FASB Takes on Pension, OPEB Project

At today's Financial Accounting Standards Board (FASB) board meeting, the FASB voted to add a project to its agenda, to reconsider the accounting for pensions and other postretirement benefits, currently covered under FASB Statement No. 87, Employers' Accounting for Pensions (FAS 87), and FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other than Pension (FAS 106). A press release issued by the FASB announcing this decision is available here.

The project will be conducted in two phases, with a standard contemplated to be issued by the end of phase one (the short term phase) and other standards potentially issued during the second (comprehensive) stage, as described further below.

Phase One, Short term "initial improvements phase"

During phase one (short term phase), FASB would consider whether to require entities to recognize on the balance sheet the net funded (unfunded) status of postretirement plans. The net amount would be based on amounts currently disclosed in footnotes only. No changes to measurement requirements would be enacted in this phase. The FASB will endeavor to issue a standard under phase one by the end of 2006.

Specifically, as stated in the board handout, the standard considered under phase one would potentially amend FAS 87 and FAS 106 by requiring:

1. That a reporting entity recognize in its balance sheet a net postretirement benefit asset or a net postretirement benefit obligation for each sponsored defined benefit plan equal to the difference between plan assets measured at their fair value and the projected benefit liability (pensions) and accumulated postretirement benefits obligation (other postretirement benefits), measured as of the measurement date. That would ensure an employer reports in the balance sheet the economic funded or unfunded status of its defined benefit postretirement plans.
2. That there would be no change to the amount of net benefits cost included in the determination of net income. Rather, changes in the fair value of plan assets and the benefit obligation that are not currently required to be recognized in earnings (unrecognized gains and losses) would be reported as credits or charges through other comprehensive income (OCI).
3. That an intangible asset related to any unrecognized prior service costs be recognized consistent with the current requirements in Statement 87 when an additional minimum liability is recognized.

FASB noted that pension and other post-employment benefit (OPEB) accounting was identified as one of the top standard-setting recommendations made to the FASB in the SEC’s “Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers” published in June, 2005. Additionally, pensions and OPEB has been ranked as a top priority recommended by FASB's Financial Accounting Standards Advisory Council (FASAC) and FASB's User Advisory Council and was noted as one of the top issues to address in the recently issued Report of the 2005 Annual FASAC Survey. FASB also believes that improving the balance sheet by recording the net funded (unfunded) postretirement obligation would be convergent with International Financial Reporting Standards (IFRS), because IFRS allows entities the option of immediately recognizing actuarial gains and losses outside of profit or loss in a statement of changes in equity.

Second Phase - Comprehensive Reconsideration

The second phase (comprehensive phase) of the project would reconsider comprehensively most, if not all, aspects of the existing standards of accounting for postretirement benefits. The staff recommends that a goal of this phase be the development of one or more high-quality common standards that apply internationally. That goal would be achieved by undertaking this effort jointly with the IASB. The comprehensive phase would also take into account developments in the FASB and IASB's joint Conceptual Framework, Performance Reporting, and Consolidations projects.

In this second phase, FASB may issue a single standard after all deliberations are completed, or may issue more than one standard after groups of issues are addressed.

Further details describing many of the significant issues that would be addressed in "phase two" or the comprehensive phase of the project can be found in the Appendix at the end of the board handout.

One board member commented that some may be concerned with the need for two transitions, one at the end of phase one, and another after some of the measurement issues are determined under phase two. However, on balance, the board agreed that there was a need to put the net funded (unfunded) postretirement asset (obligation) on the balance sheet in the near term to meet the needs of users of financial statements, that disclosure alone was not enough.

Prepared Nov. 10, 2005 by Edith Orenstein (eorenstein@fei.org), Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.