FAS 88 Settlement Acounting

[dmb]

When determining whether Settlement Accounting is needed, are monthly benefits included in the distributions that are compared to the Service Cost plus Interest Cost or only lump sums and annuity purchases?? Thanks.

[david rigby]

The defintion of a settlement does not include regular annuity payments.

The test of whether a settlement has occurred is in ASC 715-30-35-82, "...if the cost of all settlements (emphais added) during a year is greater than the sum of the service cost and interest cost components..."

BTW, there is an accounting policy here: the rest of the referenced section states that settlement recognition may be (but is not requried) at a lower threshold level.

Is this in agreement with your research?

[dmb]

Thanks. And yes agreed that settlement accounting may is permitted if settlements are less than SC and IC.

[dmb]

And maybe just to play devil's advocate, why wouldn't the monthly payment be considered part of a settlement?? It's a distribution that is reducing the obligation??

[quinnfield]

But a monthly distribution is not completely relieving the plan sponsor of the obligation, just a part of it. Thus it doesn't fit the definition of a settlement.

[david rigby]

The glossary is in ASC 715-30-20. Settlement is defined as a transaction that is an irrevocable action, relieves the employer (or the plan) of primary responsibility for a pension benefit obligation, and eliminates significant risks related to the obligation and the assets used to effect the settlement.

715-30-15-6 includes this additonal text. "Examples of transactions that constitute a settlement include making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits and purchasing nonparticipating annuity contracts to cover vested benefits."

BTW, paragraph 3 of SFAS No. 88 is nearly the exact same wording.

[Guest ky-mike]

I would add that not all lump sums should be considered for settlement accounting purposes. If a participant takes a partial lump sum and partial annuity, then the lump sum payment should not considered a settlement payment since the entire pension obligation has not been settled.

As for annuity payments, one could make the argument that the final annuity payment to a participant who dies is a settlement payment since the payment is in final settlement of amounts owing under the plan. However, I doubt that anyone ever considers these as such since they are generally immaterial to the overall settlement calculation.