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FASB Completes Pension Reporting Standard

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The Financial Accounting Standards Board has released a final version of a major new retirement plan accounting rule.

FASB, Norwalk, Conn., says the standard, “Statement of Financial Accounting Standards Number 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” will require employers to include obligations associated with single-employer defined benefit pensions, retiree health plans and other postretirement plans in their financial statements.

The new standards will replace existing standards that let employers put plan funding information in financial statement notes, FASB officials say in a discussion of the new standards.

The new standards also will eliminate “smoothing,” the practice of spreading gains and losses that occur during a specific year over several years.

“Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits,” FASB officials say.

But the new standard “does not change the basic approach to measuring plan assets, benefit obligations, or annual net period benefit cost,” FASB officials note.

Because employers already have been disclosing retirement plan funding information in financial statement notes, “no new information or new computations other than those related to income tax effects are required,” officials say.

Under the new standards, a retirement plan sponsor must:

- Recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status.

- Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur.

- Measure (in most cases) a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year.

The new standards will take effect Dec. 15 for publicly traded companies and June 15, 2007, for other employers, officials say.

The FASB hopes to work with the International Accounting Standards Board, London, on a second phase of the retirement benefits reporting project, which will cover techniques for measuring retirement benefit obligations, officials say.

James Klein, president of the American Benefits Council, Washington, a group that represents large employers, criticized some aspects of the new standard earlier this year during a hearing organized by the Senate Banking, Housing and Urban Affairs Committee.

Klein criticized FASB’s decision to use a 2-phase approach to changing retirement obligation reporting rules.

Some employers worried about the changes made in the first phase might shut defined benefit pension plans permanently, only to see FASB address their concerns in the standards that emerge from the second phase, Klein said.

Klein also criticized FASB’s decision to require pension plans to include projected benefit obligation figures in their reports, rather than accumulated post-retirement benefit obligation figures.

The projected benefit obligation calculations would include assumptions about how long participants in defined benefit pension plans might stay with an employer and what their future earnings might be, while the accumulated post-retirement benefit obligation calculations are present value of benefits actually earned by employees.

“We see no theoretical reason to include future pay increases in pension liabilities when they are not included in other liabilities,” Klein said.


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