The Pension Protection Act will generate several financial reporting consequences for companies that sponsor defined benefit pension plans, according to an accounting alert published by Deloitte & Touche L.L.P. Dec. 4.

Deloitte's Accounting Alert 06-3 describes three PPA provisions that will affect pension plan sponsors:

• the new Treasury yield curve for determining the funded status of pension plans;

• Removal of a sunset provision in the Economic Growth and Tax Relief Reconciliation Act of 2001 that increases the amount of benefits a qualified defined pension plan can pay; and

•  accelerated vesting for both defined benefit plans and cash balance plans.

The Yield Curve.

The PPA directed the Treasury Department to develop a new yield curve for discounting pension obligations that are used for determining the funded status of a plan, according to Deloitte's alert. The new yield curve will weight three grades of bonds (A, AA, and AAA) equally, regardless of the capacity within each grade, it said.

However, the alert added that the lower of the three grades of bonds to be used--A rated bonds--falls beneath the Financial Accounting Standards Board Emerging Issues Task Force's definition of “high quality” bonds, which currently are required for determining plan discount rates.

EITF Topic D-36, Selection of Discount Rates Used for Measuring Defined Benefit Pension Obligations and Obligations of Postretirement Benefit Plans Other Than Pensions, clarified that “fixed-income debt securities that receive one of the two highest ratings given by a recognized ratings agency should be considered high quality (for example, a rating of Aa or higher from Moody's Investors Service, Inc.).”

According to the Deloitte alert, since the yield curve includes bonds rated below AA, it would not meet the definition of “high quality” as discussed in EITF Topic No. D-36, since it would include single-A-rated bonds. “Accordingly, it would be unusual for entities to be able to support their selection of the discount rate for financial reporting purposes by reference to this yield curve,” Deloitte said.

EGTRRA Provisions.

A provision under tax code Section 415(b), which increased benefit payment levels that a qualified defined benefit plan can pay, would have expired after Dec. 31, 2010, but was made permanent by the PPA, according to the alert. The provision was part of a package of time-limited laws enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 that were made permanent by the PPA.

FASB guidelines required that the previously sunsetting increased benefit payment levels “be factored into the measurement of a plan's benefit obligation and net periodic benefit cost for financial reporting purposes,” the Deloitte alert said.

After the PPA's enactment date of Aug. 17, 2006, the sunset of the increased benefit payment levels should no longer be reflected in benefit obligation and net periodic cost measurements, the alert advised. The permanently extended provision should be assessed as a potential trigger for an interim plan remeasurement, along with consideration of the impact the change will have on a plan's benefit obligation, it said.

Accelerated Vesting.

Deloitte's alert also pointed out that the PPA accelerates the vesting schedules for employer contributions to defined contribution plans and defined benefit cash balance plans. By prescribing that all contributions made by an employer vest at three-year cliff or six-year graded vesting schedules, which currently are used for employer matching contributions, the provisions essentially speed up the five-year cliff or seven-year graded rate of vesting that otherwise would be used for certain other contributions, such as discretionary contributions, the alert said.

The alert said that since cash balance plans are a form of defined benefit plan, they “should be reflected in the measurement of a cash balance plan's benefit obligation for financial reporting purposes under [FASB] Statement 87;” be accounted for as a plan amendment as of the PPA's enactment date; and be assessed as a potential trigger for an interim plan remeasurement of benefit obligation and assets.

By Sheila R. Cherry