In the small plan market, we often do not need to provide financial statement accounting for our clients’ pension plans. Plan sponsors that are publicly held require financial statement accounting. In addition, private plans that require Generally Accepted Accounting Principles (GAAP) accounting, such as construction companies with bonding requirements and companies with loan covenants, will require financial statement accounting as well. Ultimately, the plan sponsor’s auditor is responsible for determining whether the accounting is required.
In the United States, pension plans must follow the rules under Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 715 (ASC 715). The ASC 715 valuation determines the expense (or income) that is charged on the company’s statement of net income, as well as the liability (or asset) that is reported on the company’s balance sheet.
But what if the plan sponsor is a subsidiary of a foreign company? International Accounting Standard 19 (IAS 19) governs how companies in most countries outside of the United States account for their pension plans. U.S. rules allow foreign companies who comply with U.S. GAAP accounting to follow IAS 19 instead of ASC 715.
The following chart highlights the major differences between ASC 715 and IAS 19:
|
|
ASC 715 |
IAS 19 |
|
Present Value of Benefits The calculations are the same, but the terminology is different. |
Projected benefit obligation (PBO) |
Defined benefit obligation (DBO) |
|
Asset Valuation |
For funded status, fair market value. For expected return on assets, market-related value. |
For all purposes, fair market value. |
|
Balance Sheet Liability |
Shown as negative: PBO(-) + assets(+) = liability(-)/asset(+) |
Shown as positive: DBO(+) + assets(-) = liability(+)/asset(-)
The balance sheet asset is subject to an “asset ceiling”, which is the present value of economic benefits derived from surplus. |
|
Remeasurements |
Not applicable. |
Changes in plan assets and in assumptions relative to actual experience included in the DBO (i.e. asset and liability gains and losses) and changes in the asset ceiling. |
|
Accumulated Other Comprehensive Income (AOCI) |
Amounts not yet recognized in net pension cost. |
Remeasurements may be accumulated via AOCI or charged/credited to another equity account. |
|
Cost Recognized |
The net pension cost is recognized in P&L. Service cost + Interest cost – Expected return on plan assets +/- Amortization of unrecognized amounts |
The defined benefit cost components are recognized based on their nature. Service cost (P&L) +/- Interest on balance sheet liability/asset (P&L) +/- Remeasurements (OCI) |
|
Service Cost |
Current service cost |
Current service cost + change in DBO resulting from plan amendment or curtailment +/- gains and losses arising from settlements |
|
Interest Cost |
Increase in the PBO due to the passage of time; measured using expected contributions and benefit payments |
Increase in the balance sheet liability/asset due to the passage of time; measured using actual contributions and benefit payments |
|
Expected Return on Plan Assets |
There is an explicit assumption for the expected long-term rate of return on plan assets. |
Not applicable, as it is implicitly included in the interest on balance sheet liability/asset. It is based on the discount rate assumption. |
|
Recognition of Gains and Losses |
Gains and losses may be recognized immediately or delayed. Often, gains and losses falling outside of a corridor are often amortized over average remaining service of active participants (or life expectancy for a permanently frozen plan). |
Gains and losses are recognized immediately and included in remeasurements. |
In addition, IAS 19, Paragraph 145 requires disclosure of a sensitivity analysis “for each significant actuarial assumption” showing how the DBO would have been affected by these changes. The statement does not specify which assumptions are significant, though I’ve seen the following: +/-1% change in the discount rate, +/-0.5% change in compensation increases, and +1 year change in life expectancy.
In summary, the actuarial calculations to determine the present value of benefits will generally be the same under ASC 715 and IAS 19. The amounts disclosed on financial statements will differ based on whether ASC 715 or IAS 19 applies.
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