Accountants' Handbook Special Industries and Special Topics 10th Edition_12

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Accountants’ Handbook Special Industries and Special Topics 10th Edition_12 36.2 SPONSOR ACCOUNTING 36 5 •annual amount per year per participant plus a surcharge applicable to underfunded plans. Withinspecified time constraints, an employer can terminate a fully funded plan at will. A procedure is pre-scribed for notifying participants and the PBGC. Underfunded plans maintained by employers in fi-nancial distress can transfer responsibility to the PBGC for paying benefits guaranteed by theinsurance program.(d) EVOLUTION OF PENSION ACCOUNTING STANDARDS. SFAS Nos. 35, 87, and 88were the result of approximately 11 years of deliberations by the Financial Accounting StandardsBoard (FASB). However, the controversies concerning the accounting for pension plans well pre-ceded that. As noted in the introduction to SFAS No. 87, since 1956 pension accounting literature has“expressed a preference for accounting in which cost would be systematically accrued during the ex-pected period of actual service of the covered employees.” In 1966, APB Opinion No. 8, “Accounting for the Cost of Pension Plans,” was issued. Within broadlimits, annual pension cost for accounting purposes under APB No. 8 was the same as cash contribu-tions for prefunded plans. Over the years, however, actuarial funding methods have evolved that pro-duce different patterns of accumulating ultimate costs; some are intended to produce level costs, otherfront-end load costs, and still others tend to back-load costs. In 1980, the FASB issued SFAS No. 35, which established standards of financial accountingand reporting for the annual financial statements of a defined benefit pension plan. The State-ment was considered the FASB’s first step in the overall pension project. After SFAS No. 35was issued, the FASB concluded that the contribution-driven standard prescribed by APBNo. 8 was no longer acceptable for employer financial reporting purposes. The proliferation ofplans and a total asset pool of nearly $1 trillion (and growing) argued for an accounting ap-proach under which reported costs would be more consistent for a company from one period tothe next and more comparable among companies. SFAS No. 87 and its companion SFAS No. 88 were issued in 1985. These Statements now governthe accounting for virtually all defined benefit pension plans. They prescribe a single method for ac-cruing plan liabilities for future benefits that is independent from the way benefits are funded. Stan-dards are prescribed for selecting actuarial assumptions used for calculating plan liability andexpense components. Most importantly, the discount rate used to calculate the present value of futureobligations is market-driven and follows prevailing yields in the bond markets. Taken together, thesechanges are intended to improve the quality of pension accounting information, but further refine-ments are possible. SFAS No. 87 states: This Statement continues the evolutionary search for more meaningful and useful pension ac- counting. The FASB believes that the conclusions it has reached are a worthwhile and significant step in that direction, but it also believes that those conclusions are not likely to be the final step in that evolution.36.2 SPONSOR ACCOUNTING(a) SCOPE OF SFAS NO. 87. The goal of the FASB in issuing SFAS No. 87 was to establishobjective standards of financial accounting and reporting for employers that sponsor pension ben-efit arrangements for their employees. The Statement applies equally to single-employer plans andmultiemployer plans, as well as pension plans or similar benefit arrangements for employees out-side the United States. Any arrangement that is similar in substance to a pension plan is covered bythe Statement. The accounting specified in SFAS No. 87 does not supersede any of the plan accounting andreporting requirements of SFAS No. 35 (see “Plan Accounting”). It does, however, affect spon-sor accounting by superseding the accounting requirements to calculate pension cost as de-scribed in APB No. 8, and the disclosure requirements as stated in SFAS No. 36, “Disclosure ofPension Information.”36 6 PENSION PLANS AND OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS • The Statement does not apply to pension or other types of plans that provide life and/or health in-surance benefits to retired employees, although the sponsor of a plan that provides such benefits mayelect to account for them in accordance with the provisions of SFAS No. 87. The accounting for theobligations and cost of these other postretirement benefits is the subject of SFAS No. 106 (see “Ac-counting for Postretirement Benefits Other Than Pensions”).(b) APPLICABILITY OF SFAS NO. 87. In substance, there are two principal types of single-employer pension plans—defined benefit plans and defined contributio ...