Streamlining of pension disclosure rules moves forward

The Financial Accounting Standards Board (FASB) is moving closer to streamlining the information companies must disclose about the defined benefit pension plans and other postretirement benefits they offer employees.

The board on Feb. 14, 2018, reviewed feedback on Proposed Accounting Standards Update (ASU) No. 2016-210, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. The exposure draft was released for public comment in January 2016 to strengthen the disclosure requirements for pensions and defined benefit plans and get rid of redundant or outdated requirements for the information in financial statement footnotes.

The board agreed to scrap several disclosure requirements that were singled out for deletion in the proposal, but FASB members did not agree to add all the extra disclosures from the proposal.

A narrative description of the reasons for significant gains or losses affecting plan assets could devolve to unhelpful boilerplate, for example, FASB members said. Instead, a majority of the board agreed that companies only would have to describe the reasons for significant gains or losses affecting benefit obligations.

“I still think, on the liability side, it provides some very important context because not all the assumptions are disclosed,” FASB member Christine Botosan said.

The FASB also agreed to not require that private companies disclose the effect of a one-percentage-point increase or decrease in the assumed trend rates for health care costs. U.S. Generally Accepted Accounting Principles (GAAP) currently only requires public companies to make the disclosure.

FASB member Harold Schroeder said he was not convinced that private companies should provide the trend information, even though private companies told the FASB it would not be difficult for them to gather the data.

“We’re hanging our hats primarily on the fact that this is a low-cost, if any cost, addition to private companies, and that, to me, is a little bit troubling,” Schroeder said. “Some people may be surprised [because] I’m always looking for more disclosure. This is more a principle-driven debate: do I think it’s okay to add this when we haven’t proven the benefit to adding it?”

FASB member Marc Siegel also agreed to scrap the proposed requirement.

“I used to get a ton of questions on pensions,” said Siegel, who is a former analyst. “This particular — this 1 percent health care trend rate — was not one that came up. I can’t even remember if it ever came up.”

A majority of the board said the FASB should also remove the requirement for disclosing trends in health care costs for public companies. But FASB Chairman Russell Golden said the board’s research staff would study the requirement to make sure that the loss of the information would not reduce investors’ ability to understand a company’s obligations to employees and retirees.

The proposal also called for getting rid of a disclosure about the amount of the pension accumulated benefit obligation, which measures the present value of benefits owed to employees. But analysts and actuaries told the FASB that the number is useful for evaluating a company’s financial condition because it more closely represents the obligation that could arise if the plan is settled or liquidated or if the amount owed to beneficiaries is reduced through a curtailment.

“I have been convinced that it is clearly useful in several different ways; it is a very useful measure to show that it is close to what the settlement amount would be,” Siegel said. “And with more of these benefit plans being settled or curtailed or whatever, that’s becoming a much more relevant metric to understand.”

All seven FASB members agreed to keep the disclosure intact.

The board had a brief debate about some of the disclosures that companies and investors alike highlighted as no longer relevant. The board confirmed a previous decision to delete some information from the disclosure requirements in FASB ASC 715, Compensation — Retirement Benefits, including:

  • The amount and timing of plan assets expected to be returned to the employer,
  • Disclosures related to the June 2001 amendments of the Japanese Welfare Pension Insurance Law,
  • Related-party disclosures about the future annual benefits covered by insurance and annuity contracts and significant transactions between the employers or related parties and the plan,
  • Amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, and
  • Information nonpublic companies offer about the reconciliation of opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair-value hierarchy of FASB ASC 820, Fair Value Measurement.

Companies with defined benefit plans often say the disclosure requirements in FASB ASC 715 are among the top reasons for unnecessarily lengthening their financial statements. Investors, on the other hand, hold up the standard’s disclosure requirements as an important source of information for what can be major obligations for some companies.

The examination of the pension disclosure requirements is part of the FASB’s larger project to evaluate the footnote disclosure rules throughout U.S. GAAP. The board is developing a framework, or guide, to help a company’s management make decisions about the information that belongs in financial statement footnotes. The effort overlaps with an assessment of the disclosure rules in four areas of U.S. GAAP that are frequent targets of complaints by financial reporting professionals.

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