FAS 88 was issued concurrently with FAS 87 and was meant to be applied within the framework of that standard. FAS 88 describes the accounting to be followed by obligors when all or part of defined benefit pension plans have been settled or curtailed. It establishes employer accounting procedures for benefits offered when employment is terminated.
Settlements include both the purchase of nonparticipating annuity contracts and lump‐sum cash payments. The following three criteria must all be met in order to constitute a pension obligation settlement:
It must be irrevocable
It must relieve the obligor of primary responsibility for the obligation
It must eliminate significant risks associated with the obligation and the assets used to effect it
Transactions that do not meet these three criteria do not qualify for treatment as a settlement under FAS 88. For example, an obligor could invest in a portfolio of high‐quality fixed‐income securities that would provide cash flows of interest and return‐of‐principal payments on dates that approximate the dates on which settlement payments are expected to become due. This would not meet the above criteria, however, because the employer is still primarily liable for the pension obligation and the investment is not irrevocable. Such a defeasance strategy does not constitute a settlement.
Under an annuity contract settlement, an unrelated insurance company unconditionally accepts an obligation to provide the required benefits. The following ...