1. Insights
from People and Organization
www.pwc.com
FASB proposes improvements to the
financial reporting of pension and
OPEB benefits
February 2, 2016
In brief
On January 26, 2016, the Financial Accounting Standards Board (FASB or the Board) released two
proposed Accounting Standard Updates (ASUs or proposals) to improve employers financial reporting of
pension and other postretirement benefit (OPEB) plans, related to (1) the presentation of net periodic
pension and net periodic postretirement benefit cost (net benefit cost) and (2) disclosure requirements
for defined benefit plans.
The FASB proposed disaggregating the service cost component from the other components of net benefit
cost and presenting the service cost component with the reporting of other compensation cost for
employees providing service during the period. Further, the service cost component would be the only
amount capitalizable in assets. The other components of cost would be presented outside of operating
results (if applicable).
The FASB proposed eliminating certain disclosure requirements that are not considered useful, and
adding new disclosure requirements to provide additional information to meet the overall disclosure
objectives.
Comments on both proposals are due by April 25, 2016.
In detail
Background
Net benefit cost includes several
components, including current
period employee service cost,
interest cost on the obligation,
expected returns on plan assets,
and amortizations of various
amounts deferred from previous
periods. Each represents a
different aspect of a pension or
OPEB arrangement. Current
accounting requires these
components be aggregated and
reported as a net amount.
The FASB received feedback
from some stakeholders that
this aggregate presentation
combines elements that are
distinctly different in their
predictive value. As a result, this
presentation provides less value,
reduces transparency, and
requires users to incur greater
costs in analyzing financial
statements.
Additionally, as part of its
disclosure framework project,
the FASB reviewed and assessed
the current disclosure
requirements for defined benefit
plans with the goal of improving
the disclosure in the notes of
financial statement by providing
information that is most useful.
2. Insights
2 pwc
Presentation of net benefit cost
The FASB is proposing changes to the
presentation of the net benefit cost in
an effort to improve the transparency
and usefulness of financial
information. Under the proposal,
sponsors of defined benefit plans
would be required to:
1. disaggregate the service cost from
the other components of cost and
report the service cost component
with the reporting of other
compensation cost for employees
providing service during the
period,
2. present the other components of
cost outside of operating results (if
applicable), and
3. capitalize only the service cost
component (for example, as a cost
of inventory or a self-constructed
asset).
If a company will use a separate line
item or items to present the other
components of net benefit cost, that
line item or items would need to be
appropriately described.
The FASB is not changing any of the
recognition and measurement
provisions of employer’s current
accounting of defined benefit plans.
Observation
The proposed changes will affect all
companies that sponsor pension and
OPEB plans, but companies that
capitalize net benefit cost will be most
affected since only service cost will be
capitalized.
Companies should consider the
impact these changes will have on its
systems and processes, and consider
the impact on margins of only
capitalizing the service cost
component or of only including
service cost in operating results.
Companies may be considering
making other changes to accounting
for pension and OPEB plans, such as
adopting immediate recognition of
gains and losses, or changing the
manner in which discount rates are
used to calculate service cost and
interest cost. We encourage
companies to consider how these
changes would be impacted by the
proposed amendments.
Effective date and transition
The proposed amendments would be
applied retrospectively for the
presentation of service cost and the
other components of net benefit cost,
and prospectively for the
capitalization of service cost. The
effective date and whether early
adoption would be permitted will be
determined after the Board considers
the feedback received.
Defined benefit plan disclosures
The proposed amendments are
intended to align disclosure for
defined benefit plans with the FASB’s
broad disclosure objectives from its
conceptual framework, as part of its
separate disclosure framework
project. FASB believes the objectives
of the defined benefit plan disclosures
would be more clearly articulated
under the proposal.
Importantly, the proposal would also
clarify that materiality should be
considered when assessing the
disclosure requirements and would
emphasize that entities can use
appropriate discretion.
Observation
Many Companies believe that, to the
extent an accounting topic includes
phrases such as ‘an entity shall
disclose at a minimum…,’ that
judgment cannot be applied in
‘scaling’ the disclosure or omitting
certain disclosures, even if not viewed
to provide material information. This
amendment would clarify that these
materiality judgments are permitted
and appropriate.
The FASB proposed eliminating
disclosure requirements that are not
considered useful, and adding
disclosure requirements that would
provide additional useful information
to meet the overall disclosure
objectives.
The FASB proposed eliminating the
following disclosure requirements:
1. Amount of the pension
accumulated benefit obligation
(ABO),
2. Aggregate ABO and aggregate fair
value of plan assets for pension
plans with ABO in excess of plan
assets,
3. Amount and timing of plan assets
expected to be returned to the
entity,
4. Disclosures related to the June
2001 amendments to the Japanese
Welfare Pension Insurance Law,
5. Related party disclosures about the
amount of future annual benefits
covered by insurance and annuity
contracts, and significant
transactions between the employer
or related parties and the plan,
6. Amounts in accumulated other
comprehensive income expected to
be recognized as components of
net benefit cost over the next fiscal
year, and
7. For nonpublic entities, the
reconciliation of the opening
balances to the closing balances of
plan assets measured on a
recurring basis in Level 3 of the fair
value hierarchy. However, these
entities would be required to
disclose the amounts of transfers
into and out of Level 3 of the fair
3. Insights
3 pwc
value hierarchy and purchases of
Level 3 plan assets.
The FASB proposed requiring the
following new disclosure
requirements:
1. Description of the nature of the
benefits provided, employee
groups covered and the type of
benefit plan formula,
2. Weighted-average interest
crediting rate for cash balance
plans and other plans with a
promised interest crediting rate,
3. Quantitative and qualitative
disclosures required by ASC 820,
Fair Value Measurement, about
assets measured at net asset value
(NAV) using the NAV practical
expedient,
4. 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,
6. For nonpublic entities, 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 benefit costs
and the benefit obligation for
postretirement health care benefits
(a disclosure already required for
public entities).
Observation
While the proposed disclosure
changes will impact all companies
that sponsor pension and OPEB
plans, the FASB does not anticipate
that companies will incur significant
cost related to the changes. The
elimination of certain requirements
would provide some relief to
employers, but the proposal would
require new disclosures that may
take some effort to prepare (e.g., the
quantitative and qualitative
disclosures about plan assets
measured at NAV).
Effective date and transition
These proposed amendments would
be applied retrospectively to all
periods presented, except for the
qualitative disclosures about plan
assets measured at net asset value,
which would only be required
beginning with the period of adoption.
The effective date and whether early
adoption would be permitted will be
determined after the Board considers
the feedback received.
Next steps
The comment period is open until
April 25, 2016, and we encourage you
to provide the Board feedback on the
changes and concerns or potential
unintended consequences.
The takeaway
The proposed changes to presentation
of net benefit cost and disclosures for
defined benefit plans may be coming
soon. While the changes may improve
the financial reporting of pension and
OPEB plans, there will be implications
of these changes that companies will
need to consider.
