It is not unusual for an entity to make amendments or other changes to multiple benefit plans or other employee compensation arrangements simultaneously (or within a relatively short period of time). Often, a benefit will be reduced under one arrangement, but the reduction may be compensated for, in whole or in part, under another arrangement. For example, an entity may eliminate benefits under a postretirement medical arrangement, but increase benefits under a pension plan to mitigate the reduction.
In these situations, we believe it is important to understand the economic substance of the entire series of interrelated changes in employee benefit arrangements. This is important in order to ensure that financial statement recognition is not distorted due to the different recognition models that exist under the various employee compensation standards. For example, the income statement impact of amendments to a defined benefit pension plan are generally deferred and amortized, while a change to a cash bonus arrangement would typically be reflected immediately in the income statement.
As a simple example, a reporting entity may reach an agreement with its employees to forgo paying a presently due bonus that the employees have earned, and in return will increase the benefits payable under its pension plan by an equal amount. If one were to view the two actions in isolation, the elimination of the bonus accrual would be reflected as a gain in the income statement immediately, while the benefit enhancement in the pension plan would be reflected as prior service cost and amortized over a future period. That accounting would not reflect the underlying economic substance of the exchange. ASC 715
contains several examples of concurrently negotiated changes in various benefit plans. Consistent with that guidance, in some circumstances, it may be appropriate to immediately recognize in income part or all of the change in the obligation under a defined benefit plan rather than reflecting such change as a positive or negative plan amendment that is amortized into income over future periods.
In another example from practice, the Pension Protection Act of 2006 caused situations affecting both qualified and non-qualified pension plans. For example, increasing the benefit and compensation limits that were scheduled to expire under the Economic Growth and Tax Reconciliation Relief Act of 2001 increased the PBO. However, since most entities have nonqualified excess benefit plans or Supplemental Executive Retirement Plans (SERPs), the increase in the PBO of the qualified plan was generally offset by a decrease in the PBO of the SERP. Accordingly, those entities found that the overall effect on total pension obligations was neutral. In that case, we generally concluded that the appropriate accounting treatment was to transfer the accrued liability from the SERP to the PBO of the qualified plan, along with a pro rata share of deferred items (prior service cost, gains and losses, and transition amount). Thus, rather than treat the events as separate events within each plan, the underlying economics were that the overall benefit to the individual was not changing; the source of the payment was merely shifting from one plan to the other.
Example PEB 4-7 illustrates how to account for the interrelated benefit changes resulting from an early retirement offer.
EXAMPLE PEB 4-7
Accounting for the interrelated benefit changes resulting from an early retirement offer
Medical benefits are provided to long-term disabled employees under a long-term disability (LTD) plan that is accounted for under ASC 712, Compensation—Nonretirement Postemployment Benefits
. When the employee retires, the medical benefits are provided under the employer’s postretirement medical plan, which is accounted for under ASC 715. Because the reporting entity assumes that employees will retire at age 65, its ASC 712 obligation includes benefits for employees through age 64, and its ASC 715
obligation includes benefits for retired employees, age 65 and older. As a result of an employer-provided incentive to retire early, 55% of the long-term disabled employees elected to retire in the current year. Because many of these employees are under age 65, this event results in a decrease in the ASC 712 obligation and an increase in the ASC 715
obligation for the cost of benefits from the employee’s age at retirement (e.g., age 60) to age 65.
Should the decrease in the ASC 712 obligation be recognized as a gain and the increase in the ASC 715
obligation recognized as an actuarial loss?
No. Although unanticipated early retirements can give rise to an actuarial loss under ASC 715
(and gain recognition under ASC 712), the early retirements in this case resulted from the overt actions of the employer to cause the employees to retire early. Further, the employees did not lose any benefits as a result of their decision to retire early. The employer’s obligation to pay their medical benefits remains unchanged; merely the source of funding changes. Because the economic substance of the employer’s obligation has not changed, any gain recognition under this fact pattern would cause the financial statements to be misleading. Accordingly, the portion of the ASC 712 liability that decreased due to the early retirement of the disabled employees should simply be transferred to the accumulated postretirement benefit obligation and included in the accrued postretirement benefit liability in the balance sheet. This is consistent with the conclusions in ASC 715-60-55-111