The Financial Accounting Standards Board has issued an exposure draft on Compensation—Retirement Benefits (Topic 715) Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The amendments in the proposed update would require a defined benefit (DB) plan sponsor to report the service cost component of retirement and postretirement benefit costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. 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.
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 amendments in the proposed update also would allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset).
The FASB explained that under generally accepted accounting principles (GAAP), defined benefit pension cost and postretirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements. Topic 715, Compensation—Retirement Benefits, does not prescribe where the amount of net benefit cost should be presented in an employer’s income statement and does not require entities to disclose by line item the amount of net benefit cost that is presented in the income statement or capitalized in assets.
According to the FASB, many stakeholders have observed that the presentation of defined benefit cost on a net basis combines elements that are distinctly different in their predictive value. As such, these stakeholders have stated that the current presentation requirement has less value and requires users to incur greater costs in analyzing financial statements. The reduced transparency in the presentation of net benefit cost also reduces the usefulness of financial information.
The full exposure draft and instructions for making comments is here