Blogging Employee Benefits

March 14, 2006

Final Open Issues of FASB Pension/OPEB Project Phase 1 Include Tax-Exempts

Filed under: Accounting, Pensions — Fuguerre @ 6:06 pm

At it Board meeting tomorrow, the Financial Accounting Standards Board will discuss the final remaining issues toward issuance of an exposure draft of new financial accounting standards under phase 1 of its project on employers’ accounting for pensions and other post-employment benefits (OPEBs). [Board Meeting Handout]  Issues on the agenda include –

  • Applicability of the Proposed Statement to Tax-Exempt Organizations – Although there are no significant differences in the underlying pension/OPEB transactions for tax-exempt sponsors as contrasted with taxable entities, there are reporting considerations unique to tax-exempts. FASB staff recommends –
    • Applicability – The provisions of the new accounting standard would be applicable to all tax-exempt sponsors of defined benefit pensions or OPEBs.
    • Intermediate Measure of Operations – If, in its statement of activities, a tax-exempt organization presents an intermediate measure of operations that is equivalent to income from continuing operations, then the new standard would require the organization to recognize, in separate line items outside that measure, the actuarial gains and losses and prior service cost that would have been recognized in comprehensive income under the new standard. If the organization does not present such an intermediate measure, then the separate line items would be recognized as components of functional expenses.
    • Elimination of Remaining Transition Balances – Consistent with as has been proposed for taxable entities, a tax-exempt organization would recognize an adjustment to the opening balance of unrestricted net assets equal to any remaining unrecognized net transition asset or obligation attributable to initial application of SFAS 87 or SFAS 106.
    • Disclosure – The tax-exempt sponsor would be required to disclose net actuarial gain or loss and prior service cost or credit recognized outside net periodic benefit cost, the cumulative amount of such amounts that have not yet been reclassified as cost components, and the portion of such amounts that will be reclassified as cost components during the next fiscal year.
    • Measurement of Net Periodic Benefit Cost – Except as will be affected by the immediate recognition of any remaining transition balances as described above, no change would be made in the determination of net periodic benefit cost, consistent with as has been proposed for taxable entities.
  • Effective Dates for Tax-Exempt Organizations and Non-Public Entities – FASB staff recommends that no effective date delay be provided for tax-exempt or non-public entities, but the Board will discuss possible alternatives. That is, the standard’s new rule for recognition of pension/OPEB funded status would apply to years ending after December 15, 2006; and the elimination of the 3-month rule for measurement dates would apply for costs determined for years beginning after December 15, 2006.
  • Guidance on Selection of the Discount Rate Assumption – Although paragraph 186 of SFAS 106’s basis for conclusions is to be elevated to incorporation into the standards sections of SFAS 87 and SFAS 106, FASB staff recommend that no other guidance be elevated to the standards level. Several Board members had expressed an interest in clarifying that the selection of the assumed discount rate should be independent of the selection of expected rate of return on plan assets.
  • Cost-Benefit Considerations – Finally, the Board is expected to agree with FASB staff that the benefits of the proposed new standard outweigh the costs, and proceed to finalization of an exposure draft of the new standard, which would likely be published by FASB within the next month.

See this weblog’s Fugue: Accounting for further background on the FASB project.

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1 Comment »

  1. “The magic’s going to be in the drafting.”

    For the proposed elimination of the 3-month rule for the measurement date for pensions or OPEBs, FASB has decided to permit tax-exempt organizations and non-public entities a one-year delay following the effective date that will be required for public taxable entities, in part due to insufficient “elasticity of supply of actuarial services.” That is, the measurement date will be required to be the financial statement date for the measurement of plan assets and benefit obligations for tax-exempts and non-publics effective for years beginning after December 15, 2007.

    In addition to elevating paragraph 186 from SFAS 106’s basis for conclusions to the standards sections of SFAS 87 and 106, FASB will add the following sentence to the formal standards: “The determination of the assumed discount rate is independent of the expected rate of return on plan assets.”

    In its Board meeting this morning, FASB agreed with all other staff recommendations relating to the final issues addressed toward publication of the exposure draft of its new financial accounting standard on employers’ accounting for pensions and OPEBs, specifically – (a) The new standard would be applicable to tax-exempt organizations with the technical details as recommended by FASB staff. (b) No delayed effective dates will be provided for tax-exempt organizations or non-public entities for the main change of phase 1, recognition of benefit funded status. However, FASB will seek specific information from all sponsors – including public taxable entities (e.g., small companies) – as to whether there is a basis for special effective dates, such as existing contractual arrangements predicated on book value that would be affected by the new standard; (c) FASB generally agreed with its staff that the benefits of the proposed new standard are expected to far outweigh the costs.

    FASB expects to publish the exposure draft of its proposed new standard by the end of March. During the discussion on possible delays in effective dates, FASB staff alluded to an expectation that employers will begin preparing to apply the new standards as soon as the exposure draft has been released, as opposed to waiting until the final standard is published (expected to be in September). Although one Board member referred to that presumption of very early preparation as “inappropriate,” the potential changes that would be required by the new standard do require the immediate attention of any pension/OPEB sponsor or practitioner.

    Comment by Fuguerre — March 15, 2006 @ 10:25 am


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