Reorganization of how portions of net periodic cost are recognized in a pension plan sponsor’s income statement is effective for privately held entities beginning after December 15, 2018. Now that the items most sensitive to the interest rate environment are no longer recorded against operating income, the volatile impact of pension and retiree medical plan costs on day-to-day operations is reduced, except in times of extreme interest rate volatility.
These changes were released in March 2017 by the Financial Accounting Standards Board (FASB) in its Accounting Standards Update (ASU) 2017-07. These changes were effective a year earlier for publicly traded entities. This brings US GAAP accounting a little closer to international accounting standards.
Only the service cost component (the increase in the projected benefit obligation due to employees’ service during the current year) is still reported in operating income with compensation-related costs. The other components will be reported in other income (expense), outside of any subtotal of income from operations.
This separation of some pension costs from operating costs may open the door to considering new strategies. Here are some examples:
The administrative expenses move out of operating cost if the load is applied against expected asset return rather than added to service cost.
A granular approach to determine discount rate can be considered, which could reduce service cost (and operating expense as well). The offsetting increases in loss amortization are not a concern since they no longer would affect operating income.
For plans reporting expected return on assets, plan sponsors can evaluate asset allocations without concern for the impact on operating income.
Risk transfer, plan freeze, and retirement windows could be more attractive since the one-time charges no longer will flow through the income statement.
The ASU presented little difference in year-end disclosures as most of the changes are currently included in the presentation of items in those disclosures.
Early adoption is permitted, and many sponsors have adopted these changes already. If you need assistance with the new standards, contact the Findley consultant you normally work with or contact Paul Gibbons at Paul.Gibbons@findley.com or 216.875.1921.
On August 28, the Financial Accounting Standards Board (FASB) issued changes in the disclosure requirements for employers who sponsor defined benefit pension or other postretirement plans.
The changes are aimed to improve the effectiveness of financial statement disclosures by eliminating the requirement for certain disclosures that FASB no longer considers cost beneficial, and requiring new disclosures for ones that FASB considers relevant. FASB does not anticipate significant cost increases because of the changes since the information shown in the newly required disclosure should be readily available.
The changes to Accounting Standards Codification (ASC) 715-20 are as follows:
The following disclosure requirements are removed:
The amounts in accumulated other comprehensive income expected to be recognized into net periodic cost for the following fiscal year.
The amounts and timing, if any, of assets expected to be returned to the employer.
Material related to the June 2001 amendments to the Japanese Welfare Pension Insurance Law.
Material about the future annual benefits covered by insurance or annuity contracts and significant transactions between the employer or related parties and the plan.
For non-public entities, the reconciliation of the Level 3 plan asset hierarchy. There is still a requirement for separate disclosures for non-public entities related to purchases of or amounts transferred into or out of Level 3 assets.
For public entities, the disclosure of a one-percentage-point increase/decrease in the assumed healthcare trend rates on the (a) aggregate of the service and interest costs components of the net periodic benefits costs, and (b) benefit obligation for postretirement healthcare benefits.
The following disclosure requirements are added:
For cash balance and other plans with a promised interest crediting rate, the weighted average of the interest crediting rates.
Explanation of the reasons for significant gains and losses concerning the benefit obligation.
Clarification of disclosure items for entities that have multiple plans, and present aggregate disclosures:
The Accumulated Benefit Obligation (ABO) and fair value of assets shall be disclosed for pension plans with assets less than the ABO.
The Projected Benefit Obligation (PBO) and fair value of assets shall be disclosed for pension plans with assets less than the PBO.
The Accumulated Postretirement Benefit Obligation (APBO) and fair value of assets shall be disclosed for postretirement plans with assets less than the APBO.
These changes are effective for public entities for fiscal years ending after December 15, 2020; December 15, 2021 for all other entities. Early adoption is permitted.
To learn more about next steps for your plan, contact David Davala, 216.875.1923 or David.Davala@findley.com or the Findley consultant you normally work with.