Blogging Employee Benefits

January 18, 2006

FASB Project Will Require Retrospective Balance Sheet Changes

Filed under: Accounting, OPEBs, Pensions — Fuguerre @ 10:06 am

When publicly held sponsors of defined benefit pension plans and other post-employment benefits (OPEBs) such as retiree healthcare begin reporting funded status on corporate balance sheets beginning at the close of 2006, companies will need to report what those balance sheet changes would have been for all prior years that are shown in the financial statements.  [FASB 1/18/06 Board Meeting Handout] For example, if the company’s financial statement shows the balance sheet for the current yearend and the prior 2 yearends, then the 2006 financial statement would include the pension/OPEB funded status as a component of shareholder equity for 2006, 2005, and 2004, as if the new GAAP had been in effect for all of those years. For the vast majority of pension plan sponsors, that retrospective view of their employee benefit plans will show a snowballing charge against shareholder equity, in some instances effectively wiping out corporate net worth.

The proposed changes in accounting standards will also require companies to measure their benefit programs as of the end of each corporate fiscal year, eliminating the current rule that permits a measurement date as early as 90 days before the date of the company’s annual financial statement. For a company that had been using an earlier measurement date, any prior years that are shown on a financial statement will not need to be re-measured as of the new measurement date, in contrast with the retrospective rule that will apply for the balance sheet changes. For example, if a company with a calendar fiscal year has been using a September 30 measurement date, then for the 2007 financial statement, the 2007 balances will be measured as of December 31, 2007, but the amounts shown on that financial statement for any earlier years will remain as measured at the respective September 30 measurement dates.

Although the new measurement date requirement will not be effective until the end of 2007, FASB has tentatively decided to require that the determination of net periodic costs for the 2007 fiscal year should use the new basis. For example, a company with a calendar fiscal year and a September 30 measurement date would determine balance sheet amounts at the end of 2006 as of 9/30/2006 and balance sheet amounts at the end of 2007 as of 12/31/2007, but would determine 2007 costs as of 12/31/2006.

Since the new GAAP will require a company to report pension/OPEB funded status on the corporate balance sheet, the new rule will dispense with the disclosure of unrecognized prior service cost and unrecognized net gains or losses currently shown in the funded status reconciliation in financial statement footnotes. The current phase of FASB’s project would not, however, modify the determintion of net periodic cost for those benefit plans (except with respect to any remaining unrecognized net transition asset or obligation), so the unrecognized balances remain relevant to the cost determination. In place of the disclosure in funded status reconciliation, the past service cost and gain/loss balances would be disclosed as components of the accumulated other comprehensive income amount being reported in the balance sheet. The new rules will further clarify existing requirements requiring presentation of benefit assets and liabilities as current or noncurrent amounts.

FASB debated requiring further detail for disclosure of the balances for unrecognized net gains or losses, considering segregation of net gains or losses arising from liability remeasurement versus net gains and losses arising from asset experience. Discussion also focused on clarification of rules for incremental disclosure of the non-market value of plan assets used in cost determinations, as well as any non-standard corridor used in the recognition of net gains or losses.

FASB anticipates publication of an exposure draft of the new accounting standard in March 2006, with a 60-day comment period. Publication of a final standard is anticipated in September, with the new rules for balance sheets and disclosures to be effective for fiscal years ending after 12/15/2006. The change in the rule for measurement dates would be effective one year later. For example, for a company with a calendar fiscal year, the balance sheet and disclosure rules would be in place for the 2006 yearend financial statement, and a yearend measurement date would be required at the end of 2007. However, as noted above, costs for 2007 must use a measurement date under the new rules, so the employer must be prepared to use the new measurement date rule for actuarial valuations for GAAP purposes by the end of 2006.

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