U.S. Financial Accounting Series Statement of Financial Accounting Standards No. 87 (Employers' Accounting for Pensions) paragraph 1 states that FAS 87 applies to pension benefits, where pension benefits are defined as

"Periodic (usually monthly) payments made pursuant to the terms of the pension plan to a person who has retired from employment or to that person's beneficiary."

In Asia, many employers have plans which provide a lump sum based on pay and service. Many of those plans are balance sheet arrangements that do not have any annuity options. Does FAS 87 apply?

The quick answer, based on a literal reading of the above, is that lump-sum plans are not pension plans and the employer escapes from the costing and disclosure responsibilities, perhaps!

Paragraph 7, however, actually modifies the scope. It points out that

"Ordinarily, such benefits are periodic pension payments to retired employees or their survivors, but they may also include benefits payable as a single lump sum..."

Paragraph 8 modifies paragraph 7 by specifically excluding employer plans that are only life and/or health insurance. Paragraph 8 does not exclude severance benefit plans.

Paragraph 7 further explains that neither the location of the assets nor whether the plan has been committed to writing or not determines application by FAS 87.

In our practice, we look at several elements of a plan to determine FAS 87 application:

• The benefit based on a written instrument,

  But note the FAS requirement of examining well-defined past practice for unwritten benefit plans.

• The trigger for payment is termination of employment.

  In Japan, when an employee is promoted to director level, he terminates as a regular employee and is paid his retirement allowance.

• The benefit is defined and the formula is based on pay and service.

  Although there are plans that define benefits some other way, some of those may not be pension plans for FAS 87 purposes.

• The plan represents the obligation of the employer.

  Here, we distinguish plans subject to FAS 87 from public plans and others where the employer's obligation extends no further than to pay a tax or premium.

In Japan, we feel confident that all retirement allowance plans are pension plans for FAS 87 purposes, whether funded under the "Book Reserve System" or externally as a TQPP. Foreign plans described as termination indemnity plans also fall in this area.

Plans falling under the category of EPF's probably are, but few auditors seem to be requiring EPF cost and liability disclosure.

Directors' plans tend to be special cases. The question for them is whether they are a true promise of the employer since continuing board resolutions are required. We feel they fall under the "well-defined practice" provision and, thus, should be consolidated on a FAS 87 basis.

Finally, if you still think FAS 87 doesn't apply because of the single lump sum nature of these plans, realize that they are still liabilities that should be recognized. If they are not pensions, then they are probably postemployment benefits other than pensions. Look to FAS 106 for guidance!

Probably not. Although it is income-tax-free, there is an asset tax. There are specific rules for a TQPP to avoid the asset tax. Few plans meet these rules.

The asset tax is a tax on total plan assets as reported by the asset manager (Insurer or Trust Bank.) It is in the range of 1.25%. It is paid from assets, i.e. if the plan had no investment income, the tax is still due.

These days, some plans are faced with diminishing assets before premiums; the government takes 1.25%, the asset manager takes about the same amount plus some other costs and yields have been abysmal.

The situation makes book reserve plans look better than ever; not only tax-free, but tax-deferred. And, the assets are there working to make your company stronger and protecting your employees' interests.

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