unexpected forfeiture of benefits by workers who had been led to believe they were entitled to them. "Liberal" vesting will not be of any use to a worker if there is no money in the fund to pay him his pension. In the words of Chairman Williams, at hearings on the Retirement Income Security for Employees Act of 1972, on July 20, 1972: It impresses me that some of the greatest tragedies we have seen have been plans with good vesting. . . this is why, if we are going to honestly legislate a requirement of vesting, we can only back it with requirements of funding and insurance for termination . . . to make it real. .. And Senator Javits, at those same hearings, said: There is a strong case for giving the worker the assurance that, at the end of the road, he will get what he wants, what he bargained for. I must say that I cannot see how you can leave out both any provision for funding and provision for insurance. . . and yet expect that we are actually reforming the system. Excerpt from "Opinions of the Accounting Principles Board of the COPYRIGHT 1966 BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS, INC. 66 Opinions of the Accounting Principles Board INTRODUCTION 1. Pension plans have developed in an environment characterized by a complex array of social concepts and pressures, legal considerations, actuarial techniques, income tax laws and regulations, business philosophies, and accounting concepts and practices. Each plan reflects the interaction of the environment with the interests of the persons concerned with its design, interpretation and operation. From these factors have resulted widely divergent practices in accounting for the cost of pension plans. 2. An increased significance of pension cost in relation to the financial position and results of operations of many businesses has been brought about by the substantial growth of private pension plans, both in numbers of employees covered and in amounts of retirement benefits. The assets accumulated and the future benefits to employees under these plans have reached such magnitude that changes in actuarial assumptions concerning pension fund earnings, employee mortality and turnover, retirement age, etc., and the treatment of differences between such assumptions and actual experience, can have important effects on the pension cost recognized for accounting purposes from year to year. 3. In Accounting Research Bulletin No. 47, Accounting for Costs of Pension Plans, the committee on accounting procedure stated its preferences that "costs based on current and future services should be systematically accrued during the expected period of active service of the covered employees" and that "costs based on past services should be charged off over some reasonable period, provided the allocation is made on a systematic and rational basis and does not cause distortion of the operating results in any one year." In recognition of the divergent views then existing, however, the committee also said "as a minimum, the accounts and financial statements should reflect accruals which equal the present worth, actuarially calculated, of pension commitments to employees to the extent that pension rights have vested in the employees, reduced, in the case of the balance sheet, by any accumulated trusteed funds or Accounting for the Cost of Pension Plans 67 annuity contracts purchased." The committee did not explain what was meant by the term "vested" and did not make any recommendations concerning appropriate actuarial cost methods or recognition of actuarial gains and losses. 4. Despite the issuance of Accounting Research Bulletin No. 47, accounting for the cost of pension plans has varied widely among companies and has sometimes resulted in wide year-toyear fluctuations in the provisions for pension cost of a single company. Generally, companies have provided pension cost equivalent to the amounts paid to a pension fund or used to purchase annuities. In many cases such payments have included amortization of past service cost (and prior service cost arising on amendment of a plan) over periods ranging from about ten to forty years; in other cases the payments have not included amortization but have included an amount equivalent to interest (see definition of interest in the Glossary, Appendix B) on unfunded prior service cost. In some cases payments from year to year have varied with fluctuations in company earnings or with the availability of funds. In other cases payments have been affected by the Federal income tax rates in effect at a particular time. The recognition of actuarial gains and losses in the year of their determination, or intermittently, has also caused year-to-year variations in such payments. 5. Because of the increasing importance of pensions and the variations in accounting for them, the Accounting Principles Board authorized Accounting Research Study No. 8, Accounting for the Cost of Pension Plans (referred to hereinafter as the "Research Study"). The Research Study was published in May 1965 by the American Institute of Certified Public Accountants and has been widely distributed. The Board has carefully examined the recommendations of the Research Study and considered many comments and articles about it. The Board's conclusions agree in most respects with, but differ in some from, those in the Research Study. 6. The Board has concluded that this Opinion is needed to clarify the accounting principles and to narrow the practices applicable to accounting for the cost of pension plans. This #1 436 0 - 72 - 4 |