|RANDALL W. LUECKE, CPA, CMA, CEBS, is
vice-president-administration and treasurer of International
Approval Services in Cleveland. IAS is a division of the
Canadian Standards Association. |
CHET ANDRZEJEWSKI, FSA, EA, is a vice-president and a consulting and research actuary for Aon Consulting in Baltimore. He is a fellow of the Society of Actuaries, an enrolled actuary and a member of the American Academy of Actuaries.
Employers have a new standard to follow in disclosing pension and other postretirement benefits in their financial statements. In February 1998, the FASB issued Statement no. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits . CPAs should understand its requirements and how they have changed from past standards. The two disclosure illustrations provided here to supplement those in the statement itself will help CPAs as they coordinate the implementation of Statement no. 132 between the employer, its actuaries and external auditors.
A BIT OF BACKGROUND
FASB Statement no. 87, Employers' Accounting for Pensions, and Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, dramatically altered the financial statements of public and nonpublic companies—Statement no. 87 by requiring them to recognize and disclose more data about pension benefit obligations and Statement no. 106 by mandating recognition and disclosure of retiree health care benefit obligations, among other things.
Statement no. 132 is intended to enhance the effectiveness of those disclosures (as well as fine-tune those of FASB Statement no. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits ). Companies must also now disclose some information not required in the past, and some disclosure requirements that are no longer considered useful have been eliminated.
Essentially, Statement no. 132
- Adds disclosure of the components of changes in the benefit obligation and asset value.
- Allows aggregation of an entity's disclosures of underfunded and overfunded plans.
- Eliminates disclosure of the components of benefit obligations and of alternative obligation measures.
- Eliminates disclosure of plan provisions.
- Adds disclosure of comprehensive income.
- Modifies disclosure of sensitivity to changes in health care trend rates.
- Standardizes disclosures of pension and other postretirement benefits.
- Permits nonpublic entities to reduce disclosures.
As part of the FASB's ongoing program to improve financial reporting effectiveness, Statement no. 132 responds to financial statement users' need for information that will help them
- Evaluate an employer's retirement benefit obligation and its effect on prospects for future cash flows.
- Analyze the quality of currently reported net income.
- Estimate future reported net income.
By standardizing disclosure requirements, the FASB hopes to improve the framework users employ to make judgments about an entity's relative financial viability.
Statement no. 132—which supersedes the disclosure requirements in Statement nos. 87, 88 and 106 ( see exhibit 1 )-addresses only disclosure requirements of pensions and other postretirement benefits, not measurement or recognition issues.
Statement no. 132 requires employers that sponsor one or more defined benefit pension or other postretirement benefit plans to disclose the following in their financial statements:
- A reconciliation of beginning and ending balances of the
benefit obligation, which refers to the entity's projected benefit
obligation (PBO) under Statement no. 87 or its accumulated
postretirement benefit obligation (APBO) under Statement no. 106.
Employers no longer have to disclose the separate components (for
fully eligible active employees, other active employees and
retirees) of the APBO. For pension plans, employers no longer must
disclose the vested benefit obligation and the accumulated benefit
obligation. (For an exception for employers with more than one plan,
see the following section.)
- A reconciliation of beginning and ending balances of
the fair value of plan assets. Nonqualified pension and other
postretirement benefits plans frequently do not have separate plan
assets. Instead, payments are made from the plan sponsor's general
assets. Statement no. 132 does not give special disclosure
requirements for these cases. Employers should still show a
reconciliation, even though there would be no return on assets and
the beginning and ending values would be zero.
- The plans' funded status, including the amounts
recognized and not recognized, in the statement of financial position.
- The amount of net periodic benefit cost recognized.
Although the actual return on assets (ROA) and the net amortization
and deferral no longer are presented as components of net periodic
pension cost, employers must show the expected ROA as well as the
amortization components for the unrecognized transition obligation
or asset, the prior-service cost and the gain or loss individually.
- The amount included within other comprehensive
income for the period, which refers to the change in the
additional minimum pension liability recognized under paragraph 37
of Statement no. 87.
- On a weighted-average basis, the assumptions used in
accounting for the plans, including the discount rate, salary scale
and expected long-term rate of return.
- The assumed health care cost trend rates, which
include the rate for the next year; a general description of the
direction and pattern of change in the assumed trend rates in
subsequent years; the ultimate trend rates and when those rates are
expected to be achieved.
- The effect of a 1% change (both increase and
decrease) in the assumed health care cost trend rates.
- The amounts and types of securities of the employer
and related parties included in plan assets, if any.
- Any alternative method used to amortize
prior-service amounts or unrecognized net gains and losses.
- Any substantive commitment used as the basis for
accounting for the benefit obligation, such as a history of regular
benefit increases that are not specified in a written document but
that are expected to continue.
- The cost of providing any special or contractual
termination benefits, including a description of the nature of the event.
- An explanation of any significant change in the benefit obligation or plan assets not otherwise apparent in other disclosures.
EMPLOYERS WITH TWO OR MORE PLANS
Employers with two or more pension or other postretirement benefit plans have considerable flexibility under Statement no. 132. Generally, pension plan disclosures cannot be aggregated with those for other postretirement benefit plans. However, an employer may aggregate the required disclosures for all of its plans of the same type or the plans may be disaggregated in groups. In so doing, disclosures of overfunded plans (plans with fair value of assets in excess of the accumulated benefit obligation) may be aggregated, or disaggregated, with disclosures for underfunded plans. However, if the employer aggregates the disclosures, it must separately disclose the aggregate benefit obligation and aggregate fair value of plan assets for the underfunded plans. In any event, it must disclose the prepaid asset separately from the accrued liability for the statement of financial position.
In addition, an employer with pension and postretirement benefit plans both in the United States and abroad may combine disclosures for plans of the same type. Separate disclosures are required if the benefit obligations of the plans outside the United States (1) are significant relative to the total benefit obligation and (2) use significantly different assumptions.
REDUCED DISCLOSURES FOR NONPUBLIC ENTITIES
In assessing the usefulness of financial reporting for nonpublic entities, the FASB concluded that a reduced, alternative set of disclosures would be appropriate since users do not require the same "level of precision" in assessing their benefit costs and net income. Although nonpublic entities are encouraged to make the full disclosures listed above, they may instead elect to use reduced disclosure. A nonpublic entity is defined as any entity other than one
- Whose debt or equity securities trade in a public market
either on a stock exchange (domestic or foreign) or in the
over-the-counter market, including securities quoted only locally
- That makes a filing with a regulatory agency in
preparation for the sale of any class of debt or equity securities
in a public market.
- An entity that is controlled by such an entity.
- The benefit obligation, fair value of plan assets and funded
status of the plan. Significant items affecting the obligations or
the assets may need to be disclosed, as indicated in the final
- Employer contributions, participant contributions
and benefit payments.
- The amounts recognized in the statement of
financial position, including the prepaid asset, the accrued
liability, any intangible asset and the amount of accumulated
other comprehensive income recognized.
- The amount of net periodic benefit cost and the
amount of other comprehensive income due to a change in the
minimum pension liability. The separate components of net periodic
benefit cost are not disclosed.
- On a weighted-average basis, the assumptions used
in accounting for the plans.
- The assumed health care cost trend rates, which
should include the rate for the next year, a general description
of the direction and pattern of change in the assumed trend rates
in subsequent years, the ultimate trend rates and when those rates
are expected to be achieved.
- The amounts and types of securities of the
employer and related parties, if any, included in plan assets.
- The nature and effect of significant nonroutine events, such as plan amendments, business combinations, divestitures, curtailments and settlements.
DEFINED CONTRIBUTION AND MULTIEMPLOYER PLANS
An employer must disclose the amount of cost recognized for defined contribution pension or other postretirement benefit plans separately from the amount of cost recognized for defined benefit plans. The disclosures must include a description of the nature and effect of any changes that have an impact on comparability (for example, a business combination, a divestiture or a change in the rate of employer contributions). While employers no longer are required to disclose the plan description, the employee groups covered or the basis for determining contributions, they are encouraged to do so if the information is meaningful.
Statement no. 132 calls for an employer to disclose the amount of contributions to multiemployer plans during the period. For disclosure purposes, an employer may aggregate contributions for pensions and other postretirement benefits. The disclosures should include a description of the nature and effect of any changes affecting comparability. Employers no longer are required to disclose plan descriptions, the employee groups covered or the types of benefits provided. The provisions of Statement nos. 87 and 106 regarding withdrawal liability continue to apply.
Employers are permitted to disclose additional information if they believe it is useful, such as a description of the plan's major provisions. Nonqualified plans may be combined with qualified plans for disclosure purposes. However, since nonqualified plans generally do not have plan assets, the accumulated benefit obligation and fair value of assets may need to be shown separately (see " Employers With Two or More Plans ").
Exhibit 2 , illustrates the financial statement disclosure of an employer with multiple defined benefit pension and other postretirement benefit plans. During the two-year period, the employer had an acquisition affecting its pension plans, made amendments to the plans, settled a portion of the pension obligation and curtailed other postretirement benefit plans. In addition, the accumulated benefit obligation exceeded the accrued pension liability in the second year shown for the employer's nonqualified pension plan.
In exhibit 2 , the disclosure illustration for pensions and other benefits is displayed in the parallel format shown in Statement no. 132, a format that makes it easier for users to understand and compare different types of benefits.
Exhibit 3 , illustrates the financial statement disclosures for that same employer as if it were a nonpublic entity that chose to reduce the amount of disclosures to the extent permitted.
Statement no. 132 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. A company should prepare to implement Statement no. 132 by meeting with its internal or external actuaries to determine what benefit plan information it will disclose in the financial statements. For comparison purposes, this information also will be needed for one or more prior periods. If prior-period information is not readily available, the company should be ready to disclose the available information and include a list of what is not available.
An actuary should not find it difficult to prepare the reconciliation of benefit obligations and plan assets. In some cases, the actuary has already prepared reconciliations and made them available to the plan sponsor in prior years. When this is not the case, it should be relatively easy for the actuary to reconstruct the reconciliation for prior years.
The effect of a 1% decrease in the health care cost trend rates also should not be difficult for the actuary to prepare. Some actuaries will calculate this with an additional computer run, changing a few parameters to obtain the results under the alternative assumption. Other actuaries will change their computer programs to automatically produce the additional results when they generate the rest of the disclosures. Some actuaries may find it difficult to obtain prior-year results, particularly if they no longer use the software that produced the earlier figures. However, entities probably do not need to disclose this calculation for other than the current fiscal year.
If a plan sponsor is not required to implement Statement no. 132 at its next fiscal yearend, the entity should ask its actuary to prepare that information anyway. It will then be readily available to satisfy prior-year disclosures when the entity finally implements the statement.
Companies also should make compliance with Statement no. 132 a topic for discussion during their next meetings with their external auditors. If decisions on how a company will comply with Statement no. 132 are made in ongoing consultation with the auditors and actuaries, at yearend all interested parties will have the same understanding about the disclosures the company needs to make—simplifying the compliance process for all concerned.