FASB Considering Changes to Presentation and Disclosure of Defined Benefit Plans

The FASB is considering changes to the presentation and disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. In January, the FASB issued two proposals aimed to address:

• Requiring an employer to present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period.
• Improving disclosures of defined benefit plans by eliminating certain disclosures and adding additional disclosures

Comments on the FASB’s proposal were due by the end of last month and FEI’s committees on Benefits and Finance and Committee on Corporate Reporting filed a joint letter expressing their views on the proposal. Click here for a copy of the comment letter.

Allocation of net-periodic benefit cost

Key to the FASB’s proposal is the notion of separating various components of net periodic benefit cost that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits provided to employees. Those components include (1) service cost, (2) interest cost, (3) actual return on plan assets, (4) prior service cost or credit, (5) net gain or loss, and (6) net transition asset or obligation.

Under today’s accounting¹, these elements are combined and reported through income as a single line item. Furthermore, today’s accounting does not prescribe where the amount of “net periodic 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 presented in the income statement or capitalized in assets.

Under the FASB’s proposed guidance, the service cost component of net periodic benefit cost would be pulled out and reported on the same income statement line as other compensation costs. All other components of net periodic benefit cost would be presented in the income statement separately from the service cost component “below-the-line” (i.e., below income from operations). This would better align the FASB guidance with the International Accounting Standards Board guidance on defined benefit plan accounting. However, the FASB would depart from the IASB and only allow the service cost component to be eligible for capitalization.

Disclosure

The amendments in this proposed update would modify the disclosure requirements for employers by removing the requirement to disclose certain elements. In addition, nonpublic entities would no longer have to disclose a reconciliation of opening to closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. However, nonpublic entities would still be required to disclose the amounts of transfers into and out of Level 3 of the fair value hierarchy as well as purchases of Level 3 plan assets.

Additional disclosures would be added including:

1. A description of the nature of the benefits provided, the employee groups covered, and the type of benefit plan formula
2. The weighted-average interest crediting rate for cash balance plans and other plans with a promised interest crediting rate
3. Quantitative and qualitative disclosures from Topic 820, Fair Value Measurement, about assets measured at net asset value using a practical expedient
4. A narrative description of the reasons for significant gains and losses affecting the benefit obligation or plan assets
5. Separate disclosures about domestic and foreign defined benefit plans, and further disaggregation of disclosures if this would provide material information

Nonpublic entities would be required to also disclose the effects of a one-percentage-point change in assumed health care cost trend rates on the aggregate of the service and interest cost components of net periodic benefit costs and benefit obligation for postretirement health care benefits. Public entities are already required to make this disclosure.

Path forward

The Board will be considering comments received and determine whether to move forward with the project in the coming year. As such, preparers should pay attention as it will require planning to address the changes required by the FASB’s proposal appropriately.

¹ ASC 715 Compensation – Retirement Benefits