Pension Cost Accounting Rule Change
The Financial Accounting Standards Board (FASB) introduced a new accounting standard that requires companies to present service cost as the only operating component of periodic pension costs on the income statement. Our forensic accounting technology has applied this convention since inception, so all of our models and research already reflect and will continue to reflect this change. In other words, we have you covered.
Background On This Change
A company’s net periodic benefit cost (NPBC) is the total cost expensed for a firm’s pension or postretirement plans. The service cost component of the NPBC is the portion of the expected postretirement benefit obligation attributed to services rendered by eligible employees during the year. Other components of NPBC include:
- Interest Cost - increases in the obligation due to the passage of time
- Expected Return on Plan Assets - typically a credit for deferred expected realized return on plan assets
- Settlements and Curtailments - non-recurring charges that lower the obligation due to payouts or change in plan terms
- Amortization of Actuarial Gains or Losses – charges that occur to reflect change in assumptions to explain change in benefit obligation, amortized from other comprehensive income (OCI) over time
- Amortization of Prior Service Cost – amount of prior service cost or credit that is attributable to plan participants’ past services rendered due to a plan amendment or initiation
Prior to this rule going into effect, companies are allowed to disclose these components of NPBC in any line item on the income statement without disclosure as to which components were in which line item. As a result, they could use non-operating elements of the NPBC to influence their operating results.
The new rule requires all companies to include the service cost in compensation costs or any line item above a subtotal of income from operations. In addition, it requires disclosure of which line items contain components of NPBC.
This change will be required for annual reporting periods beginning after Dec 15, 2017 (meaning companies with fiscal year ends of Dec 31, 2017 are not required to adopt the change). Early adoption is allowed for companies who had not filed a quarterly statement prior to the announcement, for their current annual period. Although we do not know exactly how many companies will be adopting this change early, some current examples of those who have adopted this fiscal year are Hawaiian Holdings (HA) and Ryder System (R).