This course is the fourth course in a five-course Financial Reporting Specialization. This course focuses on the recognition, measurement and subsequent accounting for equity, pensions, share-based compensation and cash flows utilizing the FASB Accounting Standards Codification and other resources.
Defined Contribution and Multiemployer Plans
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来自 University of Illinois at Urbana-Champaign 的课程
Accounting Analysis II: Accounting for Liabilities and Equity
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从本节课中
Module 2 Postretirement Benefits Part 2
In this module, you will continue your study of the employer's accounting for employee retirement benefits, including health care plans, multi-employer plans, and defined contribution plans. We will learn the definitions of curtailment and settlement and the impact of each on the financial statements. The module also describes defined contribution plans and multi-employer plans. The module will wrap up with a brief discussion of some of the major differences between US GAAP and IFRS.
与讲师见面
John HeppClinical Assistant Professor of Accountancy
Department of Accountancy
Welcome back. In this lesson,
we're going to talk about
Defined Contribution plans and Multiemployer plans, some additional topics.
So a defined contribution plan,
this provides for an individual account for each planned participant and it
specifies how contributions to the individual's account are to be determined,
rather than specifying the benefits the individual is to receive.
So the plan defines the contributions to be made to the account.
It does not define the benefits that the individuals will receive.
Hence a defined contribution plan.
So what's the difference?
Well, the main difference is the employees assume the risk.
The employee now assumes the risk for investment returns.
If the plans return well,
the employee gets a benefit rather than the plan or the plan as a whole.
The individual employee will.
But also, if the investments do not do well the employee is also at risk.
And you also have the risk of mortality,
that you may live longer than your actuarial assumptions.
In other the words, you assume the risk that you may live longer and
outlive your funds either due to some actuarial assumptions on mortality,
or actuarial assumptions on investment return.
So let's look at the accounting.
The accounting is much simpler.
It's not complicated at all.
For many plans the employees pay the costs themselves.
There is no cost to the employer really.
The employees has a deduction taken
out of their payroll and then it's payable to the plan.
There isn't even any pension plan expense at all for the employer.
Now, if the employer matches contributions or makes other contributions to the plan,
that would be recognized as an expense when due.
And so you would debit compensation expense for
that and you would credit cash or a payable to the plan,
for one case a typical plan like this.
Another type of plan is called a multiemployer plan,
and that's the plan in which two or more unrelated employers will contribute.
It's usually pursuant to one or more collective bargaining agreements.
So, a lot of times many employers will participate in
this plan and an employer can participate in more than one plan too.
I've seen clients where they've got a whole list of
different multiemployer plans that they participate in.
Sometimes one for each union or one for each state that they operate in.
Now, the accounting for this multiemployer plan is actually fairly
easy and it's exactly the same as what we had for a defined contribution plan.
Now, the disclosures will be different and we'll go through
that in great detail in just a minute.
But an employer participating in a multiemployer plan
accounts for its contributions as if the contributions are to a defined benefit plan,
debit expense, credit payable, or cash.
So it's also common among not-for-profit organizations.
For example, local chapters of a not-for-profit entity may
participate in a plan that's established by the related national organization,
say the Girl Scouts, or the Red Cross,
or something along those lines.
So in the case of that not-for-profit organization, the central sponsor,
the national unit, will usually account for the plan as a defined benefit plan.
But in the financial statements of the individual chapters or local operations,
they will account for it as a defined contribution plan,
which we just described.
So a characteristic of these plans is that the assets contributed by
one employer are not restricted to use for just that employer's employees.
They go into a common pool.
So the assets contributed,
they're available for payments to
employees of any employer who is participating in the plan.
There is one important exception
to that simple accounting that we've described for a multiemployer plan.
And that is, if it's probable or either
reasonably possible that the employer would withdraw for the plan,
that could give rise to a withdrawal obligation to the plan according to the agreement.
Or if it's probable or reasonably possible that the funds would be
increased during the remainder of
the contract period to make up a shortfall in the funds,
this can happen, for example,
to the bankruptcy of another employer that's in the plan,
well then, you're going to have to account for
contingent liability in those circumstances.
So there are situations where you could have a liability for a multiemployer plan.
So it's not exactly the same as accounting for your defined contribution plan because you
could have a withdrawal liability or liability
for additional contributions that might need to be made,
depending on what's happening to the plan itself.
There's also additional disclosures that are required.
Now, an employer that participates has to provide a narrative description,
the general nature of the multiemployer plans and how
the risk of participating in these plans are different from single employer plans.
These disclosures were added just a few years back
because there were some major changes in
the industries as a lot of unionized industries were experiencing bankruptcies or losses.
Even exit from the marketplace of certain employers that were
main contributors to these plans and the burden started to fall on other people
and then started to be some concern in the marketplace about this.
So the FASB passed rules requiring these types of additional disclosures.
Let's look at what some of them were.
In a tabular formatted they wanted things like the name of the plan,
the EIN and it's plan number,
the most recently available certified zone
status as currently defined by the Pension Protection Act of 2006.
What's the zone status?
Well, they look in particular whether you're in the red zone.
So the zone status was provided for by the plan of 2006.
If you don't have that information available from the plan though,
you have to look at the most recent data available on the basis
of the financial statements whether the plan is less than 65 percent funded.
There is your red zone. Between 65 and 80 percent funded,
or at least 80 percent funded.
Normally, a plan that's at least 80 percent funded is in
pretty good shape due to some peculiarities of how pension obligations are measured.
If it's less than 65 percent funded though,
you run into situations where the plan could run into problems in the future.
And then we're going to also disclose contract provisions,
the expiration dates because these are dates when
the contributions could potentially increase or decrease.
Or if there's more than one,
you'll provide a range of the expiration dates.
You're going to look at the relative contributions.
So you're going to look at how involved is the employer in the plan.
Is it more than five percent of the total contribution plans?
How dependent is the plan on that employer's contribution?
But also that could be an indication of how much of
the plan the employer could end that being responsible for.
And again, at the end of the most recent annual period whether
a funding improvement plan or rehab plan has been implemented,
if the plans in rehab,
whether the employer paid a surcharge to the plan or
any minimum contributions for future periods,
and if that plan level information is not available in the public domain.
Most plans file it for them.
I think it's form 5500 with the Department of Labor where you can
find a lot of this information in the public sector.
If it's not available,
then there's additional disclosures that you have to make about the plan.
And then, in addition,
in a tabular format,
they want you to disclose the total contributions made to all plans that are
not individually significant and then total contributions made to all plans.
So I have a concern.
Well, here's a press release, August 3,
2017 the insurance program that guarantees these plans,
which covers more than 10 million Americans,
it says it's likely to run out of money by the end of 2025 according to
the Pension Benefit Guaranty Corporation's FY 2016 Projections Report.
So there is a lot of concern about multiemployer plans.
The Pension Benefit Guaranty Corp., by the way,
is the entity that was created by ERISA to guarantee
pension payments if the employer is not able
to fulfill its obligations that it's made to employees.
This is part of the government guarantee.
So they're the ones, the watchdog that keep an eye on these plans.
It does say that there's a problem with these multiemployer plans.
They are concerned that they'll run out of
money by the end of the year if current trends continue.
Now, if you're in a single employer plan, though, don't worry.
The projections for the insurance program for single employer pension plans which covers
28 million people show that its financial condition is likely to continue to improve.
So it's highly unlikely to run out of money in the next 10 years and it's likely to
eliminate its deficit within the next three to seven years.
So, some bad news, some good news.
So, because of that,
we are seeing more demand for disclosures for multiemployer plans.
Again, the accounting is fairly simple.
It's like a defined contribution plan but
there are other considerations that you have to take into account.
If you're an investor there's more information that you're going to need to
demand than you would from a simple defined contribution plan.
That wraps up our discussion of defined benefit, defined contribution plans.
And now we'll continue on with a brief discussion of IFRS.
