FASB Sheds Some Light on FAS 87

FASB handed down a partial definition of what constitutes a cash balance plan in a recent project update of its broader review of Financial Accounting Standard Number 87 (FAS 87).   Per the definition, the nation’s accounting rulemakers have determined that fully vested cash balance participants are entitled to their notional account balances – those balances that are not actually realized – as either a lump sum or an actuarially equivalent annuity either immediately or at a future date , FASB said in its “Interpretation of FASB Statement No. 87.”  

Conspicuously left out of FASB’s elaboration on cash balance plans is how companies should attribute the cost of benefits earned to periods of service for plans that do not define annual retirement benefits in relation to salary and years of service.   This issue has been brought to the forefront in ongoing court battle over how IBM Corp handled its conversion from a traditional to a cash balance plan (See  IBM Cash Balance Judge: Plaintiffs Due Retroactive Benefits ). FASB promises future guidance on the subject as it continues its review of FAS 87.

What was in the interpretation was the decision reached at FASB’s March 3 board meeting, in which the Norwalk, Connecticut-based regulators decided that cash balance plan pension obligations should be measured using a “hybrid approach” rather than the current methodology or the separation approach.

Under the FASB’s interpretation of the “hybrid approach,” companies would employ the one of two measurements for their plans obligations depending on the type of interest rate utilized.   For plans with a fixed interest crediting rate, the obligation would be measured by projecting forward the plan participants’ notional account balances at the fixed crediting rate.   The result would then be discounted using a discount rate determined in accordance with provisions of FAS 87.

The other method, for plans with a variable interest crediting rate, the obligation would be measured by reference to the notional account balance.   Using this method, companies are not to project and discount the notional account balance.

Going forward, FASB has plans to discuss other cash balance related issues including disclosures, transition, and an effective date at future board meetings.   Plan sponsors can then expect an Exposure Draft to be issued in the second quarter of 2004 and a final statement by the fourth quarter of 2004.   In the meantime, “Interpretation of FASB Statement No. 87” is available at  http://www.fasb.org/project/interpretation_st87.shtml.   It should be noted that FASB’s Interpretation is merely a summary of Board decisions and does not change current accounting regulations.