Some Questions

Does the Balance Sheet Liability Established Under the Japanese Book Reserve System Satisfy FAS 87?

No.

The method of determining balance sheet liabilities for Retirement Allowance plans under the "Book Reserve System" is not based on any actuarial method. There are no actuarial assumptions. The "minimum liability" cannot be calculated at all.

But, regardless of the method actually used to determine FAS 87 liabilities and costs, if the difference from that determined applying the FAS 87 rules precisely is not material, the method can be used.

So, is there a "back-of-the-envelope" way to determine materiality of the Book Reserve System?

No.

Materiality can only be determined by conducting a proper actuarial valuation occasionally, then calculating some correlations. In the absence of large swings, the relationships can be expected to hold for several years.

Problems will occur when there are actuarial assumption changes (discount rate, salary increase rate, etc.) called for, since the book reserve system doesn't use any assumptions.

Isn't "100% of the Involuntary" more conservative than FAS 87?

Yes.

And actuaries have a historical and professional preference for conservative methods.

But who cares? FAS 87 is not an actuarial issue, it is a cost recognition and disclosure issue. The purpose of FAS 87 is to be fair, not conservative. Charging earnings with 100% of each employee's next quarter's pay is also conservative, but hardly acceptable to shareholders looking for dividends or capital gains, especially if your company is the only one reporting that way.

But, once held, aren't the accruals close enough to the Net Periodic Pension Cost calculated under FAS 87?

Maybe.

As with the total liability, only an actual actuarial valuation can quantify the gross difference. Calculate it, disclose it to your auditor, then let him decide materiality. Materiality is his domain!

Of course, you may choose, since you have calculated the actuarial values anyway, to use them. Makes sense.

The reality is, using any non-actuarial method is as about as good as any other. And, when considering the impact of a retirement plan on the bottom line, it is not cost effective to use any non-actuarial based method.

Lohmann International will provide all the FAS 87 numbers in the report you need for a base fee of 550,000 yen regardless of the number of participants. We can also do the work in three days if called upon. Call for details.

"Why do I show a gain on my local income statement and a loss when I consolidate?"

"My Japanese accountant refuses to recognize future tax deductions on...."

"Thanks to our change to the insurance company, we are deducting more than we are paying for our pension plan, what a great deal!"

Are questions, statements and just plain wrong-headedness like these plaguing your ability to plan and implement in Japan? Les Lohmann is testing the water to see if there is an interest within the American Chamber of Commerce in Japan for a group to meet regularly to discuss accounting issues and how they affect your business. It's an opportunity to learn what others are doing, improve what you're doing and, maybe, save some money. Discuss it for free before paying for a mistake!

If you have such an interest, please contact Les by phone or fax.

Copyright 1997 Lohmann International Associates