FASB Proposed Changes to Retirement Plan Reporting

Earlier this week, the Financial Accounting Standards Board (FASB) issued two proposed accounting standards updates (ASUs) with the goal of improving financial reporting for pensions and other post-retirement employee benefits. The changes are designed to provide additional transparency and clarity about the financial position of different benefit plans. While these are not permanent changes to the reporting process, it’s important to understand what changes FASB is contemplating and how it will impact your plan audit in the future. To help our clients, prospects and others understand the proposed changes and impact to the financial reporting process; JLK Rosenberger has provided a summary of the key points below.

Defined Benefit Plan ASU

The proposed ASU, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715- 20): Changes to the Disclosure Requirements for Defined Benefit Plans, would modify the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement benefit plans.

FASB’s goal is to make disclosures related to defined benefit plans more useful for financial statement users by focusing on the most relevant information. To accomplish this, they are proposing the addition of certain disclosure requirements to this accounting standard, including:

  • 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 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
  • For private companies, not-for-profit organizations, and employee benefit plans, the effects of a one percentage point change in assumed health care cost trend rates

The amendments in the proposed ASU would also eliminate particular disclosure requirements that stakeholders told the FASB they did not consider important and specify that disclosures about defined benefit pension and other post-retirement benefit plans be disaggregated between domestic and foreign plans.

Presentation of Benefit Cost ASU

The proposed ASU, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, offers amendments meant to improve guidance related to the presentation of defined benefit costs in the income statement and the components eligible for capitalization in assets.

Under U.S. Generally Accepted Accounting Principles (GAAP), net benefit cost encompasses several components that reflect different aspects of an employer’s financial arrangements and the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. However, because these aggregated elements combine figures that are distinctly different in their predictive value, particularly the service cost element, it makes analyzing and understanding the information more costly and results in less useful financial statements.

Under the amendments in the proposed ASU, an employer would break out the service cost component from the other components of net benefit cost to alleviate this concern. The proposed amendments would provide clear guidance on how to present the service cost element as well as other components of net benefit cost in the income statement. In addition, the ASU specifies that only the service cost component of net benefit cost is eligible for capitalization, when applicable.

Contact Us

It’s clear there is a coordinated effort to make the financial reporting of retirement plans more transparent and valuable to the end user. However, since these are just a proposal, FASB is taking feedback through their website until April 25, 2016. To learn more about the proposed changes or for assistance with your retirement plan audit for 2015, JLK Rosenberger wants to help. For additional information contact us at (949) 860-9890 or click here to e-mail us.

 

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