New Accounting Guidance for Pension Costs

By James Boissonneault March 9, 2018

The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2017-07, Compensation—Retirement Benefits (Topic 715); Improving the Presentation of Net Pension Cost and Net Periodic Post Retirement Benefit Cost. The purpose of this ASU is to improve the presentation of employer pension and other post retirement costs on the income statement, as well provide more meaningful disclosures in the notes to the financial statements.

Under Generally Accepted Accounting Principles (GAAP) in the United States, net pension expense is comprised of the following components:

• Service cost
• Interest cost
• Return on plan assets for the period
• Gain or loss
• Prior service costs
• Transition amounts

As required under the new ASU, the service cost component of net pension expense will be presented in the same line of the income statement as relevant employees’ wages. For example, in a manufacturing environment, this cost could be included in cost of sales or selling, general, and administrative expense. The other components of net pension expense would be presented outside of results from continuing operations in a line item such as other income or expense. Also under the new ASU, only service costs related to net pension expense will be eligible for capitalization onto the balance sheet for internally developed assets such as inventory or plant and equipment. Lastly, in the notes to the financial statements, management will need to disclose the line item(s) in the income statement where the components of net pension expense (other than service costs) are presented, if the other components of net pension expense are not presented separately on the income statement in their own line items.

ASU 2017-07 will be effective for public companies for annual periods beginning after December 15, 2017 and for other entities for annual periods beginning after December 15, 2018, and early adoption is permitted. In the first year of adoption, the prior period’s income statement presented will need to be adjusted retrospectively.

If you have any questions regarding ASU 2017-07, please contact James Boissonneault or your BNN advisor at 800.244.7444.