In light of the growing concern regarding the poor funding levels of many defined benefit multiemployer pension and other postretirement benefit plans, as well as the lack of information on commitments and risks provided by employers that participate in those plans, both the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) have issued exposure drafts that propose significant additional disclosure requirements for participating employers. The FASB's proposed disclosures would be effective for calendar year 2010 financial statements.
Some participating employers are receiving notices from plan sponsors informing them of additional contributions due, or of expected increases in future required contributions. In certain situations, these notices may give rise to a liability that should be recognized. This HRS Insight describes the accounting considerations for employers who participate in one or more defined benefit multiemployer plans, as well as the additional disclosure requirements proposed by the FASB and IASB.
Current Accounting and Disclosure Requirements
Both the FASB and the IASB define a multiemployer plan as a pension or other postretirement benefit plan in which two or more unrelated employers contribute and the assets of the plan are commingled and can be used to provide benefits to employees of the other participating employers. These plans are usually, but not always, pursuant to one or more collective bargaining agreements.
Although both Boards have similar definitions, the accounting treatment differs. Under U.S GAAP, an employer accounts for its participation in a defined benefit multiemployer plan generally as if it were a defined contribution plan. As a result, an employer's costs are generally recognized when contributions to the plan are required to be made, without any accrual of future contributions. If withdrawal from the plan would give rise to a liability and such a withdrawal is probable, the liability should be accrued. If withdrawal is reasonably possible, disclosure of the possible withdrawal liability should be made.
Under International Financial Reporting Standards (IFRS), an employer participating in a defined benefit multiemployer plan should use defined benefit accounting for its share of the plan, unless the information necessary to do so is not available.
As long as the possibility of the employer’s withdrawing from the plan is neither probable nor reasonably possible, disclosure is limited to the actual contribution for the year and a description of the nature and effect of any changes affecting comparability. If applicable, IAS 19 requires a disclosure explaining why the information necessary to perform defined benefit accounting is not available.
Observation: IFRS requires defined benefit treatment unless the information is not available. In practice the majority of employers have disclosed that the information is not available and thus revert to defined contribution treatment, similar to U.S. GAAP.
Accounting Impact of Increased Contribution Notices from Sponsors
As described above, employers that follow U.S. GAAP (and most who follow IFRS) use defined contribution accounting for their participation in a multiemployer plan. Liabilities are accrued for contributions due and unpaid and for withdrawal liabilities when withdrawal from the plan is probable. However, there may be another situation where accrual of liabilities is appropriate.
Some employers have received notices from their multiemployer plan sponsors, describing increases in the employer’s contributions. In some cases, this may be due to new funding rules under the Pension Protection Act of 2006 (“PPA”) that require automatic surcharges on employer contributions to a multiemployer plan in critical status. The PPA describes several scenarios that would cause a multiemployer plan to be in “critical status” including a plan funding percentage that is less than 65%. Once notified by the plan’s actuary that the plan is in critical status, the participating employer is obligated to pay a surcharge equal to 5% of the employer contribution in the first year and 10% for each year thereafter, until a rehabilitation plan is approved under a collective bargaining agreement. Even plans that are not in critical status may be notifying the participating employers that additional funding related to past or future service will or may be required to make up a funding deficit.
Whether a liability should be recognized for the increased future contributions should be determined based on the specific facts and circumstances. The employer is generally required to record a liability under ASC 450 only if contributions are due and unpaid before the financial statement date. For example, if the plan notifies an employer of an increase relating to a catch-up for amounts previously paid for the current year, the employer should record a liability for the increase. Even if the employer is not required to recognize a liability, increases in employer contributions that are reasonably possible should be disclosed under ASC 450.
The following table illustrates a number of potential accounting scenarios for an employer participating in a multiemployer plan:
|Employer has informed the multiemployer plan that it is withdrawing||Employer should recognize a withdrawal liability, since in this case withdrawal is probable|
|After careful consideration of alternatives, employer believes withdrawal is “reasonable possible”||Employer should disclose potential withdrawal liability, since in this case withdrawal is reasonably possible|
|Employer receives a notice in November, 2010 that an additional contribution will be required in January, 2011 to catch up for PPA surcharge related to 2010 (or earlier)||Since the additional contribution is attributable to the prior year's required contribution, the employer should recognize expense and a liability in 2010 for the additional contribution|
|Employer receives a notice in November, 2010 that, starting in 2011, the contribution rate will increase from $0.10 to $0.14 per hour due to the plan’s underfunded status||No requirement to record a liability in 2010 as the increase in contribution rate relates to contributions due in future years. The employer may consider disclosing the increase, but disclosure is not required under current rules|
|Employer receives a notice in October, 2010 that, due to underfunding, it can expect to be billed for annual additional contributions of approximately $1 million per year starting in 2011, until asset values improve to reduce the underfunding||The notice appears to be merely a “budget estimate” of future contribution increases, which would not give rise to a liability in the current period. However, judgment should be applied based on the relevant facts. In particular, consideration should be given as to whether the future amounts specified in the notice are fixed and final, or contingent upon future events and circumstances. |
Proposed Disclosures of Certain Loss Contingencies
On July 20, 2010, the FASB issued an exposure draft of a proposed Accounting Standards Update, Contingencies (Topic 450)—Disclosure of Certain Loss Contingencies. The proposed update would expand the disclosure requirements of ASC 450 to require disclosure of certain remote loss contingencies that would have a potentially severe financial impact on the employer if they were to occur. The exposure draft defines a “severe” impact as an impact that would have a “significantly disruptive effect on the normal functioning of an entity,” which is a higher threshold than “material,” though the impact would not necessarily need to be “catastrophic.”
ASC Subtopic 715-80, Compensation—Retirement Benefits—Multiemployer Plans, currently requires that employers apply the provisions of ASC 450 if withdrawal is either probable or reasonable possible. In addition to the amendments to ASC 450, the proposed update would amend ASC 715-80 by deleting the references to “probable or reasonably possible.” Thus, the proposed update would require employers to disclose information about a potential withdrawal liability if the liability would have a severe financial impact, even if the likelihood of the employer’s withdrawal from the plan is “remote.”
The required disclosures would include qualitative and quantitative information so that financial statement users could better understand the nature, magnitude, and potential timing (if known) of the loss contingency. The FASB expects the disclosure would be more extensive in later reporting periods as additional information about a loss contingency becomes available.
The deadline for public comments on the exposure draft is September 20, 2010.
Proposed US GAAP Disclosures
On September 1, 2010, the FASB issued an exposure draft of a proposed Accounting Standards Update, Disclosure about an Employer's Participation in a Multiemployer Plan, which proposes additional disclosure requirements for employers participating in defined benefit multiemployer plans. The proposed disclosures are in reaction to criticism that current disclosures do not provide enough information about an employer's participation in plans that are often significantly underfunded.
Under the FASB's proposal, an employer would be required to provide several additional quantitative and qualitative disclosures about its participation in a multiemployer plan, including:
- the number of plans in which the employer participates,
- exposure to significant risks arising from its participation in the plan,
- the extent to which the employer can be liable to the plan for other employers’ obligations,
- how benefit levels are determined,
- expected effects of any funding improvement plan or rehabilitation plan,
- any changes affecting comparability from period to period
- total assets and the accumulated benefit obligation of the plan, if obtainable,
- the employer's contributions as a percentage of total contributions to the plan, if obtainable,
- description of contractual arrangements, including current terms, the agreed-upon basis for determining contributions, and any minimum required contributions,
- quantitative information about the employer’s participation, such as number of participants as a percent of total plan participants, percent of employer’s employees covered by the plan, etc.,
- contribution amount for the current reporting period and expected contribution for the next annual period,
- the extent to which a surplus or deficit in the plan may affect future contributions
- details of any agreed deficit or surplus allocation to participating employers on wind-up, and
- the amount that is required to be paid on withdrawal, if obtainable
Although the exposure draft provides exceptions where certain quantitative information is not obtainable (for example, total assets and accumulated benefit obligation of the plan, or amount of withdrawal liability), the employer would be required to provide an explanation of why the information is not available.
Observation: The PPA requires that a multiemployer plan provide information about withdrawal liability, in addition to other plan information, upon written request from a participating employer. However, most multiemployer plans do not determine a withdrawal liability for each employer each year. The requirements to provide information about withdrawal liability as well as the other information required by the proposed disclosure requirements to each participating employer – and to provide this information in time for disclosure in the employer’s financial statements—will mean that multiemployer plan administrators will need to determine whether they have the current capability to provide such information and, if not, develop the requisite systems and processes to do so.
The disclosure requirements would be effective for fiscal periods ending after December 15, 2010 for public entities and December 15, 2011 for non-public entities. The comment period ends November 1, 2010 and the FASB is expected to quickly redeliberate the issues in time for issuance of a final statement before year-end.
Observation: The current provisions of ASC 715-80 apply to local chapters of a not-for-profit entity that participate in a plan sponsored by the national organization, as well as to subsidiaries that participate in the parent’s defined benefit plan. Thus, it appears that in separate financial statements of both not-for-profit entities that participate in national plans and subsidiaries, the proposed disclosures would be required.
IASB Exposure Draft
In April, 2010, the IASB issued an Exposure Draft: Defined Benefit Plans Proposed amendments to IAS 19, which would require more extensive disclosure for employers participating in multiemployer plans. Although the FASB was not working jointly with the IASB on multiemployer plan disclosures, the disclosures proposed by the FASB are very similar to the disclosure requirements previously proposed by the IASB.
Under IFRS, a participating employer that accounts for its proportionate share of the obligations, assets, and cost of the multiemployer plan as participation in a defined benefit plan is required to apply the disclosures required for single-employer defined benefit plans. However, if an employer accounts for its share of a multiemployer plan as if it were a defined contribution plan (similar to U.S. GAAP), the employer also is required to disclose that the plan is a defined benefit plan and the reason why sufficient information is not available to apply defined benefit accounting.