Financial accounting and NQDC
Author | Marla J. Aspinwall - Michael G. Goldstein |
Pages | 327-354 |
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CHAPTER XIV
FINANCIAL ACCOUNTING AND NQDC
R. Lee Nunn
Senior Vice President, Aon Hewitt
I. INTRODUCTION
This chapter discusses the accounting for nonqualified benefits, the financing related to
these benefits and corporate taxes related to both the benefits and the financing.
A.
Why Is Accounting Important? Accounting rules attempt to standardize the
process of measuring financial performance, which affects both stock prices and the terms under
which companies borrow money. Stock prices affect investors, potential investors, and
employees whose compensation is tied to employer stock price. Credit ratings affect a
company’s ability to borrow or to borrow at favorable rates. The Sarbanes-Oxley Act raised the
stakes for publicly traded companies by imposing criminal and civil penalties on principal
executive officers and principal financial officers who knowingly certify fraudulent financial
statements.1
When a company considers adopting or changing a nonqualified deferred compensation
plan (or related financing), cash flow analysis and accounting are key components of financial
analysis. Accounting issues relating to nonqualified deferred compensation plans and related
financing can be highly specialized and financial decision makers want to avoid surprises —
especially when plan results vary from assumptions.
B.
Who Decides What the Accounting Rules Are? The Financial Accounting
Standards Board (FASB) is the private sector organization responsible for maintaining financial
standards for nongovernmental organizations in the US. These financial standards are known as
US Generally Accepted Accounting Principles (US GAAP). Both the Securities and Exchange
Commission2 and the American Institute of Certified Public Accountants3 officially recognize
FASB standards. For publicly held companies, Congress gave the SEC the authority to establish
financial accounting and reporting standards under the Securities Exchange Act of 1934.
Although the SEC relies heavily on FASB to establish and maintain accounting standards, the
SEC does have its own rules that apply in addition to FASB’s standards. FASB’s Accounting
Standards Codification now includes some non-authoritative SEC guidance on accounting and
reporting issues. The Governmental Accounting Standards Board (GASB) sets the financial
accounting standards for state and local governments. These governmental accounting standards
are beyond the scope of this book.
1 17 CFR, part 240, Securities Exchange Act of 1934, §§ 240.13a-14(a) and 240.15d-14(a), reflecting
changes made by the Sarbanes-Oxley Act of 2002.
2 SEC Financial Reporting Release No. 1, Section 101, and reaffirmed in the SEC’s April 2003 Policy
Statement.
3 AICPA Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979.
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The International Accounting Standards Board (IASB) is responsible for developing and
publishing International Financial Reporting Standards (IFRS). All major economies across the
globe now plan either to adopt IFRS or to merge their standards (local GAAP) with IFRS. FASB
and IASB have been working toward convergence of US GAAP and IFRS since 2002 and
reaffirmed their mutual commitment to converge the standards in October 2009. The current
strategy is to work jointly to issue new standards that reflect best practices, not necessarily
current US GAAP or IFRS. The application of IFRS to nonqualified deferred compensation is
beyond the scope of this book.
C.
Codification. FASB has reorganized US GAAP into a single source: FASB
Accounting Standards Codification (Codification), which supersedes all previous US GAAP.
The old hierarchy that included Statements (e.g., SFAS 87) down to Technical Bulletins (e.g.,
Technical Bulletin 85-4) is now a unified single source, searchable by topic and cross-referenced
with pre-Codification Standards. FASB intended to codify, not change, US GAAP but
acknowledges that unintentional changes may have occurred. Codification allows constituent
feedback on content in order to identify unintentional changes and to alert FASB on the need for
intentional changes as part of the ongoing standard setting process. The starting point was US
GAAP as of July 1, 2009, but FASB issues Accounting Standards Updates regularly.
FASB has organized Codification by topic in order to simplify its use. For example,
Corporate Owned Life Insurance (COLI) is categorized as an asset under Codification Topic
325 — Investments Other. Investments in Insurance Contracts is Subtopic 325-30. Initial
Measurement of COLI is Section 325-30-30. General guidance on such initial measurement is
paragraph 325-30-30-1. Under the Codification reference system, one number indicates a Topic;
two numbers indicate a Subtopic; three numbers indicate a Section; and four numbers (e.g., 325-
30-30-1) indicate a paragraph. If you know the pre-Codification standard, but can’t find it in
Codification, the FASB website offers an easy cross-referencing tool. This chapter will
reference GAAP according to Codification, not pre-Codification standards.
D.
Financial Statements. The financial statements that reflect accounting results
include not just the Balance Sheet4 and Income Statement.5 Much of the information important
to understanding nonqualified plans and related financing appears only in the Notes to Financial
Statements.6 Likewise, certain changes in benefit obligations and financing appear only in
Comprehensive Income7 rather than the Income Statement. Other elements of the financial
statements, which sometimes reflect nonqualified plans and related financing, are the Statement
of Shareholder Equity8 and the Statement of Cash Flows.9
4 Codification Topic 210.
5 Codification Topic 225.
6 Codification Topic 235.
7 Codification Topic 220.
8 Codification Topic 215.
9 Codification Topic 230.
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