ABO - assets), but not less than zero.

If there already is EITHER a prepaid or an accrued expense already on the books, then the "additional minimum liability" is the difference between the minimum liability and the accrued or prepaid. If there is an accrued and it is larger than the minimum liability, no adjustment is necessary; there is already enough of a recognition covering the underfunding (this is typically the case with unfunded nonqualified plans). When there is a prepaid on the books, the additional minimum liability is larger than the minimum liability because the prepaid was the opposite sign before netting them together.

Note some important points that many don't realize:

1. Once the assets>ABO again, the additional minimum liability goes away. If there had been a prepaid before recognizing an additional minimum liability, it will reappear on the books (net of any net periodic pension cost in the intervening years).

2. There are two types of accounting regimes for income statements: one is based on "comprehensive income"; the other is based on "net income". For companies that use net income (most people are familiar with this approach), the changes in additional minimum liability each year do not go through the income statement and instead become an item in equity called "other comprehensive income." However, there are two situations that use comprehensive income. In that case, there is no such account as "other comprehensive income" and all changes in the additional minimum liability must go through the income statement as an expense. These two situations are:

- Nonprofit organizations under GAAP accounting.

- Insurance companies and HMOs reporting to state insurance departments under statutory accounting (Statement of Statutory Accounting Principles #8 covers pensions). (However, they are trying to change how this works, and last year some states allowed a divergence from this rule as a permitted practice.)

Note that any reversal of the additional minimum liability under the comprehensive income regime becomes income in the year that it happens.

[Guest RSNOW]

Thanks to all for the helpful input.

[mwyatt]

Here's a helpful little link from FASB's website that allows you to get .pdf files of the statements:

FAS Statement in PDF format

Saw this mentioned previously on BL, but this is a godsend if you need to get ahold of a statement for reference if you're away from your office (probably should have remembered this in the first place...)

[MGB]

Please note:

Those are the original versions of the statements (I can't understand why FASB did this). There are a lot of changes since their original versions. For example SFAS 132 greatly amended SFAS 87, but if you read the SFAS 87 on their website, you don't see the amendments.

There is a separate listing of changes on the website, but they are only references, not the changes themselves.

[mwyatt]

Well we know why FASB did this (a little surprising, since I wouldn't think that FASB would collapse from a potential drop in publication charges). I agree, annoying that they didn't have the amended versions out there; just wanted to offer as a secondary source for the statements if you were away from the paper version (which I would venture for many small plan actuaries are equally outdated).

[Guest RSNOW]

Thanks for the website mwyatt.

[AndyH]

I have a non-profit client that was audited by the IRS. The IRS agent is asking why the 990 "deduction" did not match the contribution reported on Schedule B for that year.

Apparently the 990 booked an "accrued contribution" sustantially equal to the FAS87 minimum liability. The minimum liability was about 600% of the actual "deduction".

The client explains this as substantially the difference between a cash contribution and an accrued contribution.

Is this right, that FAS87 numbers are used for Form 990? Does this response make sense?

Unfortunately we apparently don't have MGB's expertise anymore. Can anybody else help clarify this?

[david rigby]

Where on the Form 990 was this entered?

BTW, just skimming the 990 and instructions, it appears to refer to cash contributions, not accounting expense.

[ishi]

Could this amount be an intangible asset?

[AndyH]

Line 27. The FAS#87 accrual is shown, in this case equal to the minimum liability (there is no intangible) and the auditors are saying that is correct. Does not seem right to me, but WDIK?