FASB, IFRS and statutory accounting for pension and OPEB plans

Accounting for pension and other post-employment benefits (OPEB) plans can be somewhat challenging, especially for employers in more than one country. For example, U.S. plans generally follow the GAAP guidance under Financial Accounting Standards Board (FASB) Topic 715, specifically Subtopics 715-20, 715-30, and 715-60. However, many international plans are subject to the International Financial Reporting Standards (IFRS) rules outlined in International Accounting Standard (IAS) 19. In some cases, the same plan may be subject to both FASB Topic 715 and IAS 19 accounting.

Along with these standards, the National Association of Insurance Commissioners (NAIC) has published a separate set of statutory accounting rules that apply to pension and OPEB plans sponsored by insurers. These rules are provided in Statements of Statutory Accounting Principles (SSAP) 102 (for pension plans) and 92 (for OPEB plans). Governmental plans are subject to different accounting requirements.

These accounting standards use similar methods to measure plans’ assets and liabilities, and also to perform calculations of annual expense, special expense events (such as settlements, curtailments, and special termination benefits), and disclosure items. However, there are key differences as well. This article summarizes the main features and differences of each method.

Figure 1: Liability and Asset Measurements

There are different definitions of liability under the three accounting methods: FASB and SSAP guidance define pension liability as projected benefit obligation (PBO), and OPEB liability as accumulated postretirement benefit obligation (APBO). IAS 19 uses the term "defined benefit obligation" (DBO) for the liability under both types of plans. Regardless of the terminology, the underlying calculations are essentially performed in the same manner. All liability amounts include nonvested benefits, although there was a transition period to include nonvested amounts in statutory liabilities subsequent to the release of SSAP 102/92.

The accounting calculations generally require the use of a fair market value (FV) for a funded plan’s assets, but there are exceptions. For expense calculations under FASB, you are permitted to use a “market-related” value of assets (MRV), which is a calculated value that spreads asset gains and losses over a period of five years or less. This method will help some plans to avoid significant swings in their pension expense due to annual investment returns. SSAP valuations will use a modified version of the FV of assets that reflects differences due to statutory guidance. These differences include adjustments for meaningful costs of selling an investment or measuring specific assets based on their cost minus any depreciation, as outlined in SSAP 102/92.

With respect to the assets, there is a concept applicable in IAS 19 accounting called the “asset ceiling.” This is not common, but it can occur when you have a plan that is somewhat overfunded. It places a limit on the amount of assets that can be considered in a valuation, and can apply if a plan sponsor is not able to make use of plan assets above this amount.

Figure 2: Expense Calculations

Under all three methods, the service cost calculations will reflect the cost of benefits earned in the fiscal year. Plan sponsors also have the option to include any applicable administrative expenses in the service cost. There will be no service cost attributable to participants who have reached the benefit service cap, who have frozen benefits, or who have reached the full eligibility age in an OPEB plan. For IAS 19, the service cost can also include other amounts, which consist of past service costs attributable to plan amendments or curtailments, plus any gain or loss due to a settlement. Under IAS 19, these amounts are recognized immediately, as the amortization concept does not apply to IAS 19 expense calculations.

The interest cost calculations are similar across all three methods, while the expected long-term rate of return on assets (EROA) calculation will be based on the plan’s FV, MRV, or modified FV as appropriate. For FASB and SSAP valuations, the EROA assumption is based on the fund’s asset classes, allocations, and capital market assumptions. However, in an IAS 19 valuation, there is no separate EROA assumption—the liability discount rate is used for this purpose. Under IAS 19, the total of the interest cost and the expected return on assets is referred to as the net interest on the net defined benefit liability or asset.

When the FASB and SSAP 102/92 rules became effective, there were transition periods where certain costs could be amortized as part of expense, but these periods have generally expired.

Under FASB and SSAP valuations, the prior service cost resulting from a plan amendment is often amortized over several years of expense. For pension plans, the gain or loss from an amendment is amortized over the average future service of the active population impacted by the amendment, while OPEB plans amortize these costs over the average service period to full eligibility. If all or almost all of a plan’s participants are inactive, then both types of plans can amortize the costs over the expected lifetime of the inactive population. This approach has also been used for plans with frozen benefits.

FASB and SSAP valuations also require a portion of a plan’s existing gain or loss to be amortized if the gain or loss is greater than 10% of the greater of a plan’s liability or assets. The amortization methodology is similar to that used for prior service cost amortizations, except that alternate approaches that result in quicker amortization are permissible.

Different terminology is used to describe a plan’s annual expense under the various accounting methods: FASB and SSAP accounting refer to expense as "net periodic pension cost" (NPPC) or "net periodic postretirement benefit cost" (NPPBC), while IAS 19 accounting uses the term "net periodic benefit cost" (NPBC).

In addition to the standard expense calculations, three types of special situations or events may occur that require a plan sponsor to recognize additional expense, or income: settlements, curtailments, and termination benefits.

Figure 3: Settlements

FASB and SSAP accounting rules define a settlement as a transaction that (a) is irrevocable, (b) relieves the plan sponsor of primary responsibility for the benefits, and (c) eliminates significant risks for the related liability and assets. This is slightly different from IAS 19, where a settlement is a transaction that eliminates the plan sponsor’s obligations for some or all of the benefits provided under a plan.

A settlement, or series of settlements, is required to be reflected in FASB and SSAP accounting expense if the cost of all settlements in a year exceeds the sum of the service cost (SC) and interest cost (IC) for that year. There is no specific threshold in IAS 19 at which settlement accounting is required, so plan sponsors have some latitude in applying the rules.

Settlement accounting for FASB and SSAP expense purposes first requires the liability for the settled participants to be adjusted to equal the actual cost of the settlement. A portion of the plan’s unamortized gain or loss is then recognized, based on the percentage of liability being settled. Under IAS 19, when the liability changes due to a settlement, that difference is recognized immediately, and is added to the SC.

There is also a difference in timing under the accounting methods. Settlements under IAS 19 accounting are recognized when they occur. For FASB and SSAP accounting, the transaction is recognized when it meets the settlement definition, which often occurs when the transaction becomes irrevocable.

Figure 4: Curtailments

Special event accounting is required when a curtailment occurs. Under IAS 19, a curtailment occurs when an entity significantly reduces the number of employees covered by a plan. FASB and SSAP accounting rules define a curtailment as an event that significantly reduces the expected years of future service, or eliminates benefit accruals for a significant number of employees.

For FASB and SSAP expense, the accounting for a curtailment is a multistep process. Any gain resulting from a curtailment is first used to reduce the plan’s existing loss, if possible. Curtailment losses are applied to existing gains in a similar manner. Any remaining curtailment gain or loss is then recognized immediately. A portion of any unamortized prior service cost bases that are applicable to the affected group of participants must then be recognized. This recognition is based on the reduction in the remaining future years of service of the participants. Under IAS 19, when the liability changes due to a curtailment, that difference is recognized immediately, and is added to the SC.

The timing of the curtailment recognition depends upon both the accounting method and the effect of the curtailment. Plan sponsors recognize curtailments under IAS 19 when they occur. For FASB and SSAP expense, the timing depends on whether the net effect of the curtailment results in a gain or a loss. If the net effect is a gain, the curtailment is recognized when the employees terminate, or when the plan amendment is adopted. If the net effect is a loss, the recognition occurs when curtailment is probable and the effects are reasonably estimable.

Termination benefits

Employers may provide benefits to employees in connection with their termination of employment. They may be special termination benefits offered for a specific period of time, or contractual termination benefits that may be required if a specified event, such as a plant closing, occurs. The accounting methods outline different requirements regarding the timing of when these types of benefits are to be recognized. However, all termination benefits are subject to immediate recognition, as opposed to amortization, regardless of when they are reflected.

Figure 5: Disclosure Requirements

Under all three methods, a plan’s funded status is calculated for the end-of-year disclosure, which is simply the assets of the plan, if any, minus the liabilities. FASB and SSAP disclosures require the calculation of two additional items. The first item is the (accrued)/prepaid benefit cost, which represents the accumulated value of total plan contributions, or benefit payments for unfunded plans, less the total plan expense, for all years that the plan has been subject to the accounting standard. In a SSAP valuation, prepaid assets are considered non-admitted assets. The other item is the total of all unrecognized amounts not yet amortized, which is equal to the difference between the (accrued)/prepaid benefit cost and the plan’s funded status, and has different names under FASB and SSAP accounting.

By the end of 2021, all three types of disclosures will require breakdowns of the sources of gain and/or loss. A sensitivity analysis must also be performed for each significant actuarial assumption under IAS 19 accounting. Finally, FASB requires that, for underfunded plans, a plan’s funded status be split into current liabilities (excess of amounts payable in the following year over the fair value of assets) and noncurrent liabilities (the remainder).

There has been an overall movement toward harmonizing the accounting rules over time, not only with the NAIC’s move toward the FASB standards with SSAP 102 and 92, but also with the continued adoption of IFRS in the global community. However, it remains to be seen whether there will ever be a full convergence of the accounting standards for pension and OPEB plans.