Megan N. Cook, CPA, CFE
March 9, 2009
The first pension plan offered by an American employer was that of American Express in the year 1875. Amex’s plan did not resemble the plans that we see in today’s time; the first “modern” defined benefit plan was created in 1940 by the automotive behemoth General Motors. These plans of the past still do not resemble plans that we are familiar with today. In the past, employers could exercise a “pension put” option and, in essence, close the plan down at the current level of funding and turn the assets over to the retirees. This is not an optimal situation, as many plans at the time were severely under funded and retirees would be left with pennies on the dollar of what they were counting on for retirement. (Fortune, 2005)
Post-retirement benefits are volatile on a couple of different fronts; up until the reforms in 1974 which created ERISA and the PBGC, employees had to put blind faith in their employers to secure their futures after their working years were over. (Fortune, 2005) On another front, these benefits pose a significant accounting problem – how should a company account for the costs and liabilities associated with these benefits they had to give their employees at a later and relatively indeterminable date? Prior to FAS 87, the only item that a company would record on their financial statements was the actual benefits paid within the accounting period. There were no footnote disclosures or any other supplemental data available.
Expensing post-retirement benefits as incurred does not portray the economic reality of the transactions surrounding the pension. There is an inherent liability, as employers are required to pay their employees these benefits in the future. This should affect the value of a company by increasing a long-term pension liability and decreasing the net worth. FAS 87 and FAS 106 were the first efforts by regulators to at least disclose the amount of post-retirement benefit liabilities. The aforementioned pronouncements, along with FAS 132 and 132R, required only footnote disclosures relating to pension liabilities and under funded amounts. Such disclosures were not enough for regulators; in September of 2006 the FASB issued FAS 158 which “requires employers to fully recognize their obligations associated with their defined pension, retiree healthcare, and other postretirement plans in their financial statements. A company must recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. The measurement date for determining funding status must coincide with the date of the employer’s statement of financial position. The impact on the statement of financial position may be significant...All public, nonpublic, and not-for-profit organizations are affected by SFAS 158.” (Hurtt, Kreuze, Langsam 2007) It seems that the profession is on the right track in making sure that financial statement accurately reflect the economic realities of even the most complex transactions entered in to. However, there is another variable to consider in this equation: convergence with IFRS.
IAS 19 is the international equivalent of FAS 158 in that it deals with how a company is to account for post-retirement expenses. Nevertheless, there are differences between the two methods which will make the pension expense and liabilities different depending on which method is used. Towers Perrin, a global professional services firm, has a grid of summary provisions affecting accounting for postretirement benefits under IAS19 and the various FASs. Large differences include,...