Plan assets and benefit obligations for pension plans and other postemployment benefits (OPEBs) are to be measured as of the close of the employer’s fiscal year, beginning the first fiscal year ending after December 15, 2008, according to a decision reached at yesterday’s meeting of the Financial Accounting Standards Board. [Board Meeting Handout, pp. 3-6] For an employer with a calendar fiscal year, the new rule will require a 12/31/2008 measurement for balance sheet numbers reported as of 12/31/2008 and for costs for the 2009 fiscal year.
Under current U.S. GAAP, as governed by FAS 87 and 106 for pensions and OPEBs, an employer is permitted to select a measurement date up to 3 months before the end of the employer’s fiscal year. The FASB’s exposure draft of phase 1 of its two-phase project to revise pension/OPEB accounting proposed eliminating the 3-month period. However, the exposure draft would have required that change more quickly: for a calendar year fiscal period, a 12/31/2007 measurement would have been required for the 2007 year-end balance sheet, but an earlier 12/31/2006 measurement would have been required for 2007 costs.
Yesterday’s decision not only defers the measurement date change, but eliminates the need for an extra measurement date for measurement of cost. The issue of the cost measurement has been the source of some confusion, even among the FASB itself. Yesterday’s discussion clarified that use of an early measurement date for cost merely shifts the cost measurement, rather than the cost itself. That is, for a calendar year employer that uses a 9/30 measurement, the 9/30/2007 measurement will be determining the cost to be reported for the period 1/1/2008-12/31/2008: although that cost may technically be based on accruals and demographics specifically for the year beginning 9/30, that cost is treated as the cost for the fiscal year 2008. Thus, there is not an additional quarter of cost during the transition to the 12/31/2008 measurement; rather, each year’s cost includes one year’s worth of costs, merely measured as of different dates for the 2008 cost versus the 2009 cost. FASB slightly complicated that explanation a bit further by characterizing the 2008 cost as the “last 80%” portion of the 15-month period measured as of 9/30/2007, but that simply returns us to the same position of requiring us to use the annual amount measured on 9/30/2007 as the periodic cost reported in 2008: even my simple math tells me that unless your actuary gets far more detailed with a 15-month valuation than FASB’s principle-based rules expect, prorating an annual valuation up to 15 months in order to recognize an extended period through to the next measurement, then taking 80% of that number, gets you back to 100% of the original number. The point being that we won’t see a bump-up of approximately an extra quarter’s cost for the transition to the new measurement date: all we get is one year’s costs in each year, measured as of one date under the existing rule and as of a different date under the new rule.
FASB struggled over the measurement date issue more than any other issue raised by its exposure draft, actually coming close to pushing the change off until phase 2 of its project, which is expected to take 2-3 years beyond this year’s conclusion of phase 1. The 2008 compromise keeping the measurement date change in phase 1 seemed a nod to the very strong opinions of one FASB contingent that sees no difference between valuation of pension/OPEB arrangements versus other complicated financial arrangements required to be valued as of the fiscal year end. FASB staff noted that only about one-third of S&P 500 companies currently report using a measurement date different than the fiscal year end, but only hinted at vague awareness that those disclosures give an incomplete snapshot: accelerated measurement dates are far more common among smaller firms and almost universal among firms with non-calendar fiscal years, and even many of the larger calendar-year employers that report using a fiscal year-end measurement date for domestic pension plans use a different measurement date for OPEBs and foreign plans. Perhaps the strongest advocates for the measurement date change implicitly made the case for giving a longer period for making the change: since “advance planning” is required in order to perform a year-end valuation in time to have a year-end measurement date, the anticipated September 2006 publication of the formal new accounting standard for phase 1 of the pension/OPEB project was starting to squeeze the time being given for getting that advance planning completed.