Pension accounting amendment requires employers to provide details of pension costs

Employers that offer pensions and other retirement benefits will have to highlight the annual and quarterly expenses for covering the benefits under an update to U.S. GAAP the FASB published on March 10, 2017.

Accounting Standards Update (ASU) (ASU) No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, calls for companies and not-for-profit organizations that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each quarter or fiscal year to cover the benefits, in the same line item with other current employee compensation costs. Other components of net benefit cost would be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.

“The amendments in this update improve the consistency, transparency, and usefulness of financial information to users that have communicated that the service cost component generally is analyzed differently from the other components of net benefit cost,” the FASB said.

The update also says the service cost component of the benefit cost is eligible for capitalization.

Public companies must comply with the new requirements for fiscal years that start after Dec. 15, including quarterly periods within those annual periods, the FASB said. All other organizations must follow the accounting changes after Dec. 15, 2018, and for quarterly periods beginning after Dec. 15, 2019. Businesses and organizations will be allowed to adopt the requirements early.

U.S. GAAP lists several components in the overall costs for pensions and other retirement benefits, including service cost. The other components include the interest cost, the return on plan assets, and gains or losses. The components are aggregated, or grouped together, for reporting, but investors and analysts told the FASB they specifically wanted the details about the service cost.

“Many stakeholders observed that the presentation of defined benefit cost on a net basis combines elements that are heterogeneous,” the FASB wrote. “As such, these stakeholders stated that the current presentation requirement is less transparent, reduces the decision usefulness of the financial information, and requires users to incur greater costs in analyzing financial statements.”

FASB Vice Chairman James Kroeker and FASB member Lawrence Smith voted against issuing the update.

Kroeker took issue with the focus on establishing mandatory distinctions related to financial performance for “a limited population of transactions” as opposed to providing meaningful improvements to the transparency of postemployment benefit cost overall. He also wrote that he believed the FASB should defer finalizing the decisions in the project until it finishes its broader research project on financial performance reporting.

“In mandating fundamental performance reporting changes in this piecemeal approach to establishing performance reporting requirements, the board is creating inconsistencies with other accounting standards,” Kroeker wrote.

Smith focused his dissent on the piece of the update that allows only the service cost component of benefit costs to be eligible for capitalization. The change will hurt rate-regulated businesses such as utilities and electric companies, he wrote.

One such business, FirstEnergy Corp. in Akron, Ohio, wrote in an April 2016 letter to the FASB that because net benefit cost represents costs incurred by a company in exchange for the services of employees, all net benefit costs should be eligible for capitalization.

“The proposal, in our opinion, goes beyond simplification by changing the bottom line earnings impact of having and maintaining a benefit plan for employees,” the company wrote.

During a meeting at which FASB members reviewed the feedback on the proposed version of the update, a staffer for the accounting board said utility companies feared that the update will increase the differences in the way their costs are measured under U.S. GAAP versus under regulatory accounting. They feared that the change would complicate their ability to set rates because utilities must receive regulatory approval before they can institute rate increases.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.


We have partnered with Thomson Reuters to issue our monthly Accounting insights. Please feel free to contact Baker Tilly at accounting@bakertilly.com if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.