Accounting Rules Coming Aimed at Breaking Out Pension Costs

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By Steve Burkholder

Nov. 2 — Employers will have to report defined benefit pension costs more clearly under accounting rules that the Financial Accounting Standards Board plans to issue early next year.

The planned standard, which public companies would begin to apply in January 2018, is aimed at improving the display of net postretirement costs in the income statement. FASB voted Nov. 2 to issue the final standard, which will change presentation in the statements, but not how items are recognized or measured.

Important Change

The new rules, called “so important” and “critical” by a FASB member, formerly a security analyst, will require splitting apart net periodic benefit costs. The planned standard is meant to improve a situation for investors and other users of financial statements in which the nature of those expenses has been less than transparent.

All enterprises, including not-for-profit organizations, that offer defined benefit pension plans, other defined postretirement benefits, such as retiree health care, and other defined benefits accounted for under Accounting Standards Codification 715 will have to apply the planned rules, FASB decided.

Exemption Requests Denied

Rate-regulated enterprises, such as utility companies, and military contractors had sought to be exempted from the new standard. The board turned down the requests, which were supported by FASB Vice Chairman James Kroeker.

Non-public entities, such as private companies, will have one more year beyond the effective date for public companies to apply the planned standard. Enterprises may adopt the rules earlier than the required effective dates.

Support From Big Companies

FASB member Marc Siegel, who often gives voice to investors’ views during the board’s rulemaking, said that an extraordinary proportion—more than 98 percent—of users of financial statement support the board’s proposed rules on pension cost presentation, according to comment letters on its pending January proposal.

A number of prominent companies showed support for the planned standard, Siegel said.

“Here is something where we’ve got a practical answer that users backed,” he said, “that even big companies, like AT&T, IBM, FedEx, Bristol-Myers Squibb, Xerox, said you got it right.”

The relatively narrowly drawn standard may head off the need for FASB to conduct rulemaking on recognition and measurement of pensions, Siegel said. He noted that the board affirmed on Nov. 2 the main tenets of the January draft rules.

FASB issued the draft standard Jan. 26 to improve the income statement display of net periodic pension cost and net period postretirement benefit cost. On the same day, the board issued a proposal to improve footnote disclosures about such defined benefit plans.

Major Features

The planned rules will require sponsors of defined benefit plans to report the service cost part of pension expense in the same line item of the income statement as other compensation costs stemming from employee services during the reporting period, according to an October issue summary published by Goldman Sachs’s asset management arm.

Other components of pension income and expense, such as interest cost, expected return on asset income, and amortization of actuarial gains and losses, would be shown separately outside a subtotal of income from operations, if a company presents such a rendition of operations, wrote Goldman Sachs’s Michael Moran, a financial analyst and senior pension strategist.

Thus, the service cost component would be reported separately from other cost components, FASB decided Nov. 2, affirming its earlier stance. In addition, prior service cost or credit would be displayed separately from current service cost and outside of a subtotal of income from operations, the board decided.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn. at

To contact the editor responsible for this story: S. Ali Sartipzadeh at

For More Information

A FASB board meeting handout on issues weighed Nov. 2 is available at

The board plans to post a summary of its decision soon at

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