Pension Disclosure Rules
Beneath the Surface of SFAS 132(R)
Bonnie K. Klamm and Roxanne M. Spindle
2005 - A defined-benefit pension plan requires a company to
pay each qualified employee a monthly benefit that begins
at retirement and terminates at the employee’s death.
The full extent of the cost of this obligation is unknown
until the employee dies. Nevertheless, the matching principle
inherent in GAAP requires that employers include an estimate
of the current year’s share of the total cost in the
annual income statement.
1974, FASB began creating a uniform format for calculating
annual pension costs and related disclosures; the ultimate
goal was to provide financial statement users with sufficient
information to interpret the impact of the reported pension
expense on the quality of earnings and to understand the
economics of the company’s pension plan. This process
has resulted in several accounting standards related to
defined-benefit pension plans and other postretirement benefits,
namely, SFASs 36, 87, 132, and 132(Revised).
provisions of SFAS 132(R) are effective for fiscal years
ending after December 15, 2003. Interim reporting provisions
are effective for interim reporting periods beginning after
December 15, 2003. Provisions related to estimated future
benefit payments, foreign plans, and nonprofit entities
became effective for fiscal years ending after June 15,
1 compares the disclosure requirements of the four SFASs
and reflects the increased disclosure over time as FASB
has attempted to perfect pension reporting. The underlying
nature of a defined-benefit pension plan makes this difficult,
because as users make additional demands for information,
the standard will continue to change. Thus, the authors
predict that SFAS 132(R) will not be the last standard to
amend pension disclosure.
Standards Revision Process
revising a standard, FASB reviews the required disclosures
for usefulness. The result of each review of pension-related
standards has been to increase existing disclosures and
add new ones. For example, the disclosure of pension expense
increased from reporting only the pension cost to reporting
pension cost components and related assumptions. Likewise,
the disclosure of funding status began as disclosure of
the plan’s obligation and asset amounts and has evolved
into disclosure of reconciliations of both obligations and
assets, along with related assumptions.
some cases, disclosures continue to be required but are
shifted to different areas of the footnote. For example,
SFAS 87 included actual return on plan assets as a component
of pension cost. Subsequent standards have moved actual
return to the asset reconciliation. In other cases, FASB
has added completely new disclosures. For example, SFAS
132(R) requires cash flow estimates and disclosure of pension
cost components in interim financial reports.
growth in disclosure is illustrated using the 2003 financial
statement information of MDU Resources Group, Inc. (NYSE:
MDU), as it would have appeared under each standard. The
analysis excluded other retirement benefits, such as health
plans and nonqualified plans. Using 2003 results in all
four disclosure formats allows the reader to trace numbers
and evaluate the usefulness of the additional information.
36: Disclosure of Pension Information
the issuance of SFAS 36 in 1980, companies had little guidance
on pension measurement or disclosure. Companies could measure
pension costs using a variety of actuarial methods, and
plan assets could be measured using several valuation methods.
This approach resulted in a lack of comparability. FASB
began to address the issue in 1974. By 1980, with the measurement
issues still unresolved, FASB recognized that it would be
unable to reach a consensus for several more years.
The board strongly believed that requiring conformity of
pension plan disclosures could not wait until the other
issues were resolved.
SFAS 36, issued in 1980, required all companies with defined-benefit
plans to disclose the actuarial present value of accumulated
plan benefits and the fair value of plan assets in accordance
with SFAS 35, Accounting and Reporting by Defined Benefit
Pension Plans, pertaining to financial reporting by
plans. In addition, the standard required disclosure of
the total pension cost, along with a general statement about
plan coverage and funding policies.
2 presents MDU’s 2003 pension disclosures under
1980’s SFAS 36. The brief plan description discloses
only that the plans cover most full-time employees. The
actuarial present value of plan benefits, the fair value
of net assets, and net pension cost are disclosed. The only
other required disclosure is the discount rate used to calculate
plan benefits disclosed under SFAS 36 represent the benefits
due to employees based on service to date, as calculated
with no assumptions about future compensation. After 1997,
this information no longer needed to be disclosed. In 2003,
companies were again required to disclose the aggregate
accumulated benefit obligation, but not to separately state
the vested and nonvested benefits. Also, note that the 2003
pension cost calculated under the 1980 rule would have been
different because at that time pension cost was directly
related to funding policy.
might assume from Exhibit 2 that the plans are overfunded,
because assets exceed the reported obligation. Because many
plans base ultimate payments on compensation at the time
of retirement, however, the pension benefit could be underestimated
if it does not include assumptions about future compensation
is also common for a company to have several plans. Under
SFAS 36, underfunded plans could be netted against overfunded
plans, which could mask a funding issue. Disclosure required
by subsequent standards would reveal that aggregated plan
obligations, which include future compensation, exceed assets.
Furthermore, when obligations are measured without the future
compensation component, some plans will remain underfunded.
87: Employers’ Accounting for Pensions
87, issued in 1985, replaced SFAS 36 and APB Opinion 8.
standard had three main objectives:
A standardized method for measuring net periodic pension
Immediate recognition of a liability if the benefit obligation
exceeded the plan’s assets; and
discussing the calculation of net periodic pension cost
is beyond the scope of this article, it is important to
note that the expense consists of four elements: 1) compensation
cost; 2) interest cost; 3) investment returns on plan assets;
and 4) amortization of certain historic costs. It is also
important to recognize that the investment-return component
reflects expected rather than actual returns on plan assets,
to provide a smoothing effect.
87 requires the following:
Disclosure of the impact of future pay increases;
A reconciliation of the funded status of the plan with
the accrued pension cost or prepaid pension cost reported
in the statement of financial position;
Separate schedules reconciling the funding status for
plans with assets in excess of accumulated pension benefit
obligations and for plans with accumulated pension benefit
obligations in excess of plan assets;
The recording, on a plan-by-plan basis, of a minimum liability
if the benefit obligation (computed without the future
compensation component) exceeds plan assets [Generally,
a company must recognize a minimum liability to the extent
that any individual plan has an accumulated benefit obligation
(ABO) in excess of the fair market value of its assets.
The unfunded ABO is reduced (increased) by the amount
of accrued liability (prepaid pension cost). The corresponding
offset is an intangible asset rather than a charge against
income to the extent that the plan has any unrecognized
prior service costs or unamortized transition obligation.
Any excess is an additional minimum liability that is
charged to equity.];
Disclosure of interest rates related to the benefit obligation,
compensation increases, and expected return on plan assets,
in addition to the previously disclosed discount rate;
Information on plan asset types and, if applicable, employer
(or related-party) assets.
2003 pension disclosure under SFAS 87 would have appeared
as presented in Exhibit
description. The plan description provides
minimal additional information. The reference to annual
contributions conveys only that the company complies with
federal funding requirements and is not currently subject
to funding penalties. No information is provided for predicting
future cash flows.
and assets. SFAS 87 requires disclosure of
the projected benefit obligation (including a provision
for future pay increases in addition to vested and nonvested
portions of the benefit obligation), as well as the accumulated
the additional detail required by SFAS 87, it is apparent
in Exhibit 2 that the company’s projected benefit
obligation exceeds plan assets in both 2002 and 2003. Like
many companies, MDU has plans in which the fair value of
plan assets is not sufficient to offset the current benefit
obligation. (Note that MDU was at all times in compliance
with federal tax laws.) SFAS 87’s disclosure format
makes it easy for users to see this. In 2002, this underfunding
required MDU to record an additional minimum liability.
In 2003, the difference was offset by the increase in plan
assets, and no additional minimum liability was required.
disclosure. SFAS 87 requires assumptions in
paragraph form about the various interest rates. Any effects
of rate changes on the projected benefit obligation also
require disclosure. This information is not a required disclosure
for SFAS 132 or 132(R); hence, under the earlier standard,
$NA is inserted for the effect of rate changes on plan obligations
and assets. Asset types are briefly described as primarily
debt and equity securities. Because there is no reference
to employer-related securities, it is assumed that none
are held by the plan.
costs. Under the SFAS 87 disclosures, it is
evident that the plan suffered investment losses in 2002
and 2001 and earned income in 2003. Evaluating the impact
of return on plan assets on the calculation of pension costs,
however, is difficult. The disclosures do not make it clear
that pension expense in all three years was adjusted to
reflect the company’s expected return on plan assets.
Unexpected return (the difference between actual and expected
return) is netted with various amortized amounts in the
net amortization and deferral figure. Therefore,
users cannot independently determine the expected return
for any given year. This makes analyzing the impact of the
company’s investing decisions difficult.
132: Employers’ Disclosures About Pensions and Other
primary purpose behind SFAS 132 was to address SFAS 87’s
weakness in determining the impact of a company’s
investing decisions. Exhibit
4, which presents MDU’s 2003 pension disclosure
under SFAS 132, shows why the company reported pension income
(versus pension expense) in 2001 and 2002 despite experiencing
actual negative returns on plan assets.
132, issued in 1998, required the following:
Reconciliations of beginning and ending balances for the
benefit obligation and plan assets;
Separate disclosure of unamortized prior-period service
costs and unrecognized gains and losses;
Dividing any required additional minimum liability into
the intangible asset and the accumulated other comprehensive
income amounts; and
Modified disclosure of the net periodic pension cost components
by replacing the net other component number with specific
amortized amounts and requiring disclosure of expected
changes are important because they provide users with information
to evaluate explicit changes in benefit obligations and
plan assets and to compare the expected return on plan assets
with the actual results. This standard also eliminated the
need to disclose information about vested and nonvested
portions of the accumulated benefit obligation, except for
plans that have a minimum liability.
description. This now serves only as an introduction
to the note to the financial statements, and contains no
and assets. Detail about vested, nonvested,
and future pay increases are no longer disclosed; funded
and underfunded plans are collapsed into one column. In
place of this information, SFAS 132 requires details on
the changes in benefit obligations and plan assets, including
the effect of component increases and decreases and the
impact on pension cost. For example, in 2003 the largest
change to the benefit obligation was $27.7 million for an
“actuarial loss,” which represents changes in
actuarial assumptions (in this case, the discount rate decreased).
This amount will be amortized over a fairly long period.
evaluate the change in plan assets, users can see clearly
the impact of the investment return. Some users might note
that employer contributions are about $3 million in both
years despite the large fluctuation in actual returns.
section now provides more detail on the amounts included
on the balance sheet. Without this additional disclosure,
a user could not easily determine that in 2002, for example,
the $204 million of other liabilities includes almost $5
million of additional minimum liability related to the pension
plan. Although the detail is provided in MDU’s statement
of common stockholders’ equity, the new disclosures
make it easier to see that the defined-benefit plans account
for a large portion of the other comprehensive loss of $12.0
million for that year.
disclosures. SFAS 132 requires less-detailed
information about plans that have accumulated benefit obligations
that exceed assets. The projected benefit obligation, the
accumulated benefit obligation, and the plan assets must
be disclosed for these plans. Because these amounts are
also now included in the total column, users who want to
compare potentially underfunded plans to funded plans must
make their own calculations. In addition, the interest rates
now appear in tabular form and are easier to read.
costs. While SFAS 132 made no change to pension
cost calculations, it did change pension cost disclosures.
Expected return has replaced actual return. More detail
about the various amortization charges must also be provided.
One thing that becomes much easier to see is the inherent
smoothing effect of using expected return as a component
of pension expense. Most of the $26 million loss on plan
assets from 2002 was offset by gains in 2003. SFAS 87 requires
MDU to defer the 2002 loss, and prevents MDU from using
the excess gains from 2003 to reduce pension cost. Without
the smoothing mechanism, MDU would have had a very large
pension expense in 2002 and a very large pension income
132(R): Employers’ Disclosures About Pensions and
March 2003, responding to user requests, FASB again reviewed
pension plan disclosures. SFAS 132(R) requires the annual
statement footnote to provide additional information beyond
the earlier standard:
Accumulated benefit obligation;
Major categories of plan assets, including the percentage
of the fair value of total plan;
Narrative description of investment policies and strategies,
including target allocations for each major category of
description of the basis used to determine the overall
expected long-term rate of return on assets;
Disclosure of additional asset categories and additional
information about specific assets is encouraged if that
information is expected to be useful in understanding
expected to be paid in each of the next five fiscal years,
and in the aggregate for the five fiscal years thereafter;
The best estimate of contributions expected to be paid
to the plan during the next fiscal year;
Separate statement of the assumptions used to determine
the benefit obligation and the net benefit cost; and
The measurement dates used to determine plan assets and
of the changes are designed to help users understand the
underlying economics of a company’s pension plans.
More information is available to help users evaluate the
reasonableness of the company’s estimates and expected
returns, determine the potential market risk, and gauge
the impact of market changes since the measurement date.
The disclosures related to plan assets and cash flows do
provide some new, useful economic information. The disclosures,
however, are about aggregated plans; individual plan information
132(R) also requires the following disclosures in interim
reports issued after December 31, 2003:
Pension cost for the period, including the major components
separately stated; and
Employer contributions for the current fiscal year if
they differ significantly from amounts previously disclosed.
5 presents MDU’s pension disclosures from its
2003 financials. Some sections are unchanged: the obligation
and asset reconciliations and pension costs, seen in Exhibit
4. Even without the unchanged sections, the exhibit demonstrates
the large growth in disclosure since SFAS 36.
description. This section is the same as in
prior years, except that MDU has chosen to include the required
disclosure about its measurement dates.
disclosure. Users wanted more information
about the probability that a company might have to record
a minimum liability. With a little math, users can now determine
that the fair value of plan assets, $223 million, exceeded
the total accumulated benefit obligation of $212 million.
Because this is an aggregate number, it would be possible
for one plan to have a high surplus while several other
plans were close to even. Although the aggregate information
is not optimal, it provides sufficiently useful information
for most users to justify the minimal cost to produce it.
132(R) continues to require some detail for plans in which
the accumulated benefit obligation exceeds plan assets.
This information, reported in a tabular format, is easier
to read than the presentation shown in Exhibit 4. Coupled
with the aggregate information about the accumulated benefit
obligation and plan assets, an informed user knows more
about the probability that the company’s pension plans
might result in the recording of a minimum liability.
observed that disclosures about certain key assumptions
would be more useful if they followed consistent conventions.
Therefore, SFAS 132(R) requires disclosure of the assumptions
used to determine the benefit obligation (the actuarial
present value of benefits to be paid under the pension benefit
formula) and the net benefit cost (the amount recognized
in an employer’s financial statements as the cost
of a pension plan for a period). Users can now see the aggregate
rates that were used for both the cost and the liability
calculations. This information, coupled with the measurement
date, will help informed users evaluate the reasonableness
of the pension accrual.
company must disclose the basis used to determine the expected
rate of return on plan assets. MDU’s expected return
on plan assets is 8.5%, which is based on 70% equity securities
and 30% fixed-income securities. This information is followed
by an aggregate presentation of the actual asset allocations.
MDU was close to its overall allocation in 2003, but not
information is followed by a statement concerning the company’s
investment strategies. As a result, users see that in addition
to diversifying its assets, MDU does not allow plan assets
to be invested in the following:
Commodities and future contracts;
Leveraged or derivative securities;
Short sells; or
new information should give users who take the time to analyze
it a better idea of the financial stability of the plan
assets and whether the company’s disclosed expected
rate of returns is reasonable.
FASB received comments about the inadequate coverage of
future cash flows, the current standard requires an estimate
of the next fiscal year’s contributions and disclosure
of 10-year estimates of future cash outflows for benefit
payments (for fiscal years ending after June 15, 2004).
These new disclosures provide information that cannot be
determined from the obligation reconciliation or the pension
cost detail. Brian
W. Carpenter and Daniel P. Mahoney, in “Pension Accounting:
The Continuing Evolution” (The CPA Journal,
October 2004), suggest that these disclosures, which should
help users assess whether expected benefit payments are
adequately funded, may represent the most important new
provisions of the statement.
MDU’s case, the reported expected cash contribution
for 2004 was $1.6 million. In its 2004 footnote, MDU estimated
its 2005 payments at $900,000. These estimates are much
smaller than the 2003 contribution of $3.3 million. Because
pension plan contributions can fluctuate widely from year
to year, this new disclosure should help users assess cash
the 10-year estimate of expected benefit payments was not
required until 2004, Exhibit 5 includes information from
the 2004 footnote. MDU is predicting relatively small increases
in payment for the next four plan years, then much larger
increases in years 5 through 10. This disclosure may help
sophisticated users evaluate whether plans are adequately
funded and plan assets are properly invested.
quarterly filing for the period ending March 31, 2004 (Exhibit
6), reflects the new SFAS 132(R) disclosure requirements.
In addition to reporting a quarterly estimate of net periodic
pension cost, the interim footnote must include information
on the employer’s contributions for the current year
if the amount is significantly different from the previously
disclosed expected contribution.
interim footnotes provide considerable information about
how pension costs will impact current-year earnings and
cash flow. They also allow users to draw conclusions about
the stability of the pension calculation. The first-quarter
estimate net periodic pension cost was more than $1 million,
indicating that the final pension cost for 2004 could exceed
$4 million. At the same time, the impact on cash flow for
2004 was expected to be much smaller ($1.6 million). Tracing
these estimates through the interim financial reports allows
users to timely verify the estimates. The fact that MDU’s
estimates for 2004 proved to be very stable should have
provided additional useful information to those who followed
the pension disclosures during the year (net periodic pension
cost for 2004 was $4.1 million and the employer contribution
was $1.6 million).
information is very different from the 2003 information,
which should have increased the usefulness of the interim
2004 estimates. In 2003, net periodic pension cost was only
about $153,000, while the cash contribution was more than
$3 million. Without the disclosure of the estimate for the
2004 cash contribution in the 2003 footnote and the interim
disclosures of net periodic pension cost, most users would
have no way to gauge the impact of the pension plans on
either net income or cash flows until the 2004 statements
were actually issued.
a “Project Update” dated shortly before the
release of SFAS 132(R), FASB described the new disclosure
requirements as aiming to “select the disclosures
that will provide users with the most useful information,
without imposing undue costs on auditors and preparers.”
management estimated that “the additional disclosures
required for the 2003 financial statements took about 16
hours of preparation and another four hours of supervisory/management
review.” Although MDU’s management did not encounter
difficulty in providing the interim information, it did
incur additional actuarial fees. When the authors asked
about the additional complexity of reporting the benefit
information required for 2004, the company replied, “We
did not have any obstacles reporting the benefit payment
numbers in 2004.” It appears that, at least in this
case, FASB has met its goal of not imposing undue costs
on preparers of financial statements. While MDU believes
that the new disclosures should have added value to the
financial statements, the company reports that it has not
received much investor feedback.
has issued four major pension-related standards during the
last 30 years, and from the beginning its goal has been
to require disclosure that provides users with sufficient
information to evaluate the quality of earnings and predict
future cash flows. While SFAS 132(R) has drastically increased
the information reported, it is likely that pension reporting
has not yet reached that goal. The questions raised by the
disclosures in MDU’s first interim report suggest
that many potential requests for additional disclosures
may be working their way to the FASB. The board’s
challenge is to determine the appropriate level of disclosure
about a highly technical and complicated subject.
K. Klamm, PhD, CPA, is an assistant professor of
accounting and information systems at North Dakota State
University, Fargo, N.D.
Roxanne M. Spindle, PhD, CPA, is an associate
professor of accounting at Virginia Commonwealth University,
authors would like to thank MDU Resources Group, Inc. (www.mdu.com),
for its suggestions and comments. Publicly available historical
financial information for MDU Resources Group is included
in this article for illustrative purposes only. MDU Resources
Group is a diversified, natural resource company whose activities
include electric and natural gas utilities, natural gas
pipelines and energy services, utility services, natural
gas and oil production, construction materials and mining,
and domestic and international independent power production.
The company is not responsible for the content of this article,
or for any related assumptions, analyses, or conclusions
made in connection with it. This article does not constitute
an offer to sell any securities of MDU Resources Group,
Inc., and should not be relied upon in making any investment