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FASB Pitches Reporting Improvements for Pensions

Jan 27th 2016
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The Financial Accounting Standards Board (FASB) proposed changes to current accounting guidance on Jan. 26 that is geared toward improving financial reporting of defined benefit pension and other post-retirement benefit plans.

The proposed Accounting Standards Update, CompensationRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, would provide additional guidance on the presentation of the components of net periodic pension cost and net periodic post-retirement benefit cost in the income statement, and on the components eligible for capitalization in assets.

Currently under US GAAP, net benefit cost comprises many components that reflect different aspects of a company's financial arrangements, as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements.

Financial statement users have told the FASB that the current presentation of defined benefit cost on a net basis combines elements that are distinctly different in their predictive value, resulting in financial statements that are more opaque and less useful to investors and other users.

Also, users of financial statements said that service cost is analyzed differently and has different predictive value than other components of net benefit cost.

Under the proposed guidance, an employer would be required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the applicable employee during the period, according to the FASB. 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. In addition, 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.

The proposed guidance also would allow only the service cost component of net benefit cost to be eligible for capitalization.

Now, on to disclosure requirements. Proposed Accounting Standards Update, CompensationRetirement BenefitsDefined Benefit PlansGeneral (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans, would make disclosures related to defined benefit plans more helpful for financial statement users by adding requirements related to other relevant information. The new disclosure requirements that would be added include:

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

Under the proposed guidance, the following disclosure requirements would be removed:

  1. The amount of the pension accumulated benefit obligation.
  2. The aggregate pension accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets.
  3. The amount and timing of plan assets expected to be returned to the entity.
  4. The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law.
  5. Related-party disclosures about the amount of future annual benefits covered by insurance and annuity contracts, and significant transactions between the employer or related parties and the plan.
  6. The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year.
  7. For nonpublic entities, the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities would be required to disclose the amounts of transfers into and out of Level 3 of the fair value hierarchy and purchases of Level 3 plan assets.

Comments on both proposed Accounting Standards Updates are due by April 25. Instructions on how to submit comments are included in both exposure drafts.


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