On March 10, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07 to improve the reporting of net periodic benefit cost from defined benefit pension plans and other postretirement benefit plans in the financial statements of all employers—including not-for-profit entities.
ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, is meant to provide financial statement users with:
- Clearer and disaggregated information related to the components of net periodic benefit cost
- Improved transparency of the presentation of net periodic benefit cost in the financial statements
This update doesn’t change recognition or measurement guidance.
Under current GAAP, net periodic benefit cost from defined benefit pensions and postretirement benefits includes several components that are aggregated for reporting in the financial statements, as required by FASB Accounting Standards Codification® Topic 715, Compensation—Retirement Benefits.
Stakeholders indicated to the FASB that, under current requirements, many of the components contained within net periodic benefit cost are distinctly different. This has resulted in users incurring more costs than necessary to evaluate the impact of those items on the financial statements. ASU 2017-07 is intended to address this concern.
The two key provisions of the update are outlined below.
Income Statement Presentation
Entities must present the service cost component in the same line item or items as other employee compensation costs arising from services provided by the related employees in the same period. The other components of net periodic benefit cost must be presented:
- Separately from the service cost component
- Outside of income from operations in the income statement, if that subtotal is presented
The line item or items used to present the other components in the income statement must be appropriately described or disclosed.
Only the service cost component can be capitalized—for example, as a cost of inventory or self-constructed asset. Other net periodic benefit cost components aren’t eligible for capitalization.
Effective Dates and Transition
ASU 2017-07 is effective for:
- Public entities. Annual periods beginning after December 15, 2017, including interim periods within those periods.
- Nonpublic entities. Annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Early adoption is permitted as of the beginning of an annual period for which financial statements haven’t yet been issued or made available for issuance.
The amendments related to presentation of service cost and other components in the income statements must be applied retrospectively to all periods presented. The amendments related to the capitalization of the service cost component should be applied prospectively, on and after the date of adoption.
ASU 2017-07 provides a practical expedient that allows employers to use the amounts disclosed in prior comparative periods’ pension and postretirement plan footnotes as the basis for the retrospective application of the new income statement presentation requirements.
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