New disclosures for pensions and other benefits in the United States

New financial statement disclosures for sponsors of pensions and postretirement benefits will be required under a new accounting standard published by the U.S. Financial Accounting Standards Board (FASB) in December 2003. For employers with calendar fiscal years, most of the new requirements applied beginning with the 31 December 2003 year-end financial statements.

Although the new standard will not directly modify the underlying rules on measuring and recognizing benefit costs and liabilities, the added disclosures could necessitate new calculations and may influence management decisions about pensions and other post-employment benefits.

Background

Concerns over recent economic events and the financial status of employee benefit programs led the FASB to propose changes to footnote disclosures in plan sponsors’ financial statements. After reviewing comments from companies, financial statement preparers, and financial statement users, the Board affirmed its intention to change the disclosure rules, with most of the changes taking effect as early as the end of 2003. The new requirements will not affect privately held firms that do not produce financial reports following generally accepted accounting principles (GAAP).

Annual financial statement footnotes

Under the new accounting standard, footnotes of an employer’s annual financial statement must include, in addition to disclosures already required, new information on:

• Plan assets—Market values and target allocation percentages must be disclosed separately for major asset classes. The broadest categories of plan assets for which such disclosures are required include, at a minimum: equity securities, debt securities, real estate, and all other assets. If target allocation percentages are not available, the plan sponsor must provide a narrative description of the plan’s investment policy. A narrative description about how the plan’s assumption of expected return on plan assets has been developed also must be provided.
• Cash flow—Financial statement footnotes must include information about future expected benefit payments for each of the next 10 fiscal years. Projected benefit payments should be based on the same actuarial assumptions and participant data used in the measurement of obligations. For the first five fiscal years, expected benefit payments in each year must be listed. For the second five fiscal years, a single aggregate amount is disclosed. The footnotes must also disclose expected contributions during the coming year, on a cash (not accrual) basis.

The new standard will also require disclosure of a plan’s accumulated benefit obligation (ABO), which is a significant element in the determination of the additional minimum liability and any associated balance sheet items for plans with asset values that are less than that obligation. A specific tabular presentation of major assumptions will be required, clearly delineating assumptions used for measuring obligations as of the financial statement date from those used for determining costs for the year just ended. The date used to measure plan assets, obligations, and costs must also be disclosed.

Benefit disclosures in interim financial reports

The new accounting rules will require each interim report to disclose, but not re-compute, each component of net periodic benefit cost assigned to the quarter, including the effect of any settlements or curtailments. If information about employer contributions has changed significantly since the prior financial statement, then updated details must be disclosed in the quarterly statement.

Effective date

The new rules apply to the annual statement for the first fiscal year ending after 15 December 2003, except that disclosure of benefit payment projections will not apply until fiscal years ending after 15 June 2004. The new rules for interim statements would take effect for the first quarterly report thereafter (i.e., for most employers, the first quarter of 2004). Comparative information, such as allocation of assets among major categories, in the new initial disclosures for earlier dates and periods should be disclosed if available.

A delayed effective date of the new disclosure rules applies to nonpublic entities and to non-U.S. plans: changes will not be required until annual financial statements (and subsequent interim statements) for years that end after 15 June 2004.

Possible future changes

Although the FASB only addressed disclosure requirements, it continues to contemplate—and lean toward—revising the measurement and attribution of obligations. However, whether such a change will occur as a result of convergence with international accounting standards (expected before the decade is complete) or due to the FASB directly modifying requirements under SFAS 87 (for pensions) or SFAS 106 (for other post-retirement benefits) is unknown at this time.