FAS 158 - What to do with Prepaid

[Guest pm01]

FAS 158 seems to eliminate the concept of Prepaid Pension Cost and Unfunded Accrued Pension Cost. My question deals with what to do with a Prepaid or Accrued when a company transitions to 158.

Prior to the adoption of 158, the company has:

PBO $1,000

Assets $1,020

Funded Status $20

Loss $900

Prepaid $920

What does the company do with the Prepaid asset when they adopt 158? Do they write down the Prepaid and recalculate the Gain/Loss? Or do they maintain the asset and recognize the entire Gain/Loss in OCI? Is there a choice?

[Guest Mike Melnick]

I think the answer is: recognize the entire Gain/Loss in OCI (Other Comprehensive Income).

In other words, the pre-paid asset (or accrued pension cost) is gone. However, in the year of compliance, you might disclose what the pre-paid would have been , plus an intital change (in unrestricted assts) to apply 158 (for the unrecognized amounts). In your example:

Pre- Paid Asset: 920

New Restriction on net assets for previously unrecognized amounts: 900

Funding in excess of obligation: 20

Note you still maintain the unrecognized amounts to develop the actual pension expense, because you are still gradually transferring the unrecognized amounts into the ordinary income and expense.

[Guest Grant]

I would also add that it appears as though the amount of the prepaid at the time of adoption will be "imbedded" in the difference between the net pension asset and the AOCI, now and going forward. The name will disappear, but its presence will still be felt.

[Guest pm01]

I would also add that it appears as though the amount of the prepaid at the time of adoption will be "imbedded" in the difference between the net pension asset and the AOCI, now and going forward. The name will disappear, but its presence will still be felt.

Are you saying that the asset will still exist even though it will not be called the "Pre-paid Pension Cost"? How does it show up on the financial statement? Would you state the AOCI amount net of the amount that would have been considered "Pre-paid"? Thanks

[Andy the Actuary]

Would someone please comment whether or not they agree that this is what the accounting entries would look like:

PBO $1,000

Assets $1,020

Funded Status $20

Loss $900

Prepaid $920

Liability for Pension Benefits* 920 (debit)

====================================

AOCI 920 (debit)

Liability for Pension Benefits* 920 (credit)

Liability For Pension Benefits 20 (debit)

AOCI 20 (credit)

*Or whatever we called "Prepaid Pension Expense"

[ishi]

Here is my understanding of the balance sheet entries:

Pre FAS 158, the plan had a liability of (920), and no AOCI

Post FAS 158, the plan has a liability of (20), and an AOCI of (900)

In essence (for this example), the loss becomes a charge to equity.

[Andy the Actuary]

Thank you, I believe you have shown the net of my pension entries.

[Guest Grant]

I would also add that it appears as though the amount of the prepaid at the time of adoption will be "imbedded" in the difference between the net pension asset and the AOCI, now and going forward. The name will disappear, but its presence will still be felt.

Are you saying that the asset will still exist even though it will not be called the "Pre-paid Pension Cost"? How does it show up on the financial statement? Would you state the AOCI amount net of the amount that would have been considered "Pre-paid"? Thanks

No, I am saying the you will have 1. a pension asset or liability = over/under funding PBO, 2. your losses will still be your losses, 3. at adoption of of 158, the AOCI will be the difference in your old prepaid, and the current overfunded, 4. the difference between the two will be the existing loss (that all has to balance).

My comment was that going foward, you will always have this difference between your funded status and your unrecognized losses. The prepaid officially goes away, never to be seen again, but it's "ghost" will continue on as a difference between the funded status and unrecognized loss. Just carry out your example into year 2 and you will see what I mean.