FAS 35 disclosures under PPA

[AndyH]

For FAS#35 disclosures for 2008, what mortality and interest rates are practioners using? The same as 2007, or the 2008 segmented rates and new mortality? What about plans that are funded assuming lump sums - is that methodology being used?

Has anyone had feedback from auditors on this issue?

[Andy the Actuary]

As up-in-arms as "people" get regarding FASB87 assumptions, the opposite has been my experience in respect of FAS35. As I recall, FAS35 says use the valuation assumptions. For some plans, we comply with this requirement. For others, FASB87 assumptions are employed for FAS35 so FASB ABO is reported for FAS35. Others simply use fixed interest rates.

For all my clients, FAS35 is reported as of the end of the year. Thus, for example when the 2007 Plan Year is audited, we develop for FAS35 the change in present value of accrued benefits from 1/1/2007-12/31/2007. The FAS35 exhibit is typically included with the 2008 actuarial report. For 2007, I am using the 2007 actuarial assumptions. (Hey, you got all your 2008 valuations done???)

For 2008, I'll ask the auditors what they want to have reported. In all likelihood, they will ask what I want to do!

As an aside, I am continuing to develop basic values using prior plan methodology because somehow the concept of advance funding future accruals still feels right. I will continue to illustrate a contribution on the old basis (2007 cost method and assumptions) because it's not too difficult to envision that funding on a minimum PPA basis for a stable population can lead to spiraling contribution requirements and perhaps the client will feel more comfortable funding a reasonably constant percentage of payroll.

[AndyH]

I just got my first accountant feedback on this - they agree, tentatively, that the new interest rates and mortality tables are appropriate for FAS 35.

Any other feedback out there from accountants for plans subject to 5500 audit?

[Guest GaryGaryGary]

I just got my first accountant feedback on this - they agree, tentatively, that the new interest rates and mortality tables are appropriate for FAS 35.

Any other feedback out there from accountants for plans subject to 5500 audit?

As an actuary doing audit support within an audit firm, it looks like the PPA rates will not be recognized as meeting the paragraphs 20A and 21 of SFAS 35. At least one major actuarial consulting firm has agreed and has directed it's actuaries to continue to use the pre-PPA method.

[Andy the Actuary]

As an actuary doing audit support within an audit firm, it looks like the PPA rates will not be recognized as meeting the paragraphs 20A and 21 of SFAS 35. At least one major actuarial consulting firm has agreed and has directed it's actuaries to continue to use the pre-PPA method.

Mr. G³. may you be fruitful and multiply. Finally, someone has concluded (for whatever reasons) that PPA makes little sense.

[Guest Grant]

As an actuary doing audit support within an audit firm, it looks like the PPA rates will not be recognized as meeting the paragraphs 20A and 21 of SFAS 35. At least one major actuarial consulting firm has agreed and has directed it's actuaries to continue to use the pre-PPA method.

Mr. G³. may you be fruitful and multiply. Finally, someone has concluded (for whatever reasons) that PPA makes little sense.

A KPMG actuary has stated that FAS 35 still mentions long term rates of return, and therefore the PPA basis is unlikely to pass muster with them. Until FAS 35 is amended, they want to see a long term rate of return for the discount rate.

[david rigby]

A KPMG actuary has stated that FAS 35 still mentions long term rates of return, and therefore the PPA basis is unlikely to pass muster with them. Until FAS 35 is amended, they want to see a long term rate of return for the discount rate.

Maybe.

Don't forget to read paragraph 5. Paragraph 21 provides an alternative to paragraph 20.

[AndyH]

Any updated comments or observations on this topic? We're getting pushbacks from auditors and generally encouraging use of the Effective Rate but some are pushing for the FAS 87 LTROR assumption. What are others experiencing and using?

Any definitive positions from auditors?

[david rigby]

Any definitive positions from auditors?

Never once encountered an auditor who cared about the FAS35 assumptions.

Since PVAB (fas35) and ABO (fas87) and funding target (IRS) are essentially the same concept, there should be value in having them be the same (or similar). But not required. They have different purposes, so don't overlook the documentation of the assumptions. FAS35 has been around a long time (1980), well before the concept of ABO and funding target, and well before any financial statement recognition. It is much less important now.

[Effen]

We have been using funding (PPA) assumptions and haven't heard "boo" from anyone. Then again, we didn't really hear anything prior to PPA about the assumptions either. The number isn't really all that important to anyone.

[AndyH]

Thanks for the comments. Our experiences are much different.

Our typical client subject to 5500 audit might have used a 7% or 7.50% rate in 2007, dropped it to 6% or 6.25% 1/1/2008 if the segment rates or effective rate was used, then elevated it to 8% or 8.25% if the yield curve was used 1/1/2009. Then for 2010, guess what, the roller coaster goes back down. The auditors are most definitely focusing on the change in pvab reported on the FAS 35, at least the larger auditors for the larger plans.

We have seen comments by auditors on the Internet (conference or webcast outlines) that state that PPA segment rates may not be used for FAS 35 (fairly recently).

Perhaps because the auditors must reformat their reports to use segment rates or the Effective rate we are getting a lot of attention on this.

[Blinky the 3-eyed Fish]

My experience is the same as Effen Rigby. Am I cursing? I think I could put FAS 35 Liabilities = Lots 'O Moola and they would accept it.

[AndyH]

I have a conference call on Monday with 8 people (client and audtors) on this subject. I'm just going to tell them that I discussed their concerns with the esteemed and distinguished industry experts Effen Rigby and cursing Blinky and I would paraphrase the collective response to the auditor's concerns as: "Boo. You don't exist. Go fish. Lots O' Moola".

[Blinky the 3-eyed Fish]

Exactly the way I would handle it.

Hey, remember that time that TAG said you shouldn't take advice from some unknown fish? Good times.

[AndyH]

It actually said you can't cite or quote by name anything by someone named Blinky the 3-eyed Fish.

But it never said you can't rely on it.

[AndyH]

p.s. The distinguished Board panel was of course correct. Lots of hot air and huffing and puffing followed by acceptance following a bit of education.

[david rigby]

Almost 5 years after last discussion, anyone have additional experience/insight to share?

(I'm just curious, still surprised by the attention given to FAS35/ASC960 by some auditors.)

[Effen]

Are you surprised by the attention, or lack of attention? I am still using PPA Funding Target for 90% of my single employer plans and I still have never had an auditor ask me one question.

[My 2 cents]

Some accountants require the use of a single interest rate based on the assumed long term rate of investment return. Others appear content to accept the use of the Funding Target as is. To a significant extent, it is up to the sponsor, who will usually defer on accounting matters to their accountant.

The former FAS 35, now known as ASC 960, is needed to enable the accountant to issue their report, for attachment to the 5500 filing. Reason enough for drawing attention from the accountant!

[david rigby]

Just wondering. I'm surprised by the extremely detailed attention by a few auditors, and the lack of attention by most others.

As yet, no auditor has asked the obvious question, "why is there a difference between FAS35/PPA/FAS87 liabilities?"

We do not use the PPA liability or the FAS liability, but I would like to do so, but don't look forward to explaining the change to every auditor.

[AndyH]

My experience is also that nobody asks at this point. Some had opinions in 2008 or 2009 though.

[Andy the Actuary]

FAS35 is sort of like the bearded lady in the circus: Everyone wants to see her but no one wants anything to do with her.

[My 2 cents]

Should not be necessary to explain difference between FAS 35 (ASC 960) and FAS 87 (ASC 715). At least some accountants are requiring that the ASC 960 liability calc use a long-term rate, not an ASC 715 discount rate. The auditor's report attached to the 5500 filing will usually require ASC 960 information, so it is not something to be ignored.