And while they are more complicated and arduous than current requirements, the Financial Accounting Standards Board (FASB) has eased off some of the more speculative projections they had contemplated requiring.
For example, FASB considered, but did not include in its newest proposal, a requirement to disclose sensitivity information about the impact on net periodic benefit cost and the benefit obligation of a hypothetical change in certain assumptions, such as:
- Expected long-term rates of return on assets,
- Discount rates,
- Rate of compensation increase, while holding the other assumptions constant.
FASB said it was concerned that disclosures of hypothetical changes would not provide useful information, because economic conditions and changes therein often affect multiple assumptions. Additionally, it noted that an analysis that varied only one assumption at a time, holding the others constant, could be misleading or misinterpreted (see also FASB Passes on Pension Assumption Change Reporting ).
The proposal was developed in response to concerns expressed by users of financial statements about their need for more information about pension plan assets, obligations, cash flows, and net benefit cost. Users cited the significance of pensions for many entities and the need for more information about economic resources and obligations related to pension plans, according to FASB (see FASB Tightens Pension Reporting Noose ).
FASB is requiring disclosure of information for each “major category” of plan assets, at the broadest level, equity securities, debt securities, real estate, and all other assets. Disclosure by narrower asset categories and additional information about specific assets within a category would be encouraged if that information is expected to be useful in understanding the investment risks or expected long-term rate of return on assets, according to FASB. For each major asset category, the proposal would require:
- Percentage of the fair value of total plan assets as of the date of each statement of financial position presented
- Target allocation percentage or range of percentages, presented on a weighted average basis
- Expected long-term rate of return, presented on a weighted-average basis.
In addition, the proposal would require disclosure of the range and weighted average of the contractual maturities/term of all debt securities.
Also required would be a disclosure of the defined benefit pension plan accumulated benefit obligation, a measure of the pension obligation used to determine the amount of the minimum liability, when the accumulated benefit obligation exceeds the fair value of plan assets.
FASB is also calling for the presentation of a schedule of estimated future benefit payments included in the determination of the benefit obligation, as of the date of the latest statement of financial position presented, for each of the five succeeding fiscal years, as well as the total amount thereafter. Additionally, that presentation should include a separate deduction from the total for the amount representing interest necessary to reduce the estimated future payments to present value.
As part of the additional cash flow disclosures, the FASB proposal is calling for a detail of the employer's contributions expected to be paid to the plan during the next fiscal year (beginning after the date of the latest statement of financial position), with a separate detail of:
- Contributions required by funding regulations or laws,
- Additional discretionary contributions,
- The aggregate amount and description of any noncash contributions.
Under the proposed requirements, employers would also be required to disclose the following key assumptions (separately identifying the assumptions used to measure benefit obligations as of the plan's measurement date and those used to measure net benefit cost or income for the period):
- Assumed discount rates
- Rates of compensation increase (for pay-related plans),
- Expected long-term rates of return on plan assets.
That information would be reported on a weighted-average basis. FASB notes that this would not change the information presently required to be disclosed, but would seek to improve the clarity of the information.
FASB notes that the proposal would retain the more limited disclosures for nonpublic entities required by Statement 132 - and that of the new required disclosures, all would be required of nonpublic entities except for interim-period disclosure of the components of net periodic benefit cost recognized.
Considered, But Rejected
The FASB proposal also notes that it considered, but rejected, a number of other disclosures that were requested by users of financial statements, including:
- A description of investment policies and strategies;
- An explanation of the basis for selecting the expected long-term rate of return on assets assumption;
- The pension benefit obligation and funded status determined on a regulatory basis (for example, Employee Retirement Income Security Act of 1974 [ERISA]);
- The pension benefit obligation and funded status determined on a plan termination basis (for example, the Pension Benefit Guaranty Corporation [PBGC] termination basis);
- The amount and classification of net periodic pension and other postretirement benefit cost or income recognized in the statement of income, showing separately the amounts of net benefit cost or income included in each line item in the statement of income and reported for each period for which a statement of income is presented;
- The number of pension plan participants by group (for example, active, terminated, vested, and retired);
- The amount of benefit obligation by participant group (for example, active, terminated-vested, and retired);
- The weighted-average duration of the benefit obligation;
- Interim-period disclosure of plan assets and benefit obligations;
- A description of participation in multiemployer plans.
The full text of the proposal is at http://www.fasb.org/draft/ed_pension_disclosures.pdf