The Financial Accounting Standards Board (FASB) issued a new standard on March 10 that provides additional guidance on the presentation of net periodic pension cost and net periodic post-retirement benefit cost in income statements.
Under GAAP, defined benefit pension cost and post-retirement benefit cost (net benefit cost) comprise several components that indicate 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.
However, Topic 715, Compensation—Retirement Benefits, doesn’t prescribe where the amount of net benefit cost should be presented in an employer’s income statement and doesn’t require companies to disclose by line item the amount of net benefit cost that’s included in the income statement or capitalized in assets.
Stakeholders noted that presenting defined benefit costs on a net basis combines disparate factors. They also stated that the current required presentation is “less transparent, reduces the usefulness of the financial information, and requires users to incur greater costs in analyzing financial statements,” the FASB said.
Thus, Accounting Standards Update (ASU) No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, requires a reporting organization to separate the service cost component from the other components of net benefit cost for presentation.
The ASU also provides explicit guidance on how to present those components in the income statement. And it allows only the service cost component of net benefit cost to be eligible for capitalization.
“The amendments in this ASU improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost,” the FASB said.
The new standard goes into effect for public business entities for annual periods beginning after Dec. 15, 2017, including interim periods within those annual periods. For other entities, the amendments take effect for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.
Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, early adoption should be within the first interim period if an employer issues interim financial statements.