New Pension Disclosure Rules
Getting Beneath the Surface of SFAS 132(R)

By Bonnie K. Klamm and Roxanne M. Spindle

E-mail Story
Print Story
OCTOBER 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.

In 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).

Most 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, 2004.

Exhibit 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.

FASB’s Standards Revision Process

Before 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.

In 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.

The 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.

SFAS 36: Disclosure of Pension Information

Until 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.

Therefore, 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.

Exhibit 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.

The 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.

One 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 rates.

It 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.

SFAS 87: Employers’ Accounting for Pensions

SFAS 87, issued in 1985, replaced SFAS 36 and APB Opinion 8.

This standard had three main objectives:

  • A standardized method for measuring net periodic pension cost;
  • Immediate recognition of a liability if the benefit obligation exceeded the plan’s assets; and
  • Additional disclosures.

While 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.

SFAS 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; and
  • Information on plan asset types and, if applicable, employer (or related-party) assets.

MDU’s 2003 pension disclosure under SFAS 87 would have appeared as presented in Exhibit 3.

Plan 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.

Obligations 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 benefit obligation.

With 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.

Additional 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.

Pension 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.

SFAS 132: Employers’ Disclosures About Pensions and Other
Postretirement Benefits

The 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.

SFAS 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 return.

These 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.

Plan description. This now serves only as an introduction to the note to the financial statements, and contains no useful information.

Obligations 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.

To 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.

This 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.

Additional 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.

Pension 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 in 2003.

SFAS 132(R): Employers’ Disclosures About Pensions and Other
Postretirement Benefits

In 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 assets;
  • Narrative 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 risk;
  • Benefits 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 benefit obligations.

Most 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 could vary.

SFAS 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.

Exhibit 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.

Plan description. This section is the same as in prior years, except that MDU has chosen to include the required disclosure about its measurement dates.

Additional 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.

SFAS 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.

FASB 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.

Each 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 in 2002.

This 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;
  • Employer securities;
  • Leveraged or derivative securities;
  • Short sells; or
  • Margin transactions.

This 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.

Because 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.

In 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 flows.

Because 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.

MDU’s 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.

The 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).

This 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.

FASB’s Future Challenge

In 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.” MDU 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.

FASB 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.

Bonnie 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, Richmond, Va.

The authors would like to thank MDU Resources Group, Inc. (, 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 decisions.




















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices


Visit the new