FASB Changes

FASB has announced changes to the disclosure requirements for pension and other (OPEB) plans. Several items were removed; several were added. These changes are generally effective for 2021 (2022 for nonpublic entities), although earlier adoption is permitted. There are no changes in the methodology used to determine the benefit obligation or pension expense.

Background

FASB requires the calculation of benefit obligation (PBO for pension plans, APBO for post-retirement medical plans) and expense (NPPC) for pension and other plans, along with the disclosure of certain information regarding these plans each year.

FASB determines which disclosures should be mandated using a cost-benefit analysis, comparing the cost of calculating and preparing the disclosures to their perceived value by interested parties. FASB periodically reviews this comparison, including a review of comments by interested parties, and updates their requirements as necessary.

Disclosures Added (Clarified) by FASB

1.         FASB currently requires a disclosure of the assumptions that have the most significant impact on benefit costs and obligations. The interest crediting rate (whether fixed or variable) in a cash balance or related plan has a significant impact on benefit costs and obligations. With the expansion of these types of plans, FASB will require the disclosure of the weighted-average interest crediting rates. (A weighted average would appear to be required when a company has multiple cash balance and related plans.)

2.         FASB currently requires an explanation of significant changes in the benefit obligation or plan assets over the year. However, there is no requirement to disclose the specific reasons for the changes.

While the reasons for changes in plan assets are readily apparent, the reasons for changes in the benefit obligation are not. For example, these could include the impact of changes in the discount rate, salary growth rate, turnover or mortality, or changes in the composition of covered participants. Accordingly, FASB will require a disclosure of the specific reasons for significant changes in the benefit obligation, but not for plan assets. Not all sources of gains or losses must be disclosed; only significant ones. FASB did not define significant, but left it to the judgment of the reporting entity.

3.         The required disclosure of ABO, PBO and plan assets for plans with ABO or PBO in excess of plan assets has been clarified:

• Disclosure of ABO and plan assets is required for plans with ABO in excess of plan assets.

• Disclosure of PBO and plan assets is required for plans with PBO in excess of plan assets.

Removing the disclosure of ABO was considered. The disclosure of ABO was retained because information about the difference between PBO and ABO is useful to the reader of financial statements, and the additional cost of calculating and disclosing the ABO is not significant.

Disclosures Removed by FASB

1.         For a given year, the pension expense includes amortization of certain amortization bases. These amortization amounts reduce the accumulated other comprehensive income (AOCI) at the end of the current year. FASB currently requires the change in AOCI to be disclosed for a given year, along with the anticipated amortization amounts for the upcoming year. The required disclosure of the anticipated amortization amounts for the upcoming year has been eliminated.

2.         The amount and timing of plan assets expected to be returned to the employer in the upcoming year is currently disclosed. Information about benefits covered by insurance and annuity contracts and significant transactions between the employer or related parties and the plan are also currently disclosed. Since these have limited applicability, these disclosures have been eliminated.

3.         For nonpublic entities, a reconciliation of the changes in Level 3 assets during the year currently is required. (Level 3 assets are typically illiquid, non-publicly traded assets, such as real estate, trust deeds, private equity, etc.) Most of this disclosure has been eliminated. However, purchases of Level 3 assets and transfers of assets into and out of Level 3 are still required to be disclosed.

4.         The effect of a 1 percentage point change in assumed health care trend rates on the service and interest cost components of expense and on the benefit obligation is currently required to be disclosed, but only for public entities. FASB felt that this information is not as significant or relevant as in the past, and that this information is already available in other corporate financial disclosures; accordingly, this requirement has been removed. (Interestingly, FASB also considered expanding this requirement to nonpublic entities, but rejected this.)

Timing

These changes apply to fiscal years ending after Dec. 15, 2020 (Dec. 15, 2021 for nonpublic entities). For calendar year entities, these apply starting with the 2021 disclosures (2022 for nonpublic entities). Earlier adoption is permitted.

 

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