By John D. Rossi III, CPA, CMA, CFP
When it comes to setting accounting standards, the Financial Accounting Standards Board (FASB) sometimes seems to compromise on issues to avoid delays and excessive pressure from the business and preparer community, especially when it comes to controversial issues. This happened in 1985 with the release of SFAS 87, Employers Accounting for Pensions. Twenty-two years later, with the release of SFAS 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, FASB doesn’t seem to be cutting any corners.
Prior to SFAS 158, few post-employment benefit arrangements were recognized in financial statements. Almost all information about their financial status was disclosed in the notes. When FASB originally deliberated on SFAS 87, the board expressed a preference for balance sheet recognition of pension assets and liabilities, and no delay in income statement recognition of gains and losses. The FASB was concerned, however, that this approach would be too great a change from past practice, so it compromised with a disclosure approach.
Invariably, criticisms arose among financial statement users and the SEC. Criticisms included the use of smoothing devices on volatility - such as delayed recognition of gains and losses - and the not showing of the funded status of a plan on the balance sheet.
SFAS 158 is the first phase in a comprehensive project to reconsider the guidance set forth in SFASs 87, 88, 106, and 132R, and improve the reporting of post-employment benefit obligation accounting. The goal is to make that information more useful and transparent for investors, creditors, and other users.
SFAS 158 makes four changes to current practices for business entities and sponsors of one or more single-employer defined benefit plans. The most significant change is requiring the recognition of the funding status of the plan - difference between plan assets at fair value and the benefit obligation - on the balance sheet. The second change is the recognition of unrecognized items, net of tax, such as actuarial gains and losses and certain prior service costs and credits in other comprehensive income (OCI). These items would go from OCI to earnings, based on existing requirements and with no change in the basic measurement approach. The third change eliminates the choice to measure plan assets and obligations up to three months before the balance sheet date. Finally, SFAS 158 requires improved disclosure in the notes to financial statements information about the effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. As a result of comments received from the exposure draft, the standard does not have to be applied retroactively.
The next phase in the improvement project is a joint effort with the International Accounting Standards Board. It will be a comprehensive reconsideration of post-employment benefit obligation accounting. Challenges include the results of obligations that are very long-lived and measurements that are based on many complex assumptions. FASB will consider the long-lived nature of post-retirement benefit obligations, and decide if financial reporting standards should provide additional guidance on those assumptions. FASB also will consider earnings versus OCI; immediate recognition versus deferred recognition of certain gains and losses; and possible consolidation of post-employment benefit trusts by the plan sponsor.
FASB acknowledges that accounting for post-employment benefit obligation is in a transitional stage, and that certain pragmatic compromises were made in the past. SFAS 158, however, is the first step in an evolutionary search for a more transparent and useful accounting model. FASB believes the conclusions it has reached are a worthwhile and significant step to improved financial reporting.
John D. Rossi III, CPA, CMA, CFP, is an associate professor of accounting at Moravian College in Bethlehem. He can be reached at mejdr01@moravian.edu.
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