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It is important to consider the unit of account when analyzing deferred compensation arrangements that utilize a rabbi trust. We believe it may be appropriate to view the unit of account to be at the individual instrument level, at the plan level, or at the trust level.
Example PEB 7-1 highlights the differences in accounting based on different units of account.
EXAMPLE PEB 7-1
Unit of account for a rabbi trust used for deferred compensation
PEB Corporation has one rabbi trust that is used to fund two deferred compensation plans. One plan is a cash bonus arrangement, the other a stock bonus arrangement. The cash bonus arrangement permits diversification within the rabbi trust, while the stock bonus arrangement does not (i.e., it must be settled by the delivery of a fixed number of shares of employer stock). Additionally, dividends on the employer stock are also deferred in the rabbi trust, and will be settled in cash.
What is the appropriate accounting for the rabbi trust? Does the accounting differ depending on the assessed unit of account?
Analysis
If the unit of account is viewed to be at the trust level, the entire amount in the rabbi trust would need to follow the Plan B through Plan D accounting described in PEB 7.5.1.3 and in ASC 710-10-25-15 through ASC 710-10-25-18. That is, a deferred compensation liability would be recognized at fair value each reporting period (with a corresponding charge to compensation cost) for all amounts (both the cash and employer stock) in the trust.
If the unit of account is viewed to be at the individual deferred compensation plan level, each plan would be analyzed separately to determine the applicable plan type and accounting. The cash bonus arrangement would be considered Plan D because it permits diversification and the liability associated with it would be measured at fair value at each reporting period. The stock bonus arrangement would likely qualify for Plan A accounting, because it requires settlement by delivery of a fixed number of employer shares. However, because the dividends will be settled in cash, the entire stock bonus plan would be subject to Plan B accounting and the obligation would also be marked to fair value each reporting period.
If the unit of account is viewed to be at the individual instrument level, the three components of this arrangement (cash bonus, stock bonus, dividends) would be analyzed separately. The cash bonus component would follow Plan C/D accounting because it can be diversified. The stock bonus component would follow Plan A accounting, because it is settled in a fixed number of shares. The initial payment of the dividend would not require additional compensation expense as it would be viewed as a dividend on an existing equity instrument. Subsequent to the initial payment, the dividends would require Plan B accounting, because they are cash settled. Any change in the value going forward would require additional compensation cost to reflect changes in the fair value; for example, if interest is paid on the cash balance.
Whether a reporting entity evaluates the unit of account at the trust, plan, or instrument level is an accounting policy decision.
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