Updates aim to streamline pension, fair value measurement disclosures

When the Financial Accounting Standards Board (FASB) started talking several years ago about improving financial statement disclosures, companies pointed right away to two areas of U.S. generally accepted accounting principles (GAAP) they said needed help: fair value measurement and pensions.

Companies every quarter report redundant, overly detailed information about pensions and benefits they offer their retirees as well as the judgments they use to come up with fair value measurements, they said.

The FASB on Aug. 28, 2018, attempted to address these criticisms, publishing Accounting Standards Update (ASU) No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, and ASU No. 2018-14 Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20) Disclosure Framework — Changes to the Disclosure Requirements for Defined Benefit Plans, to improve, as the FASB characterized it, the effectiveness of these disclosures.

The standards “improve fair value and defined benefit disclosure requirements by removing disclosures that are not cost beneficial, clarifying disclosures’ specific requirements and adding relevant disclosure requirements,” FASB Chairman Russell Golden said in a statement.

ASU No. 2018-14 gets rid of several disclosures companies highlighted as no longer relevant, ranging from information related to amendments to the Japanese Welfare Pension Insurance Law, to the effect of a one-percentage-point increase or decrease in assumed healthcare cost trend rates.

The update adds two new requirements: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

Companies often zero in on the disclosure requirements in FASB ASC 715 Compensation—Retirement Benefits, as one of the top reasons why their financial statements are so lengthy. Investors, on the other hand, hold up the standard’s disclosure requirements as an important source of information to learn about what can be major obligations for some companies.

“We never believed that on pensions,” said Sandy Peters, head of the financial reporting policy group at the CFA Institute, on the criticism that pension footnotes were too voluminous. “The real issue on pensions was many of the disclosures were built for defined benefit plans, which are going to get smaller over the next 30 years.”

The second update, ASU No. 2018-13, aims to trim irrelevant or redundant information from disclosures related to methods for measuring the fair value of certain assets and liabilities as outlined in FASB ASC 820, Fair Value Measurement.

FASB ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly market transaction, as opposed to a fire sale or other unusual circumstance. It spells out how businesses should estimate the fair value of assets and liabilities by using available, quantifiable data such as market prices and also judgments and estimates. The standard separates the measurements into a three-tier fair value “hierarchy” depending on the judgment used in the measurement.

The standard requires details about how businesses and organizations come up with these measurements. The Aug. 28, 2018, update removes some disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the policy for timing of transfers between the levels. The update also modifies some existing requirements.

FASB member Harold Schroeder dissented from the final issuance. He wrote in his dissent that he objected primarily because the FASB decided not to require a roll forward of information about financial instruments classified as Level 1 and Level 2 of the fair value hierarchy.

Schroeder previously also said that the FASB missed an opportunity to require businesses — financial institutions, in particular — to provide more details about certain hard-to-value instruments. For investors, the information is crucial during a recession or market crisis.

The pensions and post-retirement benefit update stems from a proposal the FASB released in January 2016 via Proposed Accounting Standards Update ASU No. 2016-210, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Changes to the Disclosure Requirements for Defined Benefit Plans.

The FASB’s update to fair value measurement disclosures is based on a proposal released in December 2015 with Proposed ASU No. 2015-350, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement.

The amendments for fair value measurement disclosures are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2019.

The changes to pension and postretirement benefit disclosures are effective for fiscal years ending after Dec. 15, 2020, for public business entities and for fiscal years ending after Dec. 15, 2021, for all other entities.

The FASB will allow early adoption for both updates.

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