Blogging Employee Benefits

January 8, 2006

Major Pension and OPEB Accounting Changes Coming

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 2:41 pm

Almost from the beginning of this weblog, I’ve launched the Fugue: Accounting page to collect notes and links about FASB’s project aimed at overhauling GAAP for employers’ reporting of pension plans and other postemployement benefits (OPEBs). The project does deserve a page, beyond any mere weblog entry, since the FASB project will persist as one of the major benefits stories of the entire decade, if not beyond. But with my week ahead to see a luncheon where my presentation is likely to include some discussion of the FASB project, let’s call it part of the current flow.

In November 2005, FASB launched a project directed toward a major overhaul of the standards for employers’ accounting for pensions under SFAS 87 and for OPEBs under SFAS 106.  Standards for pension terminations and other events under SFAS 88 and for pension/OPEB disclosures under SFAS 132R are also likely to be changed. The FASB project is to be conducted in two phases –

  1. Phase 1 – Employer Balance Sheet and Measurement Date. The funded status of pensions and OPEBs will be reflected directly on the employer’s balance sheet. The measurement date for plans will be the end of the employer’s fiscal year. Phase 1 is expected to be effective by the end of 2006, with a 1-year delayed effective date for the measurement date change.
  2. Phase 2 – Comprehensive Review of All Pension/OPEB GAAP. All aspects of the employer’s accounting for pensions and OPEBs, including the methodology for determination of the net benefit costs reported on the employer’s income statement, will be reconsidered. Phase 2 is expected to be completed 2-3 years after the completion of Phase 1.

An exposured draft of a proposed accounting standard for Phase 1 is expected to be published in 2006 Q1, with a final standard anticipated in 2006 Q3.  Details of the current FASB position being prepared for Phase 1 –

  • Pension Plan Funded Status on Employer Balance Sheet. For a defined benefit pension plan, the difference between the projected benefit obligation (PBO) and the market value of plan assets must be reflected on the employer’s balance sheet.  The determination of net periodic pension cost would not be directly altered in Phase 1, so any balance sheet activity necessary to reflect the PBO funded status would be recorded as a direct charge or credit to other comprehensive income (OCI), essentially as a component of shareholder equity. Essentially, the initial OCI charge or credit under this rule would immediately recognize all previously unrecognized net gains or losses and any previously unrecognized prior service costs from plan amendments, although those balances would remain intact for purposes of determining net periodic pension cost. Any remaining unrecognized transition asset or obligation would also be included in the initial charge or credit to OCI, but would eliminate any remaining unrecognized transition balances, thereby indirectly affecting the remaining recogniziton of those amounts through pension costs. Any future gains or losses and any future past service costs from amendments would be reflected immediately through direct charges or credits to OCI, while continuing to be recognized in pension costs through the customary methods.
  • Comparable Treatment for OPEBs. The same approach of recognizing plan funded status on the employer’s balance sheet through OCI charges or credits will be required for OPEBs.
  • Measurement Date Set At Employer Fiscal Year End. In contrast with current rules that permit measurement of pensions and OPEBs as much as 3 months before the end of the employer’s fiscal year, the measurement date will be required to be set as the financial statement date.

That will serve for a preliminary summary of the pieces of Phase 1 as they currently stand. I’ll have further comment on what it all means in a separate weblog post soon, maybe before my luncheon engagement this week.

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1 Comment »

  1. Next step at FASB itself comes at the January 18 Board meeting, when FASB is set to discuss remaining issues in Phase 1 of its project, including (a) whether existing disclosure requirements should be modified, (b) the proposed effective date and method of transition, and (c) the length of the comment period for the exposure draft expected to be issued in March.

    Comment by Fuguerre — January 12, 2006 @ 7:15 pm


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