According to Stoler, many employers are currently reviewing the state of their pension/Other Post-Employment Benefits (OPEB) plans and the related accounting. He explains that Pension/OPEB literature permits certain deferral techniques in measuring expenses. He notes there are two ways to change the policy:
• Policy 1: Market-related value of plan assets (MRV) allows changes in asset values to be smoothed over five years.
• Policy 2: Gains and losses on changes in plan assets or obligation that differ from assumed allows employers to amortize only the amounts outside of the “corridor” and must be spread over the average of the employee service period.
If a sponsor decides to make a change in his or her policy for MRV or gain/loss recognition, it is a change in accounting principle. They will need to make sure they apply the change to all pension plans within the company, and not just select plans. However, when making changes, it does not need to be applied to both pension and OPEB plans.
When making accounting changes, these changes must be applied retrospectively to all prior periods represented within the plan, and computations may need to be applied for all years back to the initial application of ASC715.
Stoler adds that companies that have made these accounting changes have noted the following benefits from doing so:
- Transparent reporting of pension/OPEB is easier to understand;
- It allows for alignment of financial reporting with economics of the plan;
- Deferred losses are put behind;
- Future earnings are not hindered by amortization charges;
- Volatility may be highlighted with a non-GAAP earnings measure; and
- It is closer to IFRS accounting.