United States: Improving Presentation And Disclosure For Defined Benefit Plan Sponsors

Proposed guidance aims to increase transparency


The FASB recently issued a proposed ASU, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, to improve how defined benefit plan sponsors present benefit costs in the income statement. At the same time, the Board also issued a proposed ASU, Changes to the Disclosure Requirements for Defined Benefit Plans, to modify the disclosure requirements for defined benefit plan sponsors.

The Board will determine the effective dates for both proposals and decide whether to permit early adoption after it considers stakeholders' feedback. Stakeholders have until April 25 to comment on the proposals.

Improving presentation of benefit costs

The proposed guidance would require sponsors of defined benefit plans to

  • Present the service cost component of net benefit cost in the same income statement line item(s) as other compensation costs arising from services rendered by employees during the period
  • Present the other components of net benefit cost separately from the service cost component and outside any subtotal of income from operations using an appropriate description

Under the proposed guidance, only the service cost component would be eligible for capitalization (for example, as a cost of internally manufactured inventory or a self-constructed asset).

A departure from net presentation

The proposal to separately present the service component of net benefit cost is contrary to the fundamental principle of net presentation in ASC 715 on retirement benefits.

The Board heard from financial statement users that the components of net benefit cost have different predictive values. Since the service cost component is linked to employee services provided during the current period, users have expressed to the FASB that it is more closely related with an entity's ongoing operations than the other components of net benefit cost.

This issue has become more pronounced recently as a growing number of plan sponsors are electing to recognize gains and losses immediately in earnings, rather than deferring them in accumulated other comprehensive income and applying a corridor approach for recognition.

The Board therefore believes that separately presenting the service cost component provides more relevant information for users when assessing an entity's continuing operating costs.

The Board proposes that employers adopt the amended presentation requirements retrospectively, and the guidance about cost capitalization prospectively.

Updating defined benefit plan disclosure requirements

As part of its broader initiative to improve the effectiveness of disclosures in the notes to the financial statements, the FASB has proposed several amendments to the disclosure requirements for defined benefit plan sponsors.

The FASB reviewed the disclosure requirements for defined benefit plans based on the framework in both the proposed Concepts Statement, Conceptual Framework for Financial Reporting – Chapter 8: Notes to the Financial Statements, and the proposed ASU, Notes to Financial Statements: Assessing Whether Disclosures Are Material. As a result, in addition to explicitly stating that entities must apply the disclosure requirements only to the extent they are material, the Board proposes the following amendments to align the disclosure requirements for defined benefit plan sponsors with the guidance in the Conceptual Framework:

  • Remove the following disclosure requirements:

    • Amount of the accumulated benefit obligation for pension plans
    • Aggregate accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets
    • Amount and timing of plan assets expected to be returned to the entity
    • Information 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
    • Amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year
    • For nonpublic entities only, 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
  • Add the following disclosure requirements:

    • Description of the nature of the benefits provided, employee groups covered, and the type of benefit plan formula used
    • Reasons for significant gains and losses affecting the benefit obligation or plan assets
    • The weighted-average interest crediting rate for cash balance plans and other plans with a promised interest crediting rate
    • Quantitative and qualitative disclosures required under ASC 820 about assets measured using the net asset value practical expedient
    • For nonpublic entities only, the effect of a one-percentage-point change in assumed health care cost trend rates (already required for public entities)

The amendments would specify that disclosures should be disaggregated between domestic and foreign plans.

The Board giveth, the Board taketh away

Although many stakeholders will likely welcome the removal of several disclosure requirements deemed to provide less relevant information to financial statement users, many will simultaneously be focused on the proposed additional disclosures.

Overall, the proposed additional disclosure requirements appear to provide greater transparency for users, and the Board reasoned that incremental costs to preparers would largely be offset by savings due to the removal of other disclosure requirements and the clarification about omitting immaterial disclosures.

The Board has requested feedback from preparers about whether the proposed disclosures would impose significant incremental costs.

The Board proposes that employers adopt the disclosure amendments retrospectively, with the exception of the qualitative disclosure about plan assets measured at net asset value, which would only be required beginning with the most recent period presented in the initial period of adoption.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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