Are you prepared for FAS 158? - CUNA Mutual Group

Are you prepared
for FAS 158?
Presented by:
Ken Newhouse, ASA, EA, MAAA
Associate Actuary, Pension Services
CUNA Mutual Group

Before We Get Started...
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• I will periodically un-mute everyone
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in the meantime
• Session will be recorded
• Please don’t put us on hold
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I am not an accountant!*
* The information contained in this presentation should not be considered tax advice
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Are you ready for FAS 158?
• Logistics of transition and new
reporting requirements
• Preview of new report and how it
will be used during transition
• Impact of transition on balance
sheet
• Determination of Net Periodic
Pension Cost
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Logistics of Transition
Prepaid
Pension
Expense
Net Pension
Asset or
Liability
Other
Comprehensive
Income
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Logistics of Transition
Problem:
• Net Pension Asset/Liability and
OCI values not known until FYE
Solution:
• Within two weeks after FYE,
FAS 158 report will be issued to
show these values and the
recommended journal entries
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Logistics of Transition
Last
Valuation
12/31/2007
FAS 158
Report
FYE
1/1/2008
Valuation
Report
1/1/07 12/31/07
12/31/08
FAS 87 Accounting
T
r
a
n
s
i
t
i
o
n
FAS 158 Accounting
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New FAS 158 Report
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New FAS 158 Exhibit C
Transition Journal
Entries
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New FAS 158 Exhibit B
Use FAS 87 Journal
Entries Prior Year
Use FAS 158 Journal
Entries Current Year
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Logistics of Transition
• Liabilities projected from last
valuation date
• Assets up to date
– If any assets not held by CMG
must wait for asset statement
– RPP and IMAP asset info accessed
electronically
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Logistics of Transition
• NPPC for upcoming year is
estimated
– Significant changes in census may
result in updated NPPC in
valuation report
– Common causes are key
retirements, large pay increases,
new participants entering the plan
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Accounting Evolution
FAS 87/88
Basic Pension
Accounting Rules
1989
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Accounting Evolution
FAS 87/88
Basic Pension
Accounting Rules
1989
FAS 106
Accounting for
Other
Postretirement
Benefits
1995
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Accounting Evolution
FAS 87/88
FAS 106
FAS 132
Uniform Disclosure
1998
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Accounting Evolution
FAS 87/88
FAS 106
FAS 132
FAS 132(R)
Increased Disclosure
Requirements
2003
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Accounting Evolution
FAS 87/88
FAS 106
FAS 132
FAS 132(R)
FAS 158
Transparency
2007
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Balance Sheet
Assets
Liabilities
Assets
Liabilities
Equity
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Balance Sheet
Assets
Liabilities
Liabilities
Assets
(Value of Home
= $300K)
(Mortgage =
$200K)
Equity ($100K)
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CU Balance Sheet
Assets
Liabilities
Cash & Invest
Loans
Other
Liabilities
Deposits
Member’s
Equity
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Member’s Equity
• Reserves
• Undivided Earnings
• Accumulated Other Comprehensive
Income (OCI)
– Unrealized GL on AFS Securities
– Unrecognized GL in Pension Plan
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CU Balance Sheet
Assets
Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided
Earnings
40
OCI (5)
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Net Worth
• Net Worth is
Reserves plus Undivided Earnings
(60 + 40 = 100 million)
• Net Worth Ratio is
Net Worth divided by Total Assets
(100M / 1B = 10%)
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Funded Status of Pension Plan
• Net Pension Asset (Liability)
Plan Assets
less
Projected Benefit Obligation
• Shown on balance sheet as “other
asset” if overfunded or “other
liability” if underfunded
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New FAS 158 Exhibit A
Funded
Status
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Change in Funded Status
• Change in PBO
+ Service Cost (benefit accruals)
+ Interest Cost
– Benefit payments
• Change in Plan Assets
+ Contributions
+ Investment return
– Benefit payments
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Change in Funded Status
• Expected changes are expensed
Service Cost
Interest Cost
Expected Return on Assets
• Other changes not expensed
Contributions (comes from cash)
Benefit payments (reduces both side)
Gains or losses (goes to OCI)
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Change in Funded Status
PBO Assets Net Liability
Begin 7,800 6,800 +1,000
Service Cost 460 460
Interest Cost 440 440
Exp Return 500 -500
Contribution 700 -700
Benefits Paid -100 -100 0
Gain/Loss 600 200 400
End 9,200 8,100 +1,100
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Change in Funded Status
Liability Equity Asset
Net
Liability
Undivided
Earnings
OCI
Cash
Service Cost 460 -460
Interest Cost 440 -440
Exp Return -500 500
Amort Loss -100 100
Contribution -700 -700
Gain/Loss 400 -400
Change 100 -500 -300 -700
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Journal Entries
Debit Credit
Net Periodic Pension Cost
Undivided earnings 500
Net pension liability 400
OCI 100
Contributions
Net pension liability 700
Cash 700
Gains or Losses
OCI 400
Net pension liability 400
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New FAS 158 Exhibit D
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New FAS 158 Exhibit D
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Pension Expense
+ Service Cost
+ Interest Cost
– Expected Return on Assets
+ Amortization of Loss (Gain)
= Net Periodic Pension Cost
No change!
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New FAS 158 Exhibit A
Net Periodic
Pension Expense
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Transition to FAS 158
• No change in NPPC
• Prepaid Pension Expense will
become Net Pension Liability or
Asset
• Unrecognized Gains/Losses will
Reduce OCI
• Previous OCI resulting from
unfunded ABO is reversed
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Old FAS 87 Exhibit
Unrecognized
Losses
Prepaid Pension
Expense
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Journal Entries
Debit Credit
Transition to FAS 158
Prepaid pension expense 2,200
Net pension liability 1,100
OCI 3,300
• Prepaid pension expense was $2.2 million
• PBO exceeds assets by $1.1 million
• Unrecognized loss was $3.3 million
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New FAS 158 Exhibit C
Transition Journal
Entries
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CU Balance Sheet Before FAS 158
Assets
Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 50 Reserves 60
Undivided
Earnings
40
OCI (5)
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CU Balance Sheet After FAS 158
Assets
Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 48 50 X Reserves 60
Undivided
Earnings
156
X
40
OCI (5)
(8)
X
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Net Worth After FAS 158
• Net Worth is unaffected
Reserves plus Undivided Earnings
(60 + 40 = 100 million)
• Net Worth Ratio is
Net Worth divided by Total Assets
(100M / 998M = 10.02%)
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Journal Entries (Overfunded Plan)
Debit Credit
Transition to FAS 158
Prepaid pension expense 4,000
Net pension asset 1,000
OCI 3,000
• Prepaid pension expense was $4 million
• Assets exceed PBO by $1 million
• Unrecognized loss was $3 million
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CU Balance Sheet After FAS 158
Assets
Liabilities
Cash 300 Liabilities 155
Loans 650 Deposits 750
Other 47 50 X Reserves 60
Undivided
Earnings
40
OCI (5)
(8)
X
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Unrecognized Loss
• Decreasing discount rates
• Investment earnings less than
expected
• Salary increases larger than
expected
• Super-sized lump sums
• Decreasing turnover
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Moody’s Aa
Liability
4,700,000
5,800,000
8.0%
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7.5%
7.0%
6.5%
6.0%
5.5%
Dec '99
Jun '00
Dec '00
Jun '01
Dec '01
Jun '02
Dec '02
Jun '03
Dec '03
Jun '04
Dec '04
Jun '05
Dec '05
Jun '06
Dec '06
Jun '07
5.0%
7,100,000
8,800,000

Prefund $5M
Before After
Funded Status
Projected Benefit Obligation 9,200 9,200
Plan Assets 8,100 13,100
Net Pension Liability (Asset) +1,100 -4,100
Net Periodic Pension Cost
Benefit Costs 1,135 1,135
Expected Return on Assets 585 960
Net Periodic Pension Cost 550 175
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Journal Entries
Debit
Contributions
Net pension liability 1,000
Net pension asset 4,000
Credit
Cash 5,000
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Balance Sheet
Assets
Liabilities
Cash 300 Liabilities 156
295
X
Loans 650 Deposits 750
Other 52 48 X Reserves 60
Undivided
Earnings
155
X
40
OCI (8)
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Measurement Date = FYE
• Effective for FYE after 12/15/2008
• FYE is generally date for which you
have your financial audit completed,
but check with auditor
• We’ll assume no change for 2006,
but please let us know if you want
to change
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Key Changes
• Measurement Date = FYE
• Unrecognized items reduce Equity
(i.e. Other Comprehensive Income)
• Expense calculation is same
• Prefunding still works
• Effective FYE after 6/15/2007
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Questions?
If you have questions after the show please e-mail:
kenneth.newhouse@cunamutual.com
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THANK YOU
for Attending
We look forward to future
sessions with your credit union.