Improvements Proposed to Accounting for Defined Benefit Plans

In late January 2016, the Financial Accounting Standards Board (FASB) released two proposed accounting standards updates that affect Topic 715, Compensation—Retirement Benefits. One is designed to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost. The exposure draft seeks to clarify where entities report pension-related costs and how the costs are presented within the financial statements. The other addresses disclosure requirements for defined benefit plans.

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

U.S. generally accepted accounting standards (GAAP) requires reporting entities to combine all components of their defined benefit pension cost and the postretirement benefit cost. These include the following components: service cost, interest cost, actual return on plan assets, prior service cost or credit, net gain or loss, and net transition asset or obligation. Stakeholders indicated that aggregating these numbers does not reflect the differences in the components that fall under net periodic benefit costs.

Furthermore, the guidance outlined in Topic 715 does not specify where entities should include net benefit retirement cost in their income statement, nor does it require entities to disclose the amount of net retirement cost presented in the income statement versus the amount capitalized in assets. The current presentation makes information about the costs of an employer's defined benefit retirement and postretirement benefit plans more difficult for financial statement users to analyze.

Proposed Update

Should the proposed update be enacted, all entities with defined benefit plans and other plans subject to Topic 715 would report the service cost component of the plans in the same line item(s) as the other compensation costs that are related to the services provided by the employee during that reporting period. Only the service cost element of the net pension cost would be eligible to be capitalized in assets.

Other components of net benefit cost would be presented outside of the subtotal of income from operations. Any additional line items presented would have to be described in the financial statements. The proposed update provides additional guidance about how to present the other components of net benefit cost as well. Splitting the net retirement benefit cost up between service costs and other costs seeks to address the concern about the lack of transparency in current reporting requirements.

The exposure draft does not contain a proposed effective date; the date will be determined after the FASB has evaluated feedback from its proposed changes. Users can submit comments on the exposure draft until its deadline on April 25, 2016.

Disclosure Requirements

As part of the disclosure framework project, the FASB is looking to make changes to the disclosures for defined benefit plans. The proposed accounting standards update would remove the following from the current disclosure requirements for benefit pension plans or other post retirement plans:

  • The amount of the pension accumulated benefit obligation;
  • 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;
  • The amount and timing of plan assets expected to be returned to the entity;
  • The disclosures related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law;
  • 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;
  • The amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year; and
  • 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.

Other disclosures would be added, including a description of the benefits provided, employees covered and the type of benefit plan formula used. Disclosures would also be necessary to depict the weighted-average interest crediting rate for cash balance plans and others with a promised interest crediting rate; quantitative and qualitative disclosures about assets measured at net asset value using the practical expedient under the parameters in Topic 820, Fair Value Measurement and a narrative description of the reasons for significant gains or losses affecting plan assets or benefit obligations. Nonpublic entities would also have to disclose effects of the one-percentage point change in assumed healthcare cost trend rates, a provision that has previously only applied to public entities. Disclosures would have to be separated into domestic and foreign plans.

Effective Date

Once approved, the changes would be applied retrospectively to the periods presented in the financial statements. There would be an exception for the disclosures related to the assets using the fair value practical expedient; those disclosures would take effect prospectively with the most recent period presented. Comments on these changes are due by April 25, 2016.

For More Information

If you have specific comments, questions or concerns about the proposed changes, please share them with your MHM professional.

Published on February 09, 2016