Employers who sponsor defined benefit pension or other post-retirement plans should take note of proposed new accounting guidance that relates to disclosure requirements. The Financial Accounting Standards Board (FASB) has issued an exposure draft, proposing Accounting Standards Update (ASU) No. 2016-210, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans. FASB is seeking public comment on the proposed amendments by the April 25, 2016, deadline. The proposed ASU would be effective for all employers that sponsor defined benefit pension or other post-retirement plans and would be applied retrospectively to all periods presented with exception to qualitative disclosures about plan assets measured at net asset value. These qualitative disclosures would be required beginning with the most recent period presented in the initial period of adoption.
The amended standards would clarify that public entities should consider materiality when evaluating disclosure requirements for both quantitative and qualitative content. The amended standards would also remove other disclosure requirements that are not useful or applicable to most entities, such as the accumulated benefit obligation method of measure and Level 3 plan assets roll forward described below. FASB would still require nonpublic entities to disclose transfers of assets into and out of Level 3 of the fair value hierarchy as well as purchases of Level 3 assets. Additionally, all entities would be required to disclose only the projected benefit obligation, as this is a more useful measure in assessing prospects for cash flows.
Under previous standards, reporting entities used discretion when evaluating FASB’s disclosure requirements. With phrasing such as “an entity shall disclose at a minimum,” these requirements made it difficult to justify omitting immaterial disclosures. In addition, employers were required to disclose other items—such as the amount of the pension accumulated benefit obligation—considered irrelevant or of no value to users of financial statements. The accumulated benefit obligation is considered a valid alternative measure to the projected benefit obligation. It is not, however, indicative of future cash flows if the plan is not settled or curtailed, and as a result, is not considered useful information when compared to the projected benefit obligation.
Another item considered irrelevant or useless is the reconciliation of the opening balances to the closing balances of plan assets measured on a recurring basis in Level 3 of the fair value hierarchy. The roll forward of Level 3 plan assets is usually provided in table format in the notes to financial statements. According to the Private Company Decision-Making Framework, this roll forward provides disaggregated information that private companies should not be required to disclose, making it difficult to discern which information in the Level 3 plan assets table is useful.
As part of FASB’s disclosure framework project launched in 2014, the proposed ASU seeks to improve the effectiveness of the information contained in the notes to financial statements and to clearly communicate the information required under generally accepted accounting principles (GAAP).
If you have questions regarding this ASU or accounting for defined benefit plans, contact a related author listed below at PYA, (800) 270-9629.