This statement modifies and standardizes employers' disdosures of pensions and other post-retirement benefits to provide more relevant disclosures to users seeking to forecast future cash flows. The new standard was motivated in part by the Jenkins Report (1994) of the AICPA Special Committee on Financial Reporting, which recommended only the most relevant disclosures in financial reports. As this report asserts, "On the one hand, business reporting must be enhanced to maintain its relevance, while, on the other hand, undisciplined expansion of mandated reporting could result in large and needless costs" (p. 7). The report calls for "improved disclosures about the uncertainty of measurements of assets and liabilities" as well as "the identity, opportunities, and risks of off-balance-sheet financing arrangements:"
The following disclosures are required under the new standard for defined benefit pension plans and post-retirement benefit plans:
1. A reconciliation of the projected benefit obligation for pensions and the accumulated post-retirement benefit obligation from beginning to end of the year, showing separately the service cost, interest, contributions by participants, actuarial gains and losses, foreign currency exchange rate changes, benefits paid, amendments, business combinations, divestitures, curtailments, settlements, and special termination benefits. All of the items listed above after interest are specific disclosures newly required under SFAS 132 for both pensions and other post-retirement benefits with a view to conveying a full analysis of changes in the benefit obligations.
2. A reconciliation of the fair value of plan assets from beginning to end of the year, showing separately the actual return on plan assets, foreign currency exchange rate changes, contributions by the employer and participants, benefits paid, business combinations, divestitures, and settlements. Disclosure of foreign currency exchange rate changes, business combinations, divestitures, and settlements is new to this standard, again to fully analyze changes in the plan assets during the period. The disclosure of the benefit obligation, fair value of plan assets, and changes in those amounts is consistent with the FASB objective of providing information about the obligations and resources of the firm as well as changes in those items during the period in financial reports:
3. The funded status of the plans along with
a. unamortized prior service cost
b. unrecognized net gain or loss (including asset gains and losses not yet reflected in market-related value)
c. remaining unamortized, unrecognized net obligation or net asset (also called "transition") existing at the initial date of application of Statement 87 or 106
d. net pension or other post-retirement benefit prepaid assets or accrued liabilities
e. intangible asset, which was not explicitly called for as a disclosure item in prior standards.
4. The net periodic benefit cost, disclosing separately the service cost, the interest, the expected return on plan assets, amortization of the transition, gains and losses recognized, prior service cost recognized, and gain or loss recognized due to a settlement or curtailment. Apart from the first two items in #4 above, which were previously required for separate disclosure, the third item was also required under prior standards but rather as the actual instead of expected return. The last four items in #4 are new separate disclosure requirements in this standard; previously, they could be netted together.
5. The change in the additional minimum pension liability during the period.
6. On a weighted-average basis, the discount rate, rate of compensation increase (for pay-related plans) and expected long-term rate of return on plan assets.
7. The assumed health care cost trend rates for the forthcoming year used to measure the benefits and a description of the pattern of change in trend rates afterwards along with the ultimate trend rates and when they are expected to be achieved. The disclosure requirement of the health care cost trend rates is far more explicit in this standard than in SFAS 106.
8. The effect of a one-percentage-point increase and a one-percentage-point decrease in the assumed health care cost trend rates on (1) the aggregate of the service and interest cost of net post-retirement health care benefit cost and (2) the accumulated post-retirement benefit obligation for health care benefits. SFAS 106 called only for the effects of a 1% increase, not a decrease, in the health case cost trend rates, the effects of which need not by symmetrical. Again, this is a far more explicit disclosure requirement of the assumed health care cost trend rates than was previously the case.
9. The securities of the employer and related parties in plan assets, the future benefits of participants covered by insurance contracts with the employer or related parties, and transactions between the employer or related parties and the plan. All of these items are new to this standard.
10. Alternative amortization method used to amortize prior service cost and cumulative net gains and losses.
11. A substantive commitment, such as regular benefit increases, used in accounting for benefit obligations.
12. The cost of contractual termination benefits and a description of the event.
13. Explanation of changes in the benefit obligation or plan assets not otherwise apparent from other required disclosures.
The foregoing disclosure requirements #10 through #13 are all new to this standard.
The remaining disclosure requirements shown below are also new to this standard. As for employers with more than one pension or other post-retirement plan:
14. The required disclosures may be aggregated or disaggregated for all defined benefit pension plans and separately for all defined post-retirement plans. Disclosures about pension plans as well as other post-retirement benefits with assets exceeding the accumulated benefit obligation may be aggregated with disclosures about pension plans as well as other post-retirement benefits with accumulated benefit obligations exceeding assets. If these disclosures are combined, the aggregate benefit obligation and aggregate fair value of plan assets for plans with benefit obligations in excess of plan assets (i.e. underfunded plans) is to be disclosed. Prepaid benefit costs and accrued benefit liabilities from the balance sheet should be disclosed separately.
15. Disclosures of benefit plans in other countries can be aggregated with those of U.S. plans unless the benefit obligations of the plans in those countries are "significant relative to the total benefit obligation and those plans use significantly different assumptions." The FASB decided to aggregate disclosures for multiple benefit plans in order to simplify such disclosures.
[TABULAR DATA OMITTED]
With respect to defined contribution plans, the cost recognized for these benefit plans should be disclosed separately from the cost for defined benefit plans. Disclosure should include a description of significant changes [TABULAR DATA OMITTED] such as the rate of employer contributions, business combinations, and divestitures.
As for the multi-employer plans, the total contributions to multi-employer plans without disaggregating the amounts for pensions and other post-retirement benefits can be disclosed. Disclosures should reflect the nature of changes as in the rate of employer contributions, business combinations and divestitures.
The FASB in this standard eliminates the following previous disclosure requirements pertaining to pensions and other post-retirement benefits: (1) accumulated pension benefit obligations [ABO] only for plans having assets in excess of the ABO, but not for plans in which the ABO exceeds the plan assets; (2) vested benefit obligations; and (3) an analysis of other post-retirement accumulated benefit obligations for retirees, other fully eligible individuals, and active, but not fully eligible, participants. The rationale for these disclosure eliminations is that they are not needed in forecasting pension and other post-retirement benefit costs and obligations.
Nevertheless, the Board has surprisingly eliminated general descriptive information about both pension and other post-retirement benefit plans such as benefit formulas, funding policies, employee groups affected, and the types of assets held by each plan.
In this new standard, the FASB is attempting to enhance the effectiveness of disclosures in financial reports by creating more uniform disclosure requirements for pensions and other post-retirement benefits and by eliminating less relevant disclosures. Considering the benefits and costs of disclosure, including the ability of users to comprehend benefit obligation changes and to predict future cash flows from the information furnished, SFAS 132 is a step in the right direction. We can probably expect to see more new disclosure standards in the same vein.
However, this statement does not require the disclosure of the composition of assets in the benefit plans, which could provide useful information about the risk of these funds. Furthermore, without adequate justification, the statement eliminates previous general disclosure requirements about the nature of the plans, such as employee groups covered, benefit formulas, funding policy, and the nature of assets maintained by the funds.
A summary analysis of the old and new pension and other post-retirement disclosure requirements follows.
Robert Bloom is a Professor of Accountancy at John Carroll University in Cleveland, Ohio. The author of many accounting publications, including articles and books, he has taught at a number of U.S. and Canadian universities.
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|Title Annotation:||Financial Accounting Standards Board's new standard for employers' disclosures of pensions and other post-retirement benefits|
|Publication:||The National Public Accountant|
|Date:||Nov 1, 1998|
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