FASB Issues Proposed Accounting Changes for Pensions and OPEB

March 31, 2006 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB) has issued the draft of proposed rules requiring employers to recognize the overfunded or underfunded positions of defined benefit pension plans and other postemployment benefits (OPEB) in their balance sheets.

According to an FASB news release, the proposal  would also require that employers measure plan assets and obligations as of the date of their financial statements. The FASB’s exposure draft applies to plan sponsors that are with public and private companies and nongovernmental not-for-profit organizations.

A summary from Pricewaterhouse Coopers LLP explains that underfunded plans would be recorded as liabilities, and overfunded plans would be recorded as assets.  In addition:

  • Expense recognition would generally be measured on the same basis as it was under FAS 87, 88, and 106, except transition amortization would be eliminated by a write-off to retained earnings.  
  • Unrecognized prior service cost and actuarial gains and losses would be recorded in other comprehensive income (OCI).  
  • Amortization of the amount in OCI would be “recycled” from OCI into expense under traditional net periodic pension cost recognition guidance in FAS 87 and 106.

For a pension plan, the benefit obligation would be the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation would be the accumulated postretirement benefit obligation. The draft rules would also mandate that plan sponsors disclose additional information in the notes to financial statements about certain effects on net periodic benefit cost in the upcoming fiscal year that arise from delayed recognition of the actuarial gains and losses and the prior service costs and credits.

Current accounting standards for defined benefit pensions and OPEBs allow an employer to recognize an asset or liability in its balance sheet that almost always differs from its overfunded or underfunded positions. They require that information about the current funded status of such plans be reported in the notes to financial statements. That incomplete reporting results because existing standards allow delayed recognition of certain changes in plan assets and obligations that affect the costs of providing such benefits, the FASB said.

The board concluded that the costs of implementing the proposed requirement to recognize the overfunded or underfunded status of a defined benefit postretirement plan in the employer’s statement of financial position would not be significant. That is because the amounts that would be recognized are presently required to be disclosed in notes to financial statements, and, therefore, new information or new computations, other than those related to income tax effects, would not be required, FASB officials asserted.

However, Pricewaterhouse Coopers (PwC) is concerned with the complex implementation issues of the new rules.   Murray Akresh of PwC commented, “Most companies have not focused on the… need to restate five or more years of prior financial statements, including balance sheets, statements of shareholders’ equity, footnote disclosures, and in many cases the income statement as well.  This will take considerable effort, especially for companies with multiple pension/postretirement plans. For example, there will be difficult deferred tax accounting associated with the new charges to shareholders’ equity, including the possible need to set up valuation allowances affecting equity and in some cases net income.”

In December, the FASB gave tentative approval to a plan requiring many US public companies cutting back pensions, retiree health care or other benefits to reflect those moves in their other comprehensive income bookkeeping category (See FASB Rules Pension/Benefit Changes go in OCI).

“Many constituents, including our advisory councils, investors, creditors, and the SEC staff believe that the current incomplete accounting makes it difficult to assess an employer’s financial position and its ability to carry out the obligations of its plans,” said George Batavick, FASB member, in the news release. “We agree. Today’s proposal, by requiring sponsoring employers to reflect the current overfunded or underfunded positions of postretirement benefit plans in the balance sheet, makes the basic financial statements more complete, useful, and transparent. “

Effective Dates

The proposed changes for reporting the funding position of benefits would be effective for fiscal years ending after December 15, 2006. Public companies would be required to apply the proposed changes to the measurement date for fiscal years beginning after December 15, 2006 and nonpublic entities, including not-for-profit organizations, would become subject to that requirement in fiscal years beginning after December 15, 2007.

This proposal would require a public entity that currently measures plan assets and benefit obligations as of a date other than the date of its statement of financial position to implement the change in measurement date as of the beginning of the fiscal year beginning after December 15, 2006. If that entity enters into a transaction that results in a settlement or experiences an event that causes a curtailment in the last quarter of the fiscal year ending after December 15, 2006, the gain or loss would be recognized in earnings in that quarter. Net periodic benefit cost in the year in which the measurement date is changed would be based on measurements as of the beginning of that year, FASB said.

“The Board has issued this proposed Statement to address the concern that existing standards on employers’ accounting for defined benefit postretirement plans fail to produce representationally faithful and understandable financial statements, ” FASB wrote in the draft document. “That is because existing standards do not require an employer to report the current economic status (the overfunded or underfunded status) of a defined benefit postretirement plan in its statement of financial position and because they do not provide for complete recognition in comprehensive income of events occurring during the period….Insufficient guidance in existing standards may cause incomplete reporting of the employer’s financial condition and results of operations, which may lead to the inefficient allocation of resources in the capital markets. This proposed Statement is the first step in a comprehensive project to remedy that situation.

Public Comment Sought

The latest FASB document is the result of the first phase of its project to rethink its existing guidance in Statement No. 87, Employers’ Accounting for Pensions, and Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (See FASB Pushes On With Pension Accounting Standards Rewrite ). A second, broader phase will comprehensively address remaining issues. The board expects to collaborate with the International Accounting Standards Board on that phase.

The board is seeking written comments on the proposal by May 31, 2006 and also plans to hold one or more public roundtable meetings on the proposal on June 27, 2006, in Norwalk, Connecticut.

Input on the proposal, ‘ Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R),’ can be submitted by email to director@fasb.org , File Reference No. 1025-300. Comments may also be sent to the “Technical Director—File Reference No. 1025-300,” Financial Accounting Standards Board 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116.