A settlement occurs when a retirement plan provides for a participant's benefit in some irrevocable way.
In the U.S., the purchase of annuities for the accrued benefits of existing employees comes to mind. The procedure involves estimating all of the benefits for the group subject to the arrangement and asking insurers for quotes. When the benefits are in the past, the benefit calculation is supposed to be exact. When it is in the future, there are any variety of methods of dealing with the contingencies involved to the satisfaction of the parties.
A settlement also occurs when a retirement plan pays a retiring employee his entire benefit calculated under the rules of the plan. Lump sum settlements, the usual payment to retiring employees in Japan, are an example.
So, when do the rules of FAS 88 come into play?
As we have often said, only your auditor knows for sure, but there are several characteristics that one can look for to help make the decision. Once a settlement that must be specifically recognized under FAS 88 occurs, your auditor must decide how much a deviation from the exact rules of FAS 88 is permissible before the difference is "material."
A characteristic which is deterministic is that if the sponsor has made a decision to buy annuities for all existing employees who will be continuing in employment, a settlement that must be recognized under the rules of FAS 88 has occurred.
A characteristic that is almost deterministic is a decision to reduce employment across the board, a downsizing. Early retirement enhancement programs providing lump sums specifically designed to encourage greater-than-normal retirements are another example of events that are confidently accounted for as FAS 88 settlements.
On the other side of the coin, turnover reasonably anticipated by the actuarial assumptions does not require special accounting, even if large.* A company which has a practice of reorganizing itself every couple of years should have termination decrements that recognize the practice and this year's cutback would not produce special accounting.* There is a technicality of FAS 88 that could actually lead to the need to recognize a settlement, ignoring materiality, for a small plan when a senior executive retires.)
Of course, it is not always possible to chose a decrement table which will reasonably reflect the underlying nature of the cyclical terminations, especially for small plans. Ideally, the actuary will say something about the difficulty in his report and then treat the next cycle as a FAS 88 settlement.
A curtailment occurs when benefits that could reasonably be expected to accrue in the future no longer accrue. Settlements and curtailments often occur simultaneously.
As with settlements, a normal termination or retirement leads to such a result by removing the possibility of increases in the accrued benefit due to increases in pay and/or service. However, as before, "normal" turnover is supposed to be reflected in the decrement tables and would flow through gain & loss.
Plan amendments reducing or eliminating future accruals are clear examples of curtailments.
Less clear, as before, are situations related to downsizing and other reorganizations. And, as always, the amount of "pain" that a test of materiality can withstand affects the final results.
In dealing with foreign-capitalized subsidiaries in Japan, normal retirement plan terminations do not produce material effects at the consolidated level. Assuming that an entity in Japan seeks to grow larger than smaller, and where budgets permit the analysis, a FAS 88 analysis should be done to get a general feel for how changes affect income and disclosure. Knowing this in advance will help speed decision making when the true need occurs!
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