April 7, 2017

Final Financial Reporting Changes for Pension and OPEB Plans: How Will this Affect Your Plan?

The Financial Accounting Standards Board (FASB) recently issued Accounting Standard Update 2017-07, which formalized accounting changes regarding the presentation of net periodic benefit cost that FASB announced in November 2016.

The Update makes changes to Accounting Standards Codification (ASC) 715 (compensation – retirement benefits), 220 (reclassification of entries from Accumulated Other Comprehensive Income or AOCI), 330 (capitalization), 958 (operations for non-profit entities) and 980 (regulated entities).

The Update changes the reporting of, but makes no changes to the determination of, net periodic benefit cost.

It requires sponsors of defined benefit and other postretirement benefit (OPEB) plans to:

  • Separate net periodic benefit cost into the service cost component and other components;
  • Present the service cost component as a part of other current compensation costs;
  • Report the other components separately from the service cost component and outside of income from operations (if such a subtotal is presented); and
  • Disclose and describe where in the income statement the other components are reported.

The Update also confirmed that, going forward, service cost would be the only component of net periodic benefit cost eligible for capitalization (as part of an asset such as inventory or property, plant, and equipment).

The changes are effective for annual and interim reporting periods beginning after December 15, 2017 for public entities, and for annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019 for all other entities. Plan sponsors must disclose the nature of and reason for the change in accounting principle in the first interim and annual periods of adoption.

The Update should be applied retrospectively for changes to the presentation of net periodic benefit cost but can only be applied prospectively for changes in capitalization. Early adoption is permitted as of the start of an annual period for which financial statements have not yet been issued.

Employers should rely on their accountants for authoritative advice on all accounting requirements. If you have questions about the implications of the accounting changes for your plan, please contact your Sibson consultant or Vice President Michael Marks.

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