March 2, 2016
Over the past few months, there has been attention surrounding alternative acceptable methods regarding accounting for the cost of benefits plans and, in particular, the development of the service cost and interest cost components of accounting expense. The new methods, which involve applying a designated yield curve’s duration-specific spot rates (as opposed to the single, aggregated discount rate) to each element of the plan’s projected cash flow, are expected to result in a reduction in expense both in the short term and likely the intermediate term as well.
In late 2015, the Securities and Exchange Commission stated that they would not be opposed to plan sponsors switching from use of the single, aggregate discount rate to this spot-rate method and that sponsors can consider this a change in accounting estimate – thereby avoiding the need to restate prior periods.
Sibson has recently researched the Fortune 500 companies that sponsor at least one defined benefit plan and have a fiscal year ending in September through December, and have observed that roughly 25% of these Fortune 500 companies have announced that they are switching to the spot-rate method. Of those switching, many have stated in their reasoning that the spot-rate method provides a more precise measurement of service cost and interest cost. Companies that have switched include General Motors, Dow Chemical, Caterpillar, Walt Disney, Honeywell and Deere.
If you would like to know more, or are interested in considering the spot-rate method for your defined benefit plan, please contact your Sibson consultant.
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