Pension Plans and Operating Segments Pension Plans and Operating Segments Memorandum To:CEO From:Controller Re:Pension plans and operating segments for newly acquired company The intent of this memo is to answer questions regarding the pension plans and operating segments of the company we recently acquired with 100% ownership. This company has two operating segments, each with its own pension plan. Reporting requirements for these issues are explained below. Pension Plan Reporting
Pension plans include defined contribution plans, defined benefit plans, and other postretirement benefits (OPRBs). Each of these plans has separate reporting requirements. Defined Contribution Plans A defined contribution plan requires the employer to set aside a certain amount each period to fund the employee’s pension. The employee is not guaranteed a specific pension benefit upon retirement. The ultimate benefit depends on the return of invested funds in the plan, and contributions are expensed during the annual period in which they occur.
Reporting requirements for defined contribution plans are relatively simple and include disclosure of existence of the plan, the employee groups covered, the basis for determining contributions, and significant matters affecting comparability between periods (Schroeder, Clark, & Cathey, 2011). Defined Benefit Plans Required reporting for defined benefit plans is significantly more complicated. Reporting standards, based on the 2006 publication of SFAS No. 58, require companies to recognize the funded status of pension plans and report them in the statement of financial position as an asset or a liability (Financial Accounting Standards Board, SFAS No. 158, 2006). The funded status is calculated by subtracting the projected pension obligation from the fair value of plan assets. The projected pension obligation, which includes future salary increases, is calculated as the actuarial present value of the benefits attributed by the pension plan benefit formula for services already provided (Shaw, 2011).
Actuarial gains or losses and prior service costs that arise during the period are recognized as components of comprehensive income. Additionally, the amortization of actuarial gains or losses and prior service costs accrued in prior periods is recognized in comprehensive income. Notes to the financial statements must include changes to net periodic benefit costs that impact the next fiscal year from delayed recognition of gains or losses, prior service costs, or credits and transition assets or obligations (Schroeder, et. al. , 2011).
Other Postretirement Benefits Accounting for OPRBs is covered in SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Much like pension plans, OPRBs promise future benefits for current service, so they are accounted for in a similar fashion. Unlike pensions, the ultimate benefit depends on the amount of future services used by the retiree, which is difficult to estimate. Furthermore, there is no employee vesting and no additional benefit accumulated related to years of service (Schroeder, et al. , 2011).
The FASB essentially views other postretirement benefits as deferred compensation and relates its thoughts on the subject in Summary of Statement No. 106 (1990): “Accrual accounting goes beyond cash transactions and attempts to recognize the financial effects of noncash transactions and events as they occur. Recognition and measurement of the accrued obligation to provide postretirement benefits will provide users of financial statements with the opportunity to assess the financial consequences of employers’ compensation decisions. Whereas funding status of defined benefit plans is calculated using projected benefit obligation, other postretirement plan funded status is determined using the accumulated postretirement benefit obligation (ABPO), which is that portion of the expected postretirement benefit obligation (EPBO) attributable to employee service rendered to the measurement date (Schroeder, et. al. , 2011). EPBO is calculated as the actuarial present value of the total benefits expected to be paid to the employee after full eligibility.
In accordance with FASB ASC 715, disclosure of OPRBs in the financial statements includes plan details regarding policies, assets, costs, reconciliation of funded status, assumptions regarding health care cost trends used to calculate EPBO, and the effects of a one-percentage-point increase in the assumed healthcare trend rates (Schroeder, et. al. , 2011). Operating Segments The most effective way to eliminate the two operating segments from the newly acquired company is to aggregate them with our existing operating segments. There are specific prerequisites for aggregation, as specified in FASB ASC 280-10-50-11.
Segments may be aggregated if they have similar economic characteristics and if they are similar in all of the following areas: a. The nature of the products and services b. The nature of the production processes c. The type or class of customer for their products and services d. The methods used to distribute their products or provide their services e. If applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities (Financial Accounting Foundation, 2012). Assuming the two new segments meet these criteria, our company can eliminate them through aggregation with current operations.
In the event the two new segments do not meet criteria for aggregation, the acquired company can be treated as a subsidiary in consolidated financial statements. This is possible because the new entity is 100% owned, giving us full control as a parent company. The newly acquired company would continue to stand alone as a subsidiary, but consolidation permits financial treatment of the subsidiary as part of a consolidated financial statement, which simplifies reporting under the umbrella of our existing financials. Thank you for the opportunity to provide information regarding pensions and operating segments.
Please let me know if you have further questions. References Financial Accounting Foundation. (2012). 280-10-50 Segment Reporting. Retrieved September 22, 2012, from FASB: https://asc. fasb. org/viewpage? nav_type=goto;amp;ovcmd=goto;amp;codification_text=280-10-50-11;amp;codification_submit. x=23;amp;codification_submit. y=9 Financial Accounting Standards Board. (1990, 12). Summary of Statement No. 106. Retrieved September 22, 2012, from FASB: http://www. fasb. org/summary/stsum106. shtml Financial Accounting Standards Board. (2006, September). Statement of Financial Accounting Standards No. 58, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. Retrieved September 22, 2012, from FASB: http://www. fasb. org/cs/BlobServer? blobkey=id;amp;blobwhere=1175820923452;amp;blobheader=application%2Fpdf;amp;blobcol=urldata;amp;blobtable=MungoBlobs Schroeder, R. G. , Clark, M. W. , ;amp; Cathey, J. M. (2011). Financial Accounting Theory and Analysis Text and Cases. Hoboken, NJ: John Wiley ;amp; Sons, Inc. Shaw, K. W. (2011, June 14). New Accounting Rules for Defined Benefit Pension Plans. Retrieved September 22, 2012, from The CPA Journal Online: http://www. nysscpa. org/cpajournal/2008/308/essentials/p32. htm