Printer Friendly

FASB 106 standard confirmation request.

Model letter auditors can send to a client's actuary.

One of the important parts of the audit process related to financial statement assertions resulting from the Financial Standards Accounting Board Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, will be the auditor's communication with actuaries. To assist auditors with this communication, the American Institute of CPAs formed a task force of CPAs and actuaries to develop a standard confirmation request an auditor can send to the client's actnary.

Because of the complexity of Statement no. 106, it is important that auditors communicate with actuaries during the planning phase of the audit. Although FASB no. 106's scope includes postretirement benefits other than health care, tMs letter was designed for postretirement health care benefits. Letters to actuaries, if any, that value the other postretirement benefits, such as life insurance, tuition, legal, day care and housing subsidies, should be appropriately modified. Following is the suggested letter:

 (Client's letterhead)
(Name of actuary)

In connection with the audit of our financial statements for the period ending (fiscal yearend) by our independent auditors (name, address), please furnish them a copy of the most recent actuarial valuation report for (name of plan). Ira complete actuarial valuation was not prepared as of (date), please provide any reports or letters that summarize end-of-period amounts. If the information requested below is included in the valuation report, you may refer to the location in your report rather than repeating such information.

A. Please provide a brief description of the following:

1. The participant group(s) (for example, employee, retiree and dependent group[s]) covered, and the types of benefits provided.

2. The provisions of the substantive plan at the beginning of the period used in the calculation of the net periodic postretirement benefit cost for the period.

3. Any changes between the provisions of the substantive plan at the beginning of the period used in the calculation of net periodic postretirement benefit costs and the substantive plan used in the calculation of the accumulated postretirement benefit obligation (APBO) at the disclosure date. Additionally, please specify the following:

a. The disclosure date (which cannot be more than three months prior to the end of the period).

b. How these changes were included in the net periodic postretirement benefit costs for the period.

4. The date and description of plan amendments adopted during the period and whether the amendment(s) were included in items 2 and 3 above.

5. Any participants, benefits or plan terms excluded from the calculations and the reasons for their exclusion.

6. The funding policy for the plan if other than pay-as-you-go.

7. Any significant liabilities other than for benefits.

8. The method and the amortization period, if any, used for amortizing

a. Any transition asset or obligation.

b. Unrecognized prior service cost.

c. Unrecognized net gain or loss.

9. If the plan is funded, provide

a. The amounts and types of securities used to value plan assets.

b. Calculation of fair value of plan assets.

c. The date as of which fair value was calculated.

d. The method of determining the value of any contracts with insurance companies and participation provisions included in the plan assets. 10. The following information relating to the participants' demographic and compensation data used in calculating the APBO and net periodic postretirement benefit cost:

a. The source of the demographic data and the date as of which the data were collected.

b. The following information concerning the participants and their beneficiaries in the following (or a comparable) format. Please indicate any groups of participants excluded from the information.
 Number Compensation
 Participants of persons (if applicable)
 Retirees and beneficiaries eligible for benefits
 Dependents of retirees eligible for benefits
 Active employees fully eligible for benefits
 Terminated employees fully eligible for benefits
 Active employees not fully eligible for benefits
 Other (identify)
 c. Information for the following participants:
 Participants' Age or Date hired
 name or birth or year of
 number date Sex Salary initial eligibility

11. A summary of the per-capita claims costs used in the valuation and the basis for their development, including

a. In employer-specific claims data were used in connection with the development of per-capita claims cost by age, a description of the data, its source and the period from which it was taken.

b. If an external data source was used in connection with the development of per-capita claims costs by age, describe the nature of the external data source and how it was used.

c. The extent to which external data sources were used to adjust the historical claims data.

Please provide the following components of the net periodic postretirement benefit cost for the period (see A.2. above):

1. Service cost

2. Interest cost

3. Actual return on plan assets

4. Other components, net

a. Net asset gain (loss) during the period deferred for later recognitions

b. Amortization of net loss (gain) from earlier periods

c. Amortization of unrecognized prior service cost

d. Amortization of the transition obligation

e. Net total of other components (a+b+c+d)

5. Net periodic postretirement benefit cost(1+2-3+4e)

c. Please provide the following information related to the APBO as of the disclosure date

(see A.3. above):


of period

(transition End of

date)* period

1. Accumulated postretirement benefit obligation (APBO)

a. Retirees and beneficiaries eligible for benefits

b. Dependents of retirees eligible for benefits

c. Active employees fully eligible for benefits

d. Terminated employees fully eligible for benefits


of period

(transition End of

date)* period

e. Active employees, not fully eligible for benefits

f. Other (identify)

g. Total (sum of la-If)

2. Fair value of plan assets

3. Funded status (ig-2)

4. Unrecognized prior service cost

$. Unrecognized net loss (gain)

{. Unrecognized transition obligation (asset)

7. Accrued (prepaid) postretirement benefit cost (3 less items 4-6)

D. Please provide the following information regarding the assumptions used to compute the net periodic postretirement benefit cost and APBO. If a published standard table was used, provide its name.
 Net periodic
 1. General inflation (e.g., CPI)_% _%
 2. Weighted-average discount rate__% __%
 3. Weighted-average rate of compensation increase__%__ %
 4. Weighted-average expected long-term
 rate of return on plan assets__% __%
 5. Estimated income tax rate included
 in rate of return __ % __%
 6. Method used to determine
 market-related value of assets__ % __%
 7. Employee turnover rates by age Describe or attach table
 8. Rates of retirement by age Describe or attach table
 9. Rates of disability by age Describe or attach table
 10. Rates of mortality by age Describe or attach table
 11. Percentage of employees with
 dependents at retirement __ % __%
 12. Spouse age difference __% __%

If participants in this plan are covered by a defined benefit pension plan for which expense is determined in accordance with FASB Statement no. 87, Employers' Account| ing for Pensions, please state whether the above assumptions are consistent with those used in calculations in determining those pension amounts. If not, please explain the difference and the reasons for the difference.
 Net periodic
 cost APBO
 13. Weighted-average administrative expense
(e.g., claims settlement, legal,
accounting, plan administration, etc.)
as a percentage of claims or other
basis for assumption _____ % ____%
 14. Percentage expecting to elect coverage under the plan:
 a. Future retirees __ % __%
 b. Their dependents __ % __%

15. Health care cost trend rates (please provide rates for each year to the ultimate rate) Describe or attach table

a. Please state whether these rates are applicable to gross eligible charges or to net incurred claims cost. If applied to net incurred claims, please state what adjustments were made and what rates are to be shown for disclosure.

b. The effect of a one-percentage-point increase in assumed health care cost trend rate on

c. The aggregate of service and interest cost components of net periodic postretirement benefit costs.

ii. APBO.

16. Please state whether the above assumptions are consistent with the prior period, and, if not, explain the reason for the changes.

17. Please describe any other significant assumptions used in the above measurement and the basis on which they were determined.

E. Please provide a description and the amounts of gains or losses from settlements, curtailments or termination benefits dining the year, such as

1. Purchase of insurance contracts where the risk of benefit payments is fully assumed by the insurance company.

2. Lump-sum cash payments to plan participants.

3. Other irrevocable actions that relieved the employer, plan sponsor or the plan of primary responsibility for a postretirement benefit obligation and eliminated significant risks related to the obligation and assets.

4. Any events that significantly reduced the expected years of future service of employees.

5. Any events that eliminated for a significant number of employees the accrual of defined benefits for some or all of their future service.

6. Any special or contractual termination benefits offered to employees.

F. Please describe any significant events (for example, plant closings) noted subsequent to the current year's measurement date, and the effects of those events, that could materially affect the amounts shown in B or C.

G. If you have been notified of a decision by the plan sponsor to fully or partially terminate the plan, please describe the effect on the APBO and the net periodic postretirement benefit cost.

H. Was all of the information above determined in accordance with FASB Statement no. 106 to the best of your knowledge? If not, please describe any differences.

I. Describe the nature of your relationship, if any, with the plan or the plan sponsor that may impair or appear to impair the objectivity of your work.

J. Indicate your professional qualifications for performing actuarial valuations under FASB Statement no. 106.

Yours very truly,

(Client official)
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:model letter for client's actuary from auditors
Publication:Journal of Accountancy
Date:Nov 1, 1992
Previous Article:Consulting liabilities.
Next Article:B.Z. Lee looks back - and forward.

Related Articles
Before the FASB's OPEB ruling: the first steps to take.
Confirming deposit and investment information of state and local governments.
Auditing postretirement benefits: how to deal with FASB 106.
Accounting for OPEB costs and regulatory assets.
How to handle FASB 112.
POB advisory panel recommends ways to bolster independent audits.
Materiality out in postretirement statements.
A perspective on audit malpractice claims: CPAs can take steps to avoid preventable litigation.
Ask FERF (financial executives research foundation) about ... recent regulatory highlights.
Has 'privilege' lost its reward? Company officials can and sometimes should turn down auditors' requests to turn over privileged documents or waive...

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters