FASB changes presentation of defined benefit costs

By Ken Tysiac

FASB issued an accounting standard Friday that is designed to increase the transparency and usefulness of information about defined benefit costs for pension plans and other post-retirement benefit plans presented in employer financial statements.

The rules changes are described in Accounting Standards Update No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

Defined benefit pension cost and post-retirement benefit cost (net benefit cost) comprise several components under GAAP that reflect different aspects of an employer’s financial arrangements, as well as the cost of benefits provided to employees. GAAP requires those components to be aggregated for reporting in financial statements.

FASB made the changes because stakeholders said the presentation of defined benefit cost on a net basis combines elements that are heterogeneous. Therefore, the current presentation requirement was believed to lack transparency and limit usefulness of the financial information. The current requirement led users to incur greater costs in analyzing financial statements, stakeholders said.

To address those issues, the new standard requires a reporting organization to separate the service cost component from the other components of net benefit cost for presentation purposes. The new standard also:

  • Provides explicit guidance on how to present the service cost component and other components of the net benefit cost in the income statement.
  • Allows only the service cost component of net benefit costs to be eligible for capitalization.

The standard takes effect for public business entities for annual periods beginning after Dec. 15, 2017, including interim periods within those annual periods. For other entities, the amendments take effect for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019. Early adoption is permitted, subject to certain conditions.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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