FASB Proposes Pension Accounting Changes

The Financial Accounting Standards Board (FASB) has proposed changes to reporting requirements for defined benefit (DB) plans and other post-retirement benefits.

In a new publication, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” FASB explains that under generally accepted accounting principles (GAAP), defined benefit pension cost and post-retirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements.

According to FASB, many stakeholders have observed that the presentation of defined benefit cost on a net basis combines elements that are distinctly different in their predictive value. As such, these stakeholders have stated that the current presentation requirement has less value and requires users to incur greater costs in analyzing financial statements. The reduced transparency in the presentation of net benefit cost also reduces the usefulness of financial information.

The amendments in the proposed update would require an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described.

Text of the proposal is here. Comments are due by April 26.

In another publication, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans,” FASB says its objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by generally accepted accounting principles (GAAP) that is most important to users of each entity’s financial statements.

The following disclosure requirements would be added to Subtopic 715-20:

• A description of the nature of the benefits provided, the employee groups covered, and the type of benefit plan formula;
• The weighted-average interest crediting rate for cash balance plans and other plans with a promised interest crediting rate;
• Quantitative and qualitative disclosures from Topic 820, Fair Value Measurement, about assets measured at net asset value using a practical expedient;
• A narrative description of the reasons for significant gains and losses affecting the benefit obligation or plan assets; and
• For nonpublic entities, the effects of a one-percentage-point change in assumed health care cost trend rates (this disclosure is currently required only for public entities).

The proposal also includes disclosure requirements that would be removed from Subtopic 715-20. The amendments in the proposed update would specify that disclosures about defined benefit pension and other post-retirement plans should be disaggregated between domestic and foreign plans.

Text of the proposal is here. Comments are due by April 26.