BK » Topics » EITF 06-4 and EITF 06-10-Split-Dollar Life Insurance

This excerpt taken from the BK 10-K filed Feb 27, 2009.

EITF 06-4 and EITF 06-10—Split-Dollar Life Insurance

In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, “Postretirement Benefits Associated with Split-Dollar Life Insurance Arrangements,” and in March 2007, the FASB ratified EITF 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements.” EITF 06-4 and EITF 06-10 address endorsement and collateral assignment split-dollar life insurance arrangements, respectively, that provide a benefit to an employee that extends to postretirement periods. An endorsement split-dollar policy is owned and


 

104     The Bank of New York Mellon Corporation


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

 

controlled by the employer. However, a collateral assignment policy is owned and controlled by the employee. Both policy arrangements provide that the employer and an employee split the insurance policy’s cash surrender value and/or death benefits.

These EITFs require that the deferred compensation or postretirement benefit aspects of the split-dollar life insurance arrangements be recognized as a liability by the employer because the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits is recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance.

Both EITFs were effective Jan. 1, 2008. The adoption of these EITFs required us to record a net liability, in accordance with SFAS 106, of $21 million with an offsetting debit to retained earnings of $21 million.

These excerpts taken from the BK 10-K filed Feb 28, 2008.

EITF 06-4 and EITF 06-10—Split-Dollar Life Insurance

In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, “Postretirement

Benefits Associated with Split-Dollar Life Insurance Arrangements,” and EITF 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” respectively. EITF 06-4 and EITF 06-10 address endorsement and collateral assignment split-dollar life insurance arrangements, respectively, that provide a benefit to an employee that extends to postretirement periods. An endorsement split-dollar policy is owned and controlled by the employer. However, a collateral assignment policy is owned and controlled by the employee. Both policy arrangements provide that the employer and an employee split the insurance policy’s cash surrender value and/or death benefits.

The EITFs require that the deferred compensation or postretirement benefit aspects of the split-dollar life insurance arrangements be recognized as a liability by the employer because the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits will be recognized based on the substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. At adoption, any net liability recognized will be recorded as a direct adjustment to the beginning balance of retained earnings and reported as a change in accounting principle.

Both EITFs were effective Jan. 1, 2008. The adoption of these EITFs require us to record a liability, in accordance with FAS 106, of approximately $28 million with an offsetting debit to retained earnings of approximately $18 million (after-tax).

EITF 06-4 and EITF 06-10—Split-Dollar Life Insurance

STYLE="margin-top:13px;margin-bottom:0px">In September 2006, the FASB ratified Emerging Issues Task Force (EITF) 06-4, “Postretirement

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Benefits Associated with Split-Dollar Life Insurance Arrangements,” and EITF 06-10, “Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements,” respectively. EITF 06-4 and EITF 06-10 address endorsement and collateral assignment split-dollar life insurance arrangements, respectively, that provide a benefit to an employee that extends to postretirement
periods. An endorsement split-dollar policy is owned and controlled by the employer. However, a collateral assignment policy is owned and controlled by the employee. Both policy arrangements provide that the employer and an employee split the
insurance policy’s cash surrender value and/or death benefits.

The EITFs require that the deferred compensation or postretirement benefit aspects of
the split-dollar life insurance arrangements be recognized as a liability by the employer because the obligation is not effectively settled by the purchase of a life insurance policy. The liability for future benefits will be recognized based on the
substantive agreement with the employee, which may be either to provide a future death benefit or to pay for the future cost of the life insurance. At adoption, any net liability recognized will be recorded as a direct adjustment to the beginning
balance of retained earnings and reported as a change in accounting principle.

Both EITFs were effective Jan. 1, 2008. The adoption of these EITFs
require us to record a liability, in accordance with FAS 106, of approximately $28 million with an offsetting debit to retained earnings of approximately $18 million (after-tax).

FACE="Times New Roman" SIZE="2">SFAS No. 159—Fair-Value Option

In February 2007, the FASB issued SFAS No. 159 (“SFAS
159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS 159 provides companies with an irrevocable option to elect fair value as the measurement basis for selected financial assets, financial
liabilities, unrecognized firm commitments and written loan commitments which are not subject to fair value under other accounting standards. There is a one-time election available to apply this standard to existing financial instruments as of Jan.
1, 2008; otherwise, the fair value option will be available for financial instruments on their initial transaction date. The first re-measurement of existing financial instruments for which the option is elected will be recorded as an adjustment to
retained earnings. For financial instruments for which the election has


 


The Bank of New York Mellon Corporation     65







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been made, changes in the fair value subsequent to initial adoption are recorded in earnings. SFAS 159 also requires companies to provide additional
information that will help investors and other users of financial statements to understand more easily the effect on earnings of the company’s choice to use fair value. In addition, it requires companies to display the fair value of those
assets and liabilities for which they have chosen to use fair value on the face of the balance sheet.

We adopted SFAS 159 along with SFAS 157 on
Jan. 1, 2008. We elected the fair value option for $390 million of existing loans and unfunded loan commitments where the related credit risks are managed utilizing other financial instruments which are fair valued in earnings. This election
better aligns the accounting and reflects our risk management practices. As a result of adopting the fair value option on these loans and commitments, we will record a charge to retained earnings as of Jan. 1, 2008 of approximately $36 million,
after-tax.

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