The Financial Accounting Standards Board has issued two proposed accounting standards updates to improve financial reporting by employers related to defined benefit pension and other postretirement benefit plans.
One of the proposed updates, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans, is part of the FASB’s broader disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements by focusing on the information considered to be most relevant to users of financial statements.
As part of that project, FASB decided to re-examine the existing disclosure requirements in certain areas within the context of the proposed disclosure framework. Pensions was one of four areas—including income taxes, inventory, and fair value—to be re-examined.
FASB's sister organization, the Governmental Accounting Standards Board, has also been making changes in the standards for financial reporting on pensions and other post-retirement benefits in recent years, but those apply to state and local governments.
The other proposed update, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, seeks to improve guidance related to the presentation of defined benefit costs in the income statement.
Under U.S. GAAP, defined benefit pension cost and post-retirement benefit cost (net benefit cost) comprise several components that reflect different aspects of an employer’s financial arrangements, as well as the cost of benefits provided to employees. Those components are aggregated for reporting in the financial statements.
FASB said many stakeholders have observed that the current presentation of defined benefit cost on a net basis combines elements that are distinctly different in their predictive value. This makes it more costly for investors and other users to analyze and understand that information, resulting in financial statements that are more opaque and less useful than they could be.
FASB’s proposed accounting standards update aims to address these issues by requiring a reporting organization to separate the service cost component from the other components of net benefit cost for presentation purposes. It also would provide explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement. The proposed ASU would allow only the service cost component of net benefit cost to be eligible for capitalization.
FASB is asking stakeholders to comment on the proposed ASUs by April 25, 2016.