Employee Benefit Plans

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Chapter 18

• Employee Benefit Plans

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Modifications to Assignments

• Etiquette luncheon
• Friday 3/31 1130 AM
• Professional dress
• RSVP to Karina Galindo 458-6632 or
  karina.galindo_at_utsa.edu
• Revised problems (do them but dont submit)
• P18-6
• P18-9
• Substitution on case
• Read How to Excel at Options Valuation by Baril
  et al. (December 2005 Journal of Accountancy).
• Work problem described as Replacement for Case

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Plans Discussed in this Chapter

• Postretirement benefit plans other than pensions
• Share-based compensation plans.
• Stock award plans
• Stock option plans
• Stock appreciation rights
• Other compensation
• Bonuses, vacation pay, etc.

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Postretirement Benefit Plans Other than Pensions

• Postretirement benefit
• Anything other than pension usually health
  insurance.
• Accounting essentially the same as accounting for
  pension plans.
• EPBO versus PBO versus APBO
• EPBO Expected Postretirement Benefit Obligation
• Equals present value of health care, etc.
  benefits expected to be received by retirees.
• APBOAccumulated Postretirement Benefit
  Obligation
• Equals the portion of the EPBO attributed to
  employee service to date.
• Concept of service cost
• In pensions, service cost reflects additional
  benefits employees earn from an additional year
  of service.
• In health plans, service cost is simply an
  allocation to the current year of a portion of a
  fixed total cost.
• Allocation is from date of hire to eligibility
  date.
• Transition obligation
• Amortization was permitted up to 20 years.
• Since SFAS 106 effective for only 13 years, many
  companies will still be amortizing the transition
  obligation.

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Share-Based Compensation Plans

• Examples
• Stock award plans
• Stock option plans
• Stock appreciation rights

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Share-Based Compensation Plans

• Stock Award Plans
• Shares of stock given (with strings attached) to
  the employee.
• Strings
• Must remain in employment for stipulated period
  or forfeit the shares (service period).

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Share-Based Compensation Plans

• Stock Option Plans
• Gives the employee the right to buy a share of
  stock at a stipulated price (exercise price)
  during some specified period of time (exercise
  period) if employment continues for a stipulated
  period (service period) following the option
  grant.

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Share-Based Compensation Plans

• Compensates the employee by the amount of the
  stock price appreciation subsequent to the grant
  date and through the exercise (or settlement)
  date.

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Share-Based Compensation

• Share-based plans are viewed as creating a
  liability if the employers obligation under the
  plan is settled by transferring cash to the
  employee.
• Most common example is cash-based SAR plans.
• If not liability, then by default viewed as
  giving rise to equity.

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Share-Based Compensation

• For plans viewed as creating equity
• Total compensation to be recognized equals the
  fair value of the equity instrument issued on
  the grant date.
• The total compensation is recognized as
  compensation expense over the required service
  period.
• Must take expected forfeiture into account in
  recognizing compensation expense.

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Share-Based Compensation

• For plans viewed as creating a liability
• Same as for equity plans except total
  compensation is remeasured at each balance sheet
  date until settlement.