Sample Term Sheet for Real Estate Investment by pbj20508

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									      Workshop 13
 FASB in a Volatile Market

ASPPA Advanced Actuarial Conference
          June 9, 2009

      Richard Kutikoff, F.S.A.
      Pacific Benefit Services

                                      1
                          Agenda

   Who is interested?
   Selection of Assumptions
   Footnote Disclosure
   Review of corporate pension accounting
    Consolidated corporate financial statements
    Impact of asset hedging
   Where is FASB heading?


                                                  2
                    Who is interested?
   CFOs and Senior Management
   Boards of Directors
   Auditors
   Lenders
   Investors
   Wall Street
   Regulators
   Employees




                                         3
                      Large Companies
   P&L and Balance Sheet –usually more important than cash flow
   Multi-year planning
   Scenario testing
   Possible hedging strategies
   Manage pension plan as a separate business line




                                                              4
                  Small & Mid-Sized Companies
   Cash flow and deduction – usually more important than P&L or
    Balance Sheet
   CFO wants to satisfy:
       Bankers – lines of credits
       Regulators – for non-profits
       Potential buyers – if company is being sold or going public (P&L is
        usually important)
   Importance to Consulting Firm
       Large client of firm – revenue
       Client management – usually more sophisticated than small clients
       Prestige / Referrals


                                                                              5
                     Selection of Assumptions
   An old topic revisited
   Importance for financial statements
   Comparison to PPA assumptions

        Mortality         Salary Growth Rate
        Turnover          Expected Long Term Return on Plan Assets
        Retirement        Settlement / Discount Rate
        Form of Benefit
        Others




                                                                     6
                   Selection of Assumptions
                           Mortality

   Same as PPA?
   Must change each year?
   Materiality
   Must justify to auditors




                                              7
               Selection of Assumptions
Turnover, retirement, benefit form & salary growth rate

   Same as PPA?
   Must change each year?
   Materiality
   Must justify to auditors
   Salary growth rate
       consistent with current economic (inflation) assumption for long-term
        return on assets and settlement rate
       include longevity, merit and promotion increases on an individual basis
       ignore current pay freezes?



                                                                                  8
                    Selection of Assumptions
                 Long Term Return on Plan Assets

   Consistent with current economic (inflation) assumption for
    salary growth and settlement rate
   Should additional return be assumed to make up for current
    losses?
       Add 1-2% to reflect current drop (20% to 40%) over 20 years?
       Plausible?
       Conflicts with efficient market theory
   Use building blocks and projected investment mix




                                                                       9
                       Selection of Assumptions
                    Long Term Return on Plan Assets
Example:

            (1)            (2)               (3)              (4)         (5)
           Asset        Allocation      Risk premium        Expected   (2) x (4)
                                        over risk-free rate return

           Stocks          60%               7%              10%         6.00%
           Bonds           35%               2%              5%          1.75%
           Cash             5%               0%              3%          0.15%
                                                                         7.90%
   Assumed risk-free rate (= inflation) = 3%
   Sample risk premiums are used
   Should tie into to disclosure of asset mix
   Note sensitivity to risk premium and allocation
                                                                                   10
                    Selection of Assumptions
                    Settlement / Discount Rate

   Use AA Bond Rates
       Moody’s
       Compare to history of BAA, A, AA, AAA, Treasury Bond Rates




                                                                     11
                               Sample Employer
                         FAS-87 Discount Rate Selection
                            History of Bond Yields
           9%
           8%                                                             A

           7%                                                             AA
Per Cent




           6%                                                             AAA
           5%
                                                                          30 Year
           4%                                                             T Bonds
           3%                                                             FAS-87

           2%                                                             Citigroup
            12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08




                                                                                 12
                                                                       Sample Employer
                                                                FAS-87 Discount Rate Selection
                                                                 History of Bond Yield Spreads
                                       5.0%
Per Cent over 30-year Treasury Bonds




                                       4.5%
                                       4.0%
                                                                                                                              BAA
                                       3.5%
                                                                                                                              A
                                       3.0%
                                                                                                                              AA
                                       2.5%
                                                                                                                              AAA
                                       2.0%
                                                                                                                              FAS-87
                                       1.5%
                                                                                                                              Citigroup
                                       1.0%
                                       0.5%
                                       0.0%
                                              12/99   12/00   12/01   12/02   12/03   12/04   12/05   12/06   12/07   12/08




                                                                                                                                  13
                       Selection of Assumptions
                       Settlement / Discount Rate
   Use Yield Curve
       Selection
            PPA spot rates (full yield curve)
            PPA spot rates (3-segment rates)
            Citigroup rates
       Adjustments
            Rates as of end-of month vs. during month
            Pure bond has lower yield than callable bond
            Reflect higher yield to capitalize of bond pricing inefficiencies (future trading)
       Use single equivalent rate (similar to PPA effective rate) for calculations




                                                                                        14
                                 Sampl e Empl oyer
                        FAS-87 Di scount Rate Sel ecti on
                  Compari son of Ci ti group and PPA Yi el d Curves

           8.0%




           7.5%




           7.0%




           6.5%


                                                                           Citi-12/31/08
Per Cent




           6.0%
                                                                           PPA-Dec 07
                                                                           Citi-12/31/07
           5.5%
                                                                           PPA-Dec 08


           5.0%




           4.5%




           4.0%
                  0       5       10       15     20       25         30
                                         Ye ars




                                                                                           15
                  Disclosure – FAS 132-R
Of interest to:

   CFOs and Senior Management
   Boards of Directors
   Auditors
   Lenders
   Investors
   Wall Street
   Regulators
   Employees

                                           16
                   Disclosure – FAS 132-R

   Projected Benefit Obligation (PBO) and Accumulated Benefit
    Obligation (ABO)
   Beginning-of-year to end-of year reconciliation of PBO & Assets
   Net periodic pension cost by component
   Funded status by component
   Assumptions used
   Expected benefit payments – future years 1, 2, 3, 4, 5, and 6-10
   Next year’s required and expected contribution
   Miscellaneous and unusual items


                                                                17
                     Disclosure – FAS 132-R
   Plan Assets and Investment Return
       Target allocation per cent by category
       Actual allocation per cent by category
       Description of investment policy
       Description of basis used to determine expected return




                                                                 18
                         Disclosure – FAS 132-R
                    Plan Assets and Investment Return
Example:

            (1)        (2)                      (3)         (4)         (5)
           Asset     Target            Risk Premium       Expected   (2) x (4)
                    Allocation         over risk-free rate Return

           Stocks     60%                       7%          10%        6.00%
           Bonds      35%                       2%          5%         1.75%
           Cash        5%                       0%          3%         0.15%
                                                                       7.90%
   Assumed risk-free rate (= inflation) = 3%
   Sample risk premiums are used



                                                                                 19
                        Disclosure – FAS 132-R

   Accumulated Other Comprehensive Income (AOCI) and Other
    Comprehensive Income (OCI)
        AOCI at beginning-of-year, by component*
        OCI during year, by component*
            Reclassification (amortization) of beginning-of-year balances
            New amounts created during year
        AOCI at end-of-year, by component*
        Expected OCI during next year, by component*
            Reclassification (amortization) of beginning-of-year balances
            Not disclosed: New amounts created during year

* Transition Asset/Liability, Prior Service Cost/Credit, Gains/Losses


                                                                            20
                         Disclosure – FAS 132-R
                              AOCI and OCI
Example:                              Total      Transition Prior Service    Gains /
                                                 Asset /     (Costs) /      (Losses)
                                                 (Liability) Credits

   12/31/07 AOCI                      (200)           (50)   (300)           150

   2008 OCI        Reclassified*       75              25       60           (10)
                   Newly established (250)            N/A        0          (250)
                   Total             (175)             25       60          (260)

   12/31/08 AOCI                      (375)           (25)    (240)         (110)

   2009 OCI        Projected
                   Reclassified*        42            (25)      60            7

* Equivalent to amortization of outstanding balance
                                                                                    21
             Disclosure – FAS 132-R / FAS 157
Purpose – Additional information about:

   How investment allocation decisions are made
   The major categories of plan assets
   Significant concentration of investment/asset risk
   How plan assets are valued
   Additional details on valuation of certain (“Level 3”) assets




                                                                    22
               Disclosure – FAS 132-R / FAS 157
                 Additional Information About:
   How investment allocation decisions are made
       Target allocation
       Investment goals
       Risk management practices
       Diversification
       Allowable/prohibited use of derivatives
       Relationship between plan assets and liabilities




                                                           23
               Disclosure – FAS 132-R / FAS 157
                 Additional Information About:
   The major categories of plan assets
       Cash
       Equities (segregated by industry, size or investment objective)
       Corporate Debt
       Government Debt (national, state, local)
       Asset-backed securities
       Derivatives (segregated by type, such as interest rate, foreign exchange,
        equity, commodity, credit, other)
       Mutual funds (segregated by type)
       Real estate
   Description of basis to determine expected return on plan assets

                                                                               24
               Disclosure – FAS 132-R / FAS 157
                 Additional Information About:

   Significant concentration of investment/asset risk
       Concentration in single entity
       Concentration in single industry
       Concentration in single country
       Concentration in single commodity
       Concentration in single mutual fund




                                                         25
SFAS 157 – Fair Value of Assets and Liabilities

    “Fair value is the price that would be received
     to sell an asset or paid to transfer a liability
                in an orderly transaction
              between market participants
               at the measurement date.”




                                                        26
               Disclosure – FAS 132-R / FAS 157
                 Additional Information About:

   How plan assets are valued (fair value hierarchy)
       Level 1 – quoted prices in active markets for identical assets
       Level 2 – use of significant other observable (external) inputs
       Level 3 – use of significant unobservable observable (internal) inputs




                                                                                 27
               Disclosure – FAS 132-R / FAS 157
                 Additional Information About:
   Additional details on valuation of certain (“Level 3”) assets
       Actual return on assets
       Purchases, sales and settlements
       Transfers in and/or out of Level 3
       Information about valuation techniques and inputs
       Information about change in valuation techniques and inputs




                                                                      28
               Fair Value Measurement of Plan Assets
Asset Category                                        Total   Level 1 Level 2 Level 3

Cash                                                 $ 150    $ 150
Equities
-  US large cap growth*                                550      550
-  International mid-cap value*                        325      325
Fixed Income
-  US Treasuries*                                      200      200
-  Corporate bonds*                                    250       50    $200
-  Mortgage-backed securities*                          50               50
Other
-  Equity long/short hedge funds*                       55                     $ 55
-  Other private equity funds*                          45                       45
-  Real estate*                                         75                       75
Total                                                $1,700   $1,275   $250    $175
* Discuss details of each investment, as necessary

                                                                                        29
                      Details of Level 3 Assets
                                     Equity Other Real       Total
                                     Long / Private Estate
                                     Short Equity

Balance at 12/31/08                  $ 40    $ 35    $ 10    $ 85

Return on Assets
- Still held on 12/31/09               (2)      5      3        6
- Sold during 2009                              3               3
Purchases, sales, and settlements      15       2     62       79
Transfers in and/or out of Level 3      2                       2

Balance at 12/31/09                  $ 55    $ 45    $ 75    $175



                                                                     30
                                       Example 1A
                                Basic Accounting Example

                         Balance Sheet - January 1, 2008

         Assets                                    Liabilities/Equity

Cash              300            Loan                                    20
                                 Common Stock (Par)                     100 Equity = 280
                                 Retained Earnings                      180
Total             300            Total                                  300


                            Income Statement - 2008

Net Income                                                               50




                        Balance Sheet - December 31, 2008

         Assets                                    Liabilities/Equity

Cash              350            Loan                                    20
                                 Common Stock (Par)                     100 Equity = 330
                                 Retained Earnings                      230

Total             350            Total                                  350




                                                                                           31
                                     Example 1B
                         Add Minimum Pension Liability (FAS 158)

                              Balance Sheet - January 1, 2008

          Assets                                        Liabilities/Equity

Cash                  300             Loan                                    20
                                      Common Stock (Par)                     100    Equity = 280
                                      Retained Earnings                      180
Total                 300             Total                                  300


                                 Income Statement - 2008

Net Income                                                                    50
Other Comprehensive Loss (Additional "loss" outside of net income)           (90)


                             Balance Sheet - December 31, 2008

          Assets                                        Liabilities/Equity

Cash                  350             Loan                                    20
Additional Asset      (90)            Common Stock (Par)                     100 Equity = 240
                                      Retained Earnings                      230
                                      Accum. Other Comprehensive Income      (90)
Total                 260             Total                                  260




                                                                                                   32
                                          Example 1C
                                  Display of Changes in Equity

             Total      Comp      Retained   Accum. Other    Common
             Equity    Income     Earnings   Comp Income      Stock

1/1/08         280                    180              0         100

Net Income       50         50         50
OCI             (90)       (90)                       (90)             Other Comp Loss (Pension)
                           (40)

12/31/08       240                    230             (90)       100




                                                                                                   33
                                                 Example 2A
                                      2008 Corporate Financial Statements


12/31/2007                        Assets                                            Liabilities & Equity
Balance Sheet
                                           Cash    1,000                Debt                                   20

                                                                        Retained Earnings                     980

                                           Total   1,000                Total                               1,000

2008
Income Statement                        Net Income (Loss)        300


12/31/2008                        Assets                                            Liabilities & Equity
Balance Sheet
                                           Cash    1,300                Debt                                   20

                                                                        Retained Earnings                   1,280

                                           Total   1,300                Total                               1,300

Change                                             Total Common Stock           Retained Earnings          AOCI(L)
in Equity
                                      12/31/2007      980          0                   980                      0

                            Net Income (Loss)         300                              300
                    Other Comp Income (Loss)                                                                    0

                                      12/31/2008   1,280           0                  1,280                     0


                   Profit of 300, before cash bonus

                                                   12/07      12/08
                   Debt / Equity                    2.04%      1.56%
                   Debt / Assets                    2.00%      1.54%
                   Return on Equity                30.61%     in 2008
                   Return on Assets                30.00%     in 2008




                                                                                                                     34
                                           Example 2B
                                2008 Corporate Financial Statements


12/31/2007                         Assets                                           Liabilities & Equity
Balance Sheet
                                            Cash    1,000                Debt                                  20

                                                                         Retained Earnings                    980

                                            Total   1,000                Total                              1,000

2008
Income Statement                        Net Income (Loss)         265


12/31/2008                         Assets                                           Liabilities & Equity
Balance Sheet
                                            Cash    1,275                Debt                                  30

                                                                         Retained Earnings                  1,245

                                            Total   1,275                Total                              1,275

Change                                              Total Common Stock           Retained Earnings         AOCI(L)
in Equity
                                      12/31/2007      980           0                  980                      0

                            Net Income (Loss)         265                              265
                    Other Comp Income (Loss)                                                                    0

                                      12/31/2008    1,245           0                 1,245                     0


                   Profit of 300, after cash bonus of 35
                   Borrowed 10 during year

                                                    12/07      12/08
                   Debt / Equity                     2.04%      2.41%
                   Debt / Assets                     2.00%      2.35%
                   Return on Equity                 27.04%     in 2008
                   Return on Assets                 26.50%     in 2008




                                                                                                                     35
                                         Example 2C
                       2008 Corporate Financial Statements: Pre FAS-158


12/31/2007                       Assets                                               Liabilities & Equity
Balance Sheet
                                       Cash    1,000                      Pension Liability (Acc'd Expense)        20

                                                                          Retained Earnings                       980

                                      Total    1,000                      Total                                 1,000

2008
Income Statement                   Net Income (Loss)              265


12/31/2008                       Assets                                               Liabilities & Equity
Balance Sheet
                                       Cash    1,275                      Pension Liability (Acc'd Expense)        30

                                                                          Retained Earnings                     1,245

                                      Total    1,275                      Total                                 1,275

Change                                        Total Common Stock                  Retained Earnings            AOCI(L)
in Equity
                                12/31/2007       980                 0                   980                        0

                         Net Income (Loss)       265                                     265
                   Other Comp Income (Loss)                                                                         0

                                12/31/2008     1,245                 0                  1,245                       0


                   Profit of 300, after pension expense of 35
                   Contributed 25 to pension plan
                                                                                           Pension Expense
                                              12/07             12/08                          Service Cost         7
                   Debt / Equity               2.04%             2.41%                         Interest Cost       25
                   Debt / Assets               2.00%             2.35%            Expected Return on Assets       (15)
                   Return on Equity           27.04%            in 2008                      Amortizations         18
                   Return on Assets           26.50%            in 2008                                Total       35




                                                                                                                         36
                                          Example 2D
                        2008 Corporate Financial Statements: Post FAS-158
                               "Normal" Investment Environment

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,000                Pension Liability (Acc'd Expense)         20
                                                                      Pension Liability (Addt'l Min Liab)      180
                                                                      Retained Earnings                        980
                                                                      Accum. Other Comp Income (Loss)         (180)
                                         Total   1,000                Total                                  1,000

2008                               Net Income (Loss)           265
Income Statement           Other Comp Income (Loss)             18
                           Other Comp Income (Loss)            (20)

12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,275                Pension Liability (Acc'd Expense)         30
                                                                      Pension Liability (Addt'l Min Liab)      182
                                                                      Retained Earnings                      1,245
                                                                      Accum. Other Comp Income (Loss)         (182)
                                         Total   1,275                Total                                  1,275

Change                                           Total Common Stock           Retained Earnings             AOCI(L)
in Equity
                                 12/31/2007       800            0                   980                      (180)

                           Net Income (Loss)      265                                265
                   Other Comp Income (Loss)        (2)                                                          (2)

                                 12/31/2008      1,063           0                  1,245                     (182)

                                                              12/07                                12/08
                   Pension Plan-PBO                           (500)                                (552)
                   Pension Plan-Assets                         300                                  340
                   Pension Plan-Surplus/(Unfunded)            (200)                                (212)
                                                              12/07                                 12/08
                   Debt / Equity                            20.41%                                17.03%
                   Debt / Assets                            20.00%                                16.63%
                   Return on Equity                         27.04%                                in 2008
                   Return on Assets                         26.50%                                in 2008




                                                                                                                      37
                              Example 2D - Consolidated with Pension Plan
                                 2008 Corporate Financial Statements
                                  "Normal" Investment Environment

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,000                 Pension Liability (PBO)                       500
                            Pension Assets     300
                                                                   Retained Earnings                              980
                                                                   Other Equity                                  (180)
                                     Total   1,300                 Total                                        1,300

2008                             Net Income (Loss)         265
Income Statement             Pension Income (Loss)          (2)


12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,275                 Pension Liability (PBO)                       552
                            Pension Assets     340
                                                                   Retained Earnings                            1,245
                                                                   Other Equity                                  (182)
                                     Total   1,615                 Total                                        1,615

Change                                       Total Common Stock             Retained Earnings             Other Equity
in Equity
                               12/31/2007         800         0                   980                            (180)

                        Net Income (Loss)         265                             265
                    Change in Other Equity         (2)                                                             (2)

                               12/31/2008    1,063            0                  1,245                           (182)

                                                          12/07                                  12/08
                   Pension Plan-PBO                       (500)                                  (552)
                   Pension Plan-Assets                     300                                    340
                   Pension Plan-Surplus/(Unfunded)        (200)                                  (212)
                                                           12/07                                  12/08
                   Total Debt / Total Equity             62.50%                                 51.93%
                   Total Debt / Total Assets             38.46%                                 34.18%
                   Total Return on Total Equity          32.88%                                 in 2008
                   Total Return on Total Assets          20.23%                                 in 2008




                                                                                                                         38
                                           Example 2E
                               2008 Corporate Financial Statements
                          "Terrible" Investment Environment (Unhedged)

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,000                Pension Liability (Acc'd Expense)         20
                                                                      Pension Liability (Addt'l Min Liab)      180
                                                                      Retained Earnings                        980
                                                                      Accum. Other Comp Income (Loss)         (180)
                                         Total   1,000                Total                                  1,000

2008                               Net Income (Loss)           265
Income Statement           Other Comp Income (Loss)             18
                           Other Comp Income (Loss)           (110)

12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,275                Pension Liability (Acc'd Expense)         30
                                                                      Pension Liability (Addt'l Min Liab)      272
                                                                      Retained Earnings                      1,245
                                                                      Accum. Other Comp Income (Loss)         (272)
                                         Total   1,275                Total                                  1,275

Change                                           Total Common Stock           Retained Earnings             AOCI(L)
in Equity
                                 12/31/2007       800            0                   980                      (180)

                           Net Income (Loss)      265                                265
                   Other Comp Income (Loss)       (92)                                                         (92)

                                 12/31/2008       973            0                  1,245                     (272)

                                                              12/07                                12/08
                   Pension Plan-PBO                           (500)                                (552)
                   Pension Plan-Assets                         300                                  250
                   Pension Plan-Surplus/(Unfunded)            (200)                                (302)
                                                              12/07                                 12/08
                   Debt / Equity                            20.41%                                24.26%
                   Debt / Assets                            20.00%                                23.69%
                   Return on Equity                         27.04%                                in 2008
                   Return on Assets                         26.50%                                in 2008




                                                                                                                      39
                             Example 2E - Consolidated with Pension Plan
                                 2008 Corporate Financial Statements
                            "Terrible" Investment Environment (Unhedged)

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,000                 Pension Liability (PBO)                       500
                            Pension Assets     300
                                                                   Retained Earnings                              980
                                                                   Other Equity                                  (180)
                                     Total   1,300                 Total                                        1,300

2008                             Net Income (Loss)         265
Income Statement             Pension Income (Loss)         (92)


12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,275                 Pension Liability (PBO)                       552
                            Pension Assets     250
                                                                   Retained Earnings                            1,245
                                                                   Other Equity                                  (272)
                                     Total   1,525                 Total                                        1,525

Change                                       Total Common Stock             Retained Earnings             Other Equity
in Equity
                               12/31/2007         800         0                   980                            (180)

                        Net Income (Loss)         265                             265
                    Change in Other Equity        (92)                                                            (92)

                               12/31/2008         973         0                  1,245                           (272)

                                                          12/07                                  12/08
                   Pension Plan-PBO                       (500)                                  (552)
                   Pension Plan-Assets                     300                                    250
                   Pension Plan-Surplus/(Unfunded)        (200)                                  (302)
                                                           12/07                                  12/08
                   Total Debt / Total Equity             62.50%                                 56.73%
                   Total Debt / Total Assets             38.46%                                 36.20%
                   Total Return on Total Equity          21.63%                                 in 2008
                   Total Return on Total Assets          13.31%                                 in 2008




                                                                                                                         40
                                            Example 2F
                                2008 Corporate Financial Statements
                            "Terrible" Investment Environment (Hedged)

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,000                Pension Liability (Acc'd Expense)         20
                                                                      Pension Liability (Addt'l Min Liab)      180
                                                                      Retained Earnings                        980
                                                                      Accum. Other Comp Income (Loss)         (180)
                                         Total   1,000                Total                                  1,000

2008                               Net Income (Loss)           265
Income Statement           Other Comp Income (Loss)             18
                           Other Comp Income (Loss)            (20)

12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                         Cash    1,275                Pension Liability (Acc'd Expense)         30
                                                                      Pension Liability (Addt'l Min Liab)      182
                                                                      Retained Earnings                      1,245
                                                                      Accum. Other Comp Income (Loss)         (182)
                                         Total   1,275                Total                                  1,275

Change                                           Total Common Stock           Retained Earnings             AOCI(L)
in Equity
                                 12/31/2007       800            0                   980                      (180)

                           Net Income (Loss)      265                                265
                   Other Comp Income (Loss)        (2)                                                          (2)

                                 12/31/2008      1,063           0                  1,245                     (182)

                                                              12/07                                12/08
                   Pension Plan-PBO                           (500)                                (552)
                   Pension Plan-Assets                         300                                  340
                   Pension Plan-Surplus/(Unfunded)            (200)                                (212)
                                                              12/07                                 12/08
                   Debt / Equity                            20.41%                                17.03%
                   Debt / Assets                            20.00%                                16.63%
                   Return on Equity                         27.04%                                in 2008
                   Return on Assets                         26.50%                                in 2008




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                              Example 2F - Consolidated with Pension Plan
                                  2008 Corporate Financial Statements
                              "Terrible" Investment Environment (Hedged)

12/31/2007                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,000                 Pension Liability (PBO)                       500
                            Pension Assets     300
                                                                   Retained Earnings                              980
                                                                   Other Equity                                  (180)
                                     Total   1,300                 Total                                        1,300

2008                             Net Income (Loss)         265
Income Statement             Pension Income (Loss)          (2)


12/31/2008                      Assets                                            Liabilities & Equity
Balance Sheet
                                     Cash    1,275                 Pension Liability (PBO)                       552
                            Pension Assets     340
                                                                   Retained Earnings                            1,245
                                                                   Other Equity                                  (182)
                                     Total   1,615                 Total                                        1,615

Change                                       Total Common Stock             Retained Earnings             Other Equity
in Equity
                               12/31/2007         800         0                   980                            (180)

                        Net Income (Loss)         265                             265
                    Change in Other Equity         (2)                                                             (2)

                               12/31/2008    1,063            0                  1,245                           (182)

                                                          12/07                                  12/08
                   Pension Plan-PBO                       (500)                                  (552)
                   Pension Plan-Assets                     300                                    340
                   Pension Plan-Surplus/(Unfunded)        (200)                                  (212)
                                                           12/07                                  12/08
                   Total Debt / Total Equity             62.50%                                 51.93%
                   Total Debt / Total Assets             38.46%                                 34.18%
                   Total Return on Total Equity          32.88%                                 in 2008
                   Total Return on Total Assets          20.23%                                 in 2008




                                                                                                                         42
                                          Summary of Financial Ratios


                                               2D                        2E                          2F
Example                            2D                        2E                        2F
                                           Consolidated              Consolidated                Consolidated

Investment Environment                 Normal                         Terrible
Investment Strategy                     N/A               Unhedged                Hedged
                                Company Company + Company Company + Company Company +
Type of Financial Statement       Only   Pension Plan Only   Pension Plan    Only   Pension Plan

Debt / Equity -- 1/1/08          20.41%       62.50%       20.41%      62.50%       20.41%         62.50%
Debt / Assets -- 1/1/08          20.00%       38.46%       20.00%      38.46%       20.00%         38.46%

Debt / Equity -- 12/31/08        17.03%       51.93%       24.26%      56.73%       17.03%         51.93%
Debt / Assets -- 12/31/08        16.63%       34.18%       23.69%      36.20%       16.63%         34.18%

Return on Equity - 2008          27.04%       32.88%       27.04%      21.63%       27.04%         32.88%
Return on Assets -- 2008         26.50%       20.23%       26.50%      13.31%       26.50%         20.23%


Note: "Company Only" financial results reflect company debt, equity, assets and return
      "Company + Pension Plan" financial results reflect total debt, equity, assets and return




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                     Where is FASB Heading?
   Overall corporate accounting – not limited to pension accounting
   Convergence of International Accounting Standards
   General desire for mark-to-market
       Current impact of mark-to-mark on world’s financial system
       Rethinking impact of volatility?
   Income Statement
       Net income? Other comprehensive income?
       Revised format – operating income, investment income, cost of financing
   Balance Sheet – ABO or PBO?
   FASB’s future role?


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CFOs Are Interested!




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