Perspectives

Financial reporting considerations related to pension and other postretirement benefits

Financial Reporting Alert 18-12

This publication highlights some of the important accounting considerations related to the calculations and disclosures entities provide under U.S. GAAP in connection with their defined benefit pension and other postretirement benefit plans.

This is a preview of the Financial Reporting Alert. View the complete Financial Reporting Alert.

Disclosures Related to Defined Benefit Plans

In August 2018, the FASB issued ASU 2018-14, which amends ASC 715 to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU’s changes related to disclosures are part of the FASB’s disclosure framework project, which the Board launched in 2014 to improve the effectiveness of disclosures in notes to financial statements.

ASU 2018-14 adds requirements for an entity to disclose the following:

  • The weighted-average interest crediting rates used in the entity’s cash balance pension plans and other similar plans.

    A narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period.
  • An explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in the other disclosures required by ASC 715.

Further, ASU 2018-18 removes guidance that currently requires the following disclosures:

  • The amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year.
  • Information about plan assets to be returned to the entity, including amounts and expected timing.
  • Transactions resulting from the June 2001 amendments to the Japanese Welfare Pension Insurance Law.
  • Information about (1) benefits covered by related-party insurance and annuity contracts and (2) significant transactions between the plan and related parties.
    (Entities separately need to provide the related-party disclosures required under ASC 850.)
  • For nonpublic entities with Level 3 plan assets in the fair value hierarchy measured on a recurring basis, a reconciliation of the opening balances to the closing balances. (However, those entities would still need to disclose transfers of plan assets into and out of Level 3 and any purchases of Level 3 assets by the plan.)
  • For public entities, the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits.

The ASU’s amendments are effective for public business entities for fiscal years ending after December 15, 2020. For all other entities, the ASU is effective for fiscal years ending after December 15, 2021. Early adoption is permitted; however, all provisions of ASU 2018-14 must be adopted if early adoption is elected. A retrospective transition method is required.

For more information, see Deloitte’s August 29, 2018, Heads Up.

FRA 18-12 | November 16, 2018

Presentation of Net Periodic Benefit Cost

In March 2017, the FASB issued ASU 2017-07, which amends the requirements in ASC 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans.

Under current U.S. GAAP, net benefit cost (i.e., defined benefit pension cost and postretirement benefit cost) consists of several components that reflect different aspects of an employer’s financial arrangements as well as the cost of benefits earned by employees. These components are aggregated and reported net in the financial statements.

ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current compensation costs for related employees in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations if such a subtotal is presented.

The ASU also requires entities to disclose the income statement lines that contain the other components if those components are not presented on appropriately described separate lines.

Connecting the Dots

While ASU 2017-07 does not require entities to further disaggregate the other components, they may do so if they believe that the information would be helpful to financial statement users. However, entities must disclose which financial statement lines contain the disaggregated components.

In addition, only the service-cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). This is a change from current practice, under which entities capitalize the aggregate net benefit cost when applicable.

The ASU’s amendments are effective for public business entities for interim and annual periods beginning after December 15, 2017. For other entities, the amendments are effective for annual periods beginning after December 15, 2018, and interim periods in the subsequent annual period. Early adoption is permitted.

Entities must use (1) a retrospective transition method to adopt the requirement for separate presentation in the income statement of service costs and other components and (2) a prospective transition method to adopt the requirement to limit the capitalization (e.g., as part of inventory) of benefit costs to the service cost component. Further, entities must disclose the nature of and reason for the change in accounting principle in both the first interim and annual reporting periods in which they adopt the amendments.

The ASU also establishes a practical expedient upon transition that permits entities to use their previously disclosed service cost and other costs from the prior years’ pension and other postretirement benefit plan footnotes in the comparative periods as appropriate estimates when retrospectively changing the presentation of these costs in the income statement. Entities that apply the practical expedient need to disclose that they did so.

For more information, see Deloitte’s March 14, 2017, Heads Up.

U.K. Pension Benefits — High Court of Justice Ruling on Equalization

On October 26, 2018, the High Court of Justice in the United Kingdom (the “High Court”) ruled that Lloyds Bank plc was required to equalize benefits payable to men and women under its U.K. defined benefit pension plans by amending those plans to increase the pension benefits payable to participants that accrued such benefits during the period from 1990 to 1997. The inequalities arose from statutory differences in the retirement ages and rates of accrual of benefits for men and women related to Guaranteed Minimum Pension (GMP) benefits that are included in U.K. defined benefit pension plans. In its ruling, the High Court also provided details on acceptable alternative methods of amending plans to equalize the pension benefits.

All entities in the United Kingdom that offered GMP benefits during this period will need to consider the applicability of the High Court’s ruling to their U.K. defined benefit pension plans. While the potential impact of the ruling on any individual pension scheme will vary, current preliminary estimates of the potential impact are between 0 percent and 4 percent of the projected benefit obligation of a pension plan.

A separate Financial Reporting Alert will be issued on the accounting implications of the High Court’s ruling. Entities with U.K. pension obligations should consult with their legal advisers, actuaries, and independent accountants to discuss the accounting and financial reporting impacts of the ruling.

View the rest of the Financial Reporting Alert.

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