A new accounting standard requiring a breakdown of the components of net benefit cost will become effective for public companies beginning in 2018.
Public companies (or “non-public entities”) will no longer be exempt from these disclosures. However, the FASB has provided a simpler disclosure requirement than that for public companies, and has provided an additional year for non-public entities to adopt the new standard.
Under current GAAP, the components of net benefit costs relating to defined pension plans, other post-retirement pension plans, and certain other post-retirement benefit plans were aggregated for reporting in the financial statements. Stakeholders called on the FASB to require disclosure of the components of net benefit cost to enhance transparency, with investors and others stating the disaggregated information would be relevant to their decision making.
The new standard, Accounting Standards Update No. 2017-07, amends the FASB’s Accounting Standards Codification Topic 715 on compensation by including a new section on “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which specifies new disclosures required by public and non-public entities relating to the components of net benefit cost.
Breakdown of components of net benefit cost
ASU 2017-07 will require that an employer:
- report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period;
- report the other components of net benefit cost (as defined in paragraphs 715-30-35-4 and 715-60- 35-9 of FASB’s Accounting Standards Codification) by presenting them in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.
If separate line items are used to present the other components of net benefit cost, those items must be appropriately described. If separate line items are not used, the line items used in the income statement to present the other components of net benefit cost must be disclosed.
Limited eligibility for capitalization
The FASB also specifies that “only the service cost component (will) be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset).”
Removal of non-public entity exemption
The FASB’s Basis for Conclusions explains the board’s rationale in deciding to remove the exemption for related disclosures by non-public entities, including that the Board consulted the decision criteria in paragraph 3.2 of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies in deciding whether to continue to allow an exemption of alternative treatment for nonpublic entities.
“In the Board’s view, exemption from disclosing the components of net benefit cost does not automatically warrant an exemption from the changes in presentation of net benefit cost,” states the FASB. “The cost of a pension or other post-retirement benefit is not changed by whether an entity is public. … The Board further noted that the amendments in this Update will affect amounts and metrics on which users of nonpublic entities focus.”
Based on all the considerations above and others detailed in the Basis for Conclusions, the FASB decided not to allow an exemption, but did decide on a simpler disclosure requirement for non-public entities.
Two board members dissent
Two of the FASB’s longest-standing board members — former SEC Chief Accountant and current FASB Vice Chair Jim Kroeker and FASB member Larry Smith — dissented from issuance of the new standard, which was approved by a 5-to-2 vote.
Kroeker provided a dissenting statement, stating he would have preferred this project to have been taken up with FASB’s larger project on performance reporting. Smith cited the potential impact of this standard on rate-regulated entities, as well as other matters noted by Kroeker.
Effective date and transition
The effective dates are as follows:
- For public companies: Effective for annual periods beginning after Dec. 15, 2017, including interim periods within those annual periods.
- For non-public entities: Effective for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.
Early adoption is permitted as of the beginning of an annual period for which financial statements have not been issued — or, in the case of non-public companies, “made available for issuance.”
The FASB also reminds preparers, auditors, and others who use or apply its standards that “(d)isclosures of the nature of and reason for the change in accounting principle are required in the first interim and annual periods of adoption.”
Requirements for companies to transition to the new standard include that the amendments in the new standard should be applied:
- retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement, and
- prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.
The FASB provides a practical expedient in ASU 2017-07, which “permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements.”
The accounting standard-setter adds, “Disclosure that the practical expedient was used is required.”
More information can be found by referring directly to ASU 2017-07. For up-to-date information on changes in accounting and auditing standards, professional ethics, and soft skills as well, see the MACPA’s upcoming events, including the Employee Benefit Plan Conference on May 15, available in-person and via simulcast, online CPE catalog, and CPE calendar.