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Accounting for pensions and other postretirement benefits

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December 13, 2005


At the November 10, 2005 meeting, the FASB decided to add a project to its agenda to reconsider the current accounting guidance in Statement 87, Employers’ Accounting for Pensions, and Statement 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.

The goal of the overall project is to improve the transparency of financial statements by making it easier for investors, creditors, employees, retirees, and others to:

  • assess whether a company is able to meet its pension and postretirement obligations
  • evaluate the impact that meeting those obligations will have on a company’s financial position.

Project Description

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Pension and other postretirement benefits is a complex area in accounting. Therefore, the Board believes that the most effective way to approach this project is to divide it into two phases:

Phase One

The scope of the initial phase is limited to addressing whether the funded status of postretirement plans should be recognized in the employer’s balance sheet. The funded status is the net difference between the benefit obligation incurred for past employee service and the fair value of plan assets to pay those obligations. Under current accounting rules, this information is disclosed in the notes to the financial statements, but is not recognized in the basic financial statements.

Phase Two

In the second phase of the project, the Board would comprehensively reconsider most, if not all, aspects of existing standards of accounting for postretirement benefits, including:

  • how to best recognize and display the costs of providing postretirement benefits
  • how to best measure an entity’s plan obligations, particularly plans with lump-sum settlement options
  • whether additional or revised guidance should be provided regarding measurement assumptions
  • whether postretirement benefit trusts should be consolidated by the plan sponsor.

To further its effort to achieve international convergence of accounting standards, the FASB expects to work with the International Accounting Standards Board and other standards setters on this phase of the project.

It is anticipated that Phase Two will take an extended period of time to complete because of the complexity of the issues involved.

Take Note!

The SEC, in its “Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers,” reported that approximately $535 billion of retirement obligations are not recognized on public company balance sheets under existing accounting standards. Consequently, changing the accounting model for pensions and other postretirement benefits will have a significant effect on companies that sponsor these plans.


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