New Pension Disclosure Rules

CPA Journal, The, Oct 2005 by Klamm, Bonnie K, Spindle, Roxanne M

Getting Beneath the Surface of SFAS 132(R)

A defined-benefit pension plan requires a company to pay each qualified employee a monthly benefit that begins at retirement and terminates at the employee's death. The full extent of the cost of this obligation is unknown until the employee dies. Nevertheless, the matching principle inherent in GAAP requires that employers include an estimate of the current year's share of the total cost in the annual income statement.

In 1974, FASB began creating a uniform format for calculating annual pension costs and related disclosures; the ultimate goal was to provide financial statement users with sufficient information to interpret the impact of the reported pension expense on the quality of earnings and to understand the economics of the company's pension plan. This process has resulted in several accounting standards related to defined-benefit pension plans and other postretirement benefits, namely, SFASs 36, 87, 132, and 132(Revised).

Most provisions of SFAS 132(R) are effective for fiscal years ending after December 15, 2003. Interim reporting provisions are effective for interim reporting periods beginning after December 15, 2003. Provisions related to estimated future benefit payments, foreign plans, and nonprofit entities became effective for fiscal years ending after June 15, 2004.

Exhibit 1 compares the disclosure requirements of the four SFASs and reflects the increased disclosure over time as FASB has attempted to perfect pension reporting. The underlying nature of a defined-benefit pension plan makes this difficult, because as users make additional demands for information, the standard will continue to change. Thus, the authors predict that SFAS 132(R) will not be the last standard to amend pension disclosure.

FASB's Standards Revision Process

Before revising a standard, FASB reviews the required disclosures for usefulness. The result of each review of pension-related standards has been to increase existing disclosures and add new ones. For example, the disclosure of pension expense increased from reporting only the pension cost to reporting pension cost components and related assumptions. Likewise, the disclosure of funding status began as disclosure of the plan's obligation and asset amounts and has evolved into disclosure of reconciliations of both obligations and assets, along with related assumptions.

In some cases, disclosures continue to be required but are shifted to different areas of the footnote. For example, SFAS 87 included actual return on plan assets as a component of pension cost. Subsequent standards have moved actual return to the asset reconciliation. In other cases, FASB has added completely new disclosures. For example, SFAS 132(R) requires cash flow estimates and disclosure of pension cost components in interim financial reports.

The growth in disclosure is illustrated using the 2003 financial statement information of MDU Resources Group, Inc. (NYSE: MDU), as it would have appeared under each standard. The analysis excluded other retirement benefits, such as health plans and nonqualified plans. Using 2003 results in all four disclosure formats allows the reader to trace numbers and evaluate the usefulness of the additional information.

SFAS 36: Disclosure of Pension Information

Until the issuance of SFAS 36 in 1980, companies had little guidance on pension measurement or disclosure. Companies could measure pension costs using a variety of actuarial methods, and plan assets could be measured using several valuation methods. This approach resulted in a lack of comparability. FASB began to address the issue in 1974. By 1980, with the measurement issues still unresolved, FASB recognized that it would be unable to reach a consensus for several more years.

The board strongly believed that requiring conformity of pension plan disclosures could not wait until the other issues were resolved. Therefore, SFAS 36, issued in 1980, required all companies with defined-benefit plans to disclose the actuarial present value of accumulated plan benefits and the fair value of plan assets in accordance with SFAS 35, Accounting and Reporting by Defined Benefit Pension Plans, pertaining to financial reporting by plans. In addition, the standard required disclosure of the total pension cost, along with a general statement about plan coverage and funding policies.

Exhibit 2 presents MDU's 2003 pension disclosures under 1980's SFAS 36. The brief plan description discloses only that the plans cover most full-time employees. The actuarial present value of plan benefits, the fair value of net assets, and net pension cost are disclosed. The only other required disclosure is the discount rate used to calculate plan benefits.

The plan benefits disclosed under SFAS 36 represent the benefits due to employees based on service to date, as calculated with no assumptions about future compensation. After 1997, this information no longer needed to be disclosed. In 2003, companies were again required to disclose the aggregate accumulated benefit obligation, but not to separately state the vested and nonvested benefits. Also, note that the 2003 pension cost calculated under the 1980 rule would have been different because at that time pension cost was directly related to funding policy.