FASB Improves Employer Pension & Postretirement Plan Accounting

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans last week, making it easier for users of financial information to understand and assess an employer’s financial position and its ability to fulfill benefit plan obligations. The new standard requires that employers fully recognize those obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. It amends Statements No. 87, 88, 106 and 132R.

“Previous standards covering these benefits went a long way toward improving financial reporting. However, the Board at that time acknowledged that future changes would be needed, and now our constituents share this view,” said George Batavick, FASB member, in the statement announcing the new standard. “Accordingly, today’s standard represents a significant improvement in financial reporting as it provides employees, retirees, investors and other financial statement users with access to more complete information. This information will help users make more informed assessments about a company’s financial position and its ability to carry out the benefit promises made through these plans.”

The new standard requires an employer to:

  • Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status.

  • Measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year (with limited exceptions).

  • Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of business entity and in changes in net assets of a not-for-profit organization.

Statement No. 158 applies to plan sponsors that are public and private companies and nongovernmental not-for-profit organizations. The requirements recognize the funded status of a benefit plan and disclosure requirements are effective as of the end of the fiscal year ending after December 15, 2006, for employers with publicly traded equity securities and the end of the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.

Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans was developed in direct response to concerns expressed by many FASB constituents that past standards of accounting for postretirement benefit plans needed to be revisited to improve the transparency and usefulness of the information reported about them. Among the Board’s constituents calling for change were many members of the investment community, the Financial Accounting Standards Advisory Council, the User Advisory Council, the Securities and Exchange Commission (SEC) and others.

The issuing of Statement No. 158 completes the first phase of the Board’s comprehensive project to improve the accounting and reporting for defined benefit pension and other postretirement plans. A second, broader phase of this project will comprehensively address remaining issues. The Board expects to collaborate with the International Accounting Standards Board on that phase.

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