2.5 Defined Benefit Plans
In some cases, the carve-out entity’s employees participate in one or more
defined benefit plans that are sponsored by the parent entity (or another entity in
the consolidated group that is not part of the carve-out entity). While there is no
specific guidance on accounting for such benefit plans in the carve-out financial
statements, entities typically apply one of two methods: (1) a multiemployer
approach or (2) an allocation approach. Under either approach, the carve-out
entity’s income statement should reflect an allocated portion of the net periodic
benefit cost on the basis of a reasonable allocation method, which should include,
at a minimum, the allocable portion of service costs. The key difference between the
two approaches is whether allocations of the plan’s benefit obligation, plan assets,
and related AOCI balances are included in the carve-out entity’s balance sheet. The
method chosen should be appropriately disclosed in the carve-out financial
statements. Section
2.5.3 discusses considerations related to selecting an approach.
2.5.1 Multiemployer Approach
Use of a multiemployer approach is based on analogy to the guidance in ASC 715-80-35-1 on multiemployer plans, as further described in ASC 715-30-55-62 through 55-64. This guidance describes accounting similar to the accounting a subsidiary would use in its stand-alone financial statements if it participates in a defined benefit plan sponsored by the parent entity for which the plan assets are not segregated and restricted for each participating subsidiary. This approach would not reflect the carve-out entity’s share of the benefit obligation, plan assets, and related AOCI amounts in the carve-out financial statements. An intercompany payable or receivable may be included in the carve-out financial statements depending on the historical approach an employer has used when allocating benefit costs or funding the plan. Under this approach, if the carve-out entity will assume responsibility for a portion of the plan’s benefit obligation, the financial statements should disclose either the benefit obligation and plan assets to be assumed by the carve-out entity or, if that information is not available, the information available for the plan’s aggregate benefit obligation and plan assets before the carve-out transaction.
2.5.2 Allocation Approach
Under an allocation approach, the carve-out entity would reflect its portion of the benefit obligation,
plan assets, and any related AOCI amounts in the carve-out financial statements. This approach may be
more helpful to financial statement users if the carve-out entity will assume part of the benefit obligation
because the carve-out financial statements would include the amount of the benefit obligation to be
assumed by the carve-out entity (and, hence, to be carried forward into future financial statements and
operating results). In accordance with ASC 845-10-55-1, if a pension obligation is being transferred as
part of a spin-off, an entity must account for such a transfer similarly to how it accounts for a division
of a pension plan that was previously part of a larger pension plan. For both pension and other
postretirement defined benefit plans, it is appropriate for an entity to analogize to this guidance when
preparing the carve-out financial statements.
Example 1 in ASC 845-10-55-3 through 55-9 illustrates this approach. Allocation of both the benefit
obligation and unamortized prior service cost should be based on the individual plan participants for
whom the carve-out entity is assuming a benefit obligation. Net gain or loss included in AOCI is allocated
in proportion to the benefit obligations (1) being assumed by the carve-out entity and (2) staying with
the consolidated entity. Any allocation of plan assets is usually determined in accordance with the sale
or spin-off transaction agreement and may be subject to regulatory requirements such as the Employee
Retirement Income Security Act of 1974 (ERISA). The allocation approach used in the preparation of the
carve-out financial statements should reflect the terms of any such agreement.
2.5.3 Other Considerations
The purpose and the timing of the preparation of carve-out financial statements may be relevant
to the evaluation of which method of accounting for defined benefit plans is most appropriate in a
given set of facts and circumstances. For example, the allocation approach might be considered more
appropriate when there already is an agreement in place between a buyer and seller of a business that
clearly delineates which part of the parent entity’s benefit obligation will be assumed by the buyer. In
other situations, historical carve-out financial statements may be prepared in advance of a transaction
agreement to assist the parent entity in marketing and selling the carve-out business. In the absence of
contractual terms between a buyer and seller that support the structure of the transaction and related
treatment of the benefit obligation, the multiemployer approach might be considered more appropriate.
In the case of legal plan separations in the United States, ERISA includes explicit guidance on how the
plan assets must be allocated. The ERISA calculations may take a significant amount of time, so it may be
necessary for an entity to make a preliminary allocation estimate for the carve-out financial statements
before finalizing the ERISA calculations. If a preliminary allocation is used, the carve-out financial
statements should include a prominent disclosure stating this fact.
An entity should consider whether it is appropriate to highlight this
preliminary estimate in the significant risk and uncertainty disclosure required
by ASC 275-10-50 since the amount recorded in the financial statements could
materially differ from the finalized ERISA allocation. Once the legal separation
takes place, which often occurs contemporaneously with the spin-off, the plan
asset balances would be adjusted to the actual amount of plan assets allocated
to the carve-out entity, typically through equity, unless an agreement between
the entity (or its new owners) and the former parent provides for a different
treatment.
2.5.4 Parent-Entity Considerations
The parent entity should also consider whether, in connection with the potential sale of a business, a curtailment has occurred that should be reflected in the parent’s income statement. In addition, if the parent entity determines that a defined benefit plan will be settled or terminated as a result of the carve-out transaction, the accounting impact of such settlement or termination should be included in the parent’s financial statements when it occurs.