Summary of Statement No. 158

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)

Summary

This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions.

This Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to:

  1. Recognize the funded status of a benefit plan—measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation—in its statement of financial position. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation.

     

  2. Recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FASB Statement No. 87, Employers’ Accounting for Pensions, or No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. Amounts recognized in accumulated other comprehensive income, including the gains or losses, prior service costs or credits, and the transition asset or obligation remaining from the initial application of Statements 87 and 106, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements.

     

  3. Measure defined benefit plan assets and obligations as of the date of the employer’s fiscal year-end statement of financial position (with limited exceptions).

     

  4. Disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation.

     

This Statement also applies to a not-for-profit organization or other entity that does not report other comprehensive income. This Statement’s reporting requirements are tailored for those entities.

This Statement amends Statement 87, FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, Statement 106, and FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, and other related accounting literature. Upon initial application of this Statement and subsequently, an employer should continue to apply the provisions in Statements 87, 88, and 106 in measuring plan assets and benefit obligations as of the date of its statement of financial position and in determining the amount of net periodic benefit cost.

Reasons for Issuing This Statement

The Board issued this Statement to address concerns that prior standards on employers’ accounting for defined benefit postretirement plans failed to communicate the funded status of those plans in a complete and understandable way. Prior standards did not require an employer to report in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan. Those standards did not require an employer to recognize completely in earnings or other comprehensive income the financial effects of certain events affecting the plan’s funded status when those events occurred.

Prior accounting standards allowed an employer to recognize in its statement of financial position an asset or liability arising from a defined benefit postretirement plan, which almost always differed from the plan’s overfunded or underfunded status. Those standards allowed an employer to:

  1. Delay recognition of economic events that affected the costs of providing postretirement benefits—changes in plan assets and benefit obligations—and recognize a liability that was sometimes significantly less than the underfunded status of the plan.

     

  2. Recognize an asset in its statement of financial position, in some situations, for a plan that was underfunded.

     

Prior standards relegated information about the overfunded or underfunded status of a plan to the notes to financial statements. That information was in the form of a reconciliation of the overfunded or underfunded status to amounts recognized in an employer’s statement of financial position. The Board was told that presenting such information only in the notes made it more difficult for users of financial statements to assess an employer’s financial position and ability to satisfy postretirement benefit obligations.

The Board concluded that such reporting, together with other features of the existing standards, did not provide representationally faithful and understandable financial information and might lead to the inefficient allocation of resources in the capital markets. This Statement is the first step in a project to comprehensively reconsider Statements 87, 88, 106, 132(R), and related pronouncements.

How the Changes Improve Financial Reporting

This Statement improves financial reporting because the information reported by a sponsoring employer in its financial statements is more complete, timely, and, therefore, more representationally faithful. Thus, it will be easier for users of those financial statements to assess an employer’s financial position and ability to satisfy postretirement benefit obligations.

This Statement results in financial statements that are more complete because it requires an employer that sponsors a single-employer defined benefit postretirement plan to report the overfunded or underfunded status of the plan in its statement of financial position rather than in the notes.

This Statement results in more timely financial information because it requires an employer to recognize all transactions and events affecting the overfunded or underfunded status of a defined benefit postretirement plan in comprehensive income (or changes in unrestricted net assets) in the year in which they occur. Moreover, this Statement requires that plan assets and benefit obligations be measured as of the date of an employer’s fiscal year-end statement of financial position, thus eliminating the alternative of a measurement date that could be up to three months earlier.

This Statement results in financial reporting that is more understandable by eliminating the need for a reconciliation in the notes to financial statements.

How the Conclusions Underlying This Statement Relate to the FASB’s Conceptual Framework

FASB Concepts Statements No. 1, Objectives of Financial Reporting by Business Enterprises, and No. 4, Objectives of Financial Reporting by Nonbusiness Organizations, explain that financial reporting should provide information that is useful in making business and resource allocation decisions. FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, explains that essential elements of decision usefulness are relevance and reliability. Information must be timely and complete for it to be relevant and reliable. This Statement results in financial information that is more complete, timely, and, therefore, more representationally faithful.

Benefits and Costs

The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. The Board recognizes that the benefits of providing information for that purpose should justify the related costs. After careful consideration, the Board concluded that the benefits of the improved financial reporting that result from this Statement outweigh the costs of its implementation.

The Board believes that this Statement provides financial statements that are more complete and easier to understand because information previously reported in the notes will be recognized in an employer’s financial statements. Reporting the current funded status of a postretirement benefit plan as an asset or liability in an employer’s statement of financial position allows users of those financial statements to assess an employer’s financial position and its ability to satisfy the benefit obligations without referring to a reconciliation in the notes to financial statements. Likewise, recognizing transactions and events that affect the funded status in the financial statements in the year in which they occur enhances the timeliness and, therefore, the usefulness of the financial information.

The Board recognizes that employers will incur costs to implement this Statement. However, the Board believes that the expected benefits outweigh the costs. Several provisions of this Statement are intended to minimize the costs of implementation. For example, the Board decided not to require retrospective application of the changes after learning about the significant costs that some employers would incur in retrospectively revising financial statements of previous periods. Moreover, this Statement does not change the basic approach to measuring plan assets, benefit obligations, or annual net periodic benefit cost. Employers were previously required to disclose in the notes to financial statements amounts for a plan that, under the application of this Statement, are recognized in the statement of financial position. Therefore, no new information or new computations other than those related to income tax effects are required.

The Board acknowledges, however, that certain employers who previously did not use a fiscal year-end measurement date may incur incremental one-time costs when initially applying the requirement to measure plan assets and benefit obligations as of the date of the employer’s year-end statement of financial position. Furthermore, some employers may have contractual arrangements that are affected because they reference financial statement metrics, such as book value. Those employers may incur costs associated with revising those contractual arrangements. To mitigate those costs, this Statement provides delayed effective dates for certain of its provisions and an alternative approach for initially applying the change in measurement date.

Effective Dates and Transition

The required date of adoption of the recognition and disclosure provisions of this Statement differs for an employer that is an issuer of publicly traded equity securities (as defined) and an employer that is not. For purposes of this Statement, an employer is deemed to have publicly traded equity securities if any of the following conditions is met:

  1. The employer has issued equity securities that trade in a public market, which may be either a stock exchange (domestic or foreign) or an over-the-counter market, including securities quoted only locally or regionally.

     

  2. The employer has made a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market.

     

  3. The employer is controlled by an entity covered by (a) or (b).

     

An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.

An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007.

However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:

  1. A brief description of the provisions of this Statement

     

  2. The date that adoption is required

     

  3. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.

     

The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. If in the last quarter of the preceding fiscal year an employer enters into a transaction that results in a settlement or experiences an event that causes a curtailment of the plan, the related gain or loss pursuant to Statement 88 or 106 is required to be recognized in earnings or changes in unrestricted net assets of that quarter.

Earlier application of the recognition or measurement date provisions is encouraged; however, early application must be for all of an employer’s benefit plans. Retrospective application of this Statement is not permitted