The Financial Accounting Standards Board has released an update to improve the financial reporting on pensions and other post-retirement benefits.
The changes in the accounting standards update released Friday by FASB pertain to the presentation of defined benefit costs in the income statement.
Under U.S. GAAP, the defined benefit pension cost and the post-retirement benefit cost (net benefit cost) include a number of components that reflect various aspects of an employer’s financial arrangements, along with the cost of the benefits given to employees. Those components are supposed to be aggregated when they are reported on the financial statements.
However, FASB heard from many of its constituents that the presentation of defined benefit cost on a net basis combines elements that can be quite different. They argued the current presentation requirement is not as transparent as it should be and it decreases the usefulness of the financial information. They contended that it required users to incur bigger costs when they analyzed financial statements.
The new accounting standards update is supposed to address these issues. It requires a reporting organization to separate the service cost component from the other parts of the net benefit cost for presentation purposes. The update also includes specific guidance on how to present the service cost component and other parts of the net benefit cost within the income statement. On top of that, it permits only the service cost component of net benefit cost to be eligible for capitalization.
The changes are effective for public companies for annual periods beginning after Dec. 15, 2017, including interim periods within them. For other entities, the amendments take effect for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019. Early adoption is allowed, within certain parameters. See the FASB accounting standards update for more information.
Moody's Investors Service issued a statement Friday praising the new standard. “The change to pension expense classification on the income statement provides a more authentic view of the operating income,” said Moody’s accounting analyst Kevyn Dillow. “Pension expense includes many components, but only the service cost component is a true period expense. Historically, Moody’s and many other financial analysts manually adjusted the non-service cost components of pension expense out of operating income in line with the FASB’s change to presentation. After adoption of the new accounting standard, companies reporting will require less manipulation and be more useful for financial analysis.”
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