By the end of this year, public companies that offer defined-benefit pension plans will have to disentangle the costs of their plans when they report them on their income statements, according to the Financial Accounting Standards Board.
Prompted by stakeholders who complained that current rules requiring companies to report pension costs on a net basis caused them to meld unlike expense components, FASB issued an accounting standards update on Friday.
“These stakeholders stated that the current presentation requirement is less transparent, reduces the usefulness of the financial information, and requires users to incur greater costs in analyzing financial statements,” according to the update.
In issuing the update, FASB aims to improve how net pension and post-retirement benefit costs during a period are reported. The standard the board aims to improve, Topic 715, Compensation—Retirement Benefits, doesn’t say where net benefit costs should be put in an employer’s income statement.
The update requires that the employer report the service cost component in the same line item as other compensation costs arising from employee service during the period. “Service cost” refers to the pension and benefit costs incurred by an employer during the covered employee’s length of service.
Under the new standard, the other components of net benefit cost will have to be reported separately from the service cost component. (The other components are interest cost, actual return on plan assets, gain or loss, amortization of prior service cost or credit, and amortization of the transition asset or obligation.)
The update will be effective for public companies for annual periods beginning after December 15, including interim periods within them. For other entities, the update becomes effective for annual periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019.
Under GAAP, defined-benefit pension and post-retirement benefit costs include a number of 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 notes.
The standard “addresses these issues by requiring a reporting organization to separate the service cost component from the other components of net benefit cost for presentation purposes,” according to the update.
“It also provides explicit guidance on how to present the service cost component and other components of net benefit cost in the income statement. Furthermore, it allows only the service cost component of net benefit cost to be eligible for capitalization,” the board states.