Accounting and Reporting by Defined Benefit Pension Plans (Issued 3/80)
This Statement establishes standards of financial accounting and reporting for the annual financial statements of a defined benefit pension plan (plan). It applies both to plans in the private sector and to plans of state and local governmental units. It does not require the preparation, distribution, or attestation of financial statements for any plan.
The primary objective of a plan's financial statements is to provide financial information that is useful in assessing the plan's present and future ability to pay benefits when due. To accomplish that objective, the financial statements will include information regarding (a) the net assets available for benefits as of the end of the plan year, (b) the changes in net assets during the plan year, (c) the actuarial present value of accumulated plan benefits as of either the beginning or end of the plan year, and (d) the effects, if significant, of certain factors affecting the year-to-year change in the actuarial present value of accumulated plan benefits. If the date as of which the benefit information ((c) above) is presented (the benefit information date) is the beginning of the year, additional information is required regarding both the net assets available for benefits as of that date and the changes in net assets during the preceding year. Flexibility in the manner of presenting benefit information and changes there in (items (c) and (d) above) is permitted. Either or both of those categories of information may be presented on the face of one or more financial statements or in accompanying notes.
Information regarding net assets is to be prepared on the accrual basis of accounting. Plan investments (excluding contracts with insurance companies) are to be presented at fair value. Contracts with insurance companies are to be presented the same way as in the plan's annual report to certain governmental agencies pursuant to the Employee Retirement Income Security Act of 1974 (ERISA). Plans not subject to ERISA are to account for their contracts with insurance companies as though they also filed that annual report.
The primary information regarding participants' accumulated plan benefits reported in plan financial statements will be their actuarial present value. This Statement defines participants' accumulated plan benefits as those future benefit payments that are attributable under the plan's provisions to employees' service rendered to the benefit information date. Their measurement is primarily based on employees' history of pay and service and other appropriate factors as of that date. Future salary changes are not considered. Future years of service are considered only in determining employees' expected eligibility for particular types of benefits, for example, early retirement, death, and disability benefits. To measure their actuarial present value, assumptions are used to adjust those accumulated plan benefits to reflect the time value of money (through discounts for interest) and the probability of payment (by means of decrements such as for death, disability, withdrawal, or retirement) between the benefit information date and the expected date of payment. An assumption of an ongoing plan underlies those assumptions.
The use of averages and other methods of approximation consistent with recommended actuarial practice is permitted, provided the results are substantially the same as those contemplated by this Statement. Such simplified techniques may be particularly useful for plans sponsored by small employers.
Plan financial statements are required to include certain information about (a) the plan, (b) the results of transactions and other events that affect the information presented regarding net assets and participants' benefits, and (c) other factors necessary for users to understand the information provided.
This Statement is effective for plan years beginning after December 15, 1980.
Basis for Conclusions
In developing the foregoing standards, the Board first identified both the users of plan financial statements and the objectives of those statements. The Board believes that the content of plan financial statements should focus on the needs of participants because pension plans exist primarily for their benefit. However, plan financial statements should also be useful to others who either advise or represent participants, are present or potential investors or creditors of the employer(s), are responsible for funding the plan, or for other reasons have a derived or indirect interest in the plan's financial status.
Because employees render service long before they receive the benefits to which they are entitled as a result of that service, they are concerned with whether the plan will be able to pay their future benefits. Therefore, the Board concluded that the primary objective of plan financial statements should be to provide financial information that is useful in assessing the plan's present and future ability to pay benefits when due. However, plan financial statements do not provide all the information necessary for that assessment. They should be used in combination with other pertinent information, including information about the financial condition of the employer(s) and, for plans subject to ERISA, the guaranty of the Pension Benefit Guaranty Corporation. Also, financial statements for several plan years can provide information more useful in assessing the plan's future ability to pay benefits than can the financial statements for a single plan year.
Because a plan's net assets are the existing means by which it may provide benefits, information about them (the net asset information) is considered essential in assessing a plan's ability to pay benefits when due. The Board believes that measuring a plan's investments (other than contracts with insurance companies) at fair value will provide the most relevant information about those assets consistent with the primary objective of plan financial statements.
Insurance companies offer plans a wide variety of contracts. Because of their complexity, several difficult issues arise in recognizing and measuring the elements of such contracts that constitute plan assets. The Board decided that sufficient information was not available at this time to enable it to reach definitive conclusions about certain conceptual and implementation issues. It therefore chose the practical solution of requiring contracts with insurance companies to be reported in plan financial statements in the same way they are reported (for ERISA plans) or would have been reported (for non-ERISA plans) in the annual report required by ERISA to be filed with certain governmental agencies. That approach may result in such contracts being presented at other than fair value.
To be useful in assessing a plan's present and future ability to pay benefits when due, plan financial statements must also present information about the benefits to be paid. The Board believes that information (the benefit information) should relate to the benefits reasonably expected to be paid in exchange for employees' service to the benefit information date. Because the Board did not deem it essential at this time to resolve the issue of the accounting nature of the benefit information, this Statement does not prescribe its location in the financial statements.
The initial Exposure Draft required that both the benefit and net asset information be determined as of the same date. Thus, if the plan's annual financial statements were as of the end of the plan year, end-of-year benefit information was required. A number of respondents expressed the view that determination of end-of-year benefit information on a timely basis was not practical and would cause increased actuarial fees. They indicated that most actuarial valuations are performed during the year using data as of the beginning of the year. Changing that practice at this time might create significant timing problems in terms of scheduling the actuaries' workload and, in some cases, obtaining necessary end-of-year data.
The Board concluded that the perceived costs of requiring end-of-year benefit information at this time may exceed the potential benefits of such information. Therefore, this Statement provides for the presentation of benefit information as of either the beginning or end of the year. However, the Board continues to believe that presenting both net asset and benefit information as of the same date is necessary to present the financial status of the plan. Therefore, if benefit information is presented as of the beginning of the year, this Statement requires that net asset information also be presented as of that date.
The information about a plan's ability to pay benefits when due that is provided by its financial statements is affected whenever transactions and other events affect the net asset or benefit information presented in those statements. Normally, a plan's ability to pay participants' benefits does not remain constant. Therefore, users of the financial statements are concerned with assessing the plan's ability to pay participants' benefits not only as of a point in time but also on a continuing basis. To facilitate that latter assessment, users need to know the reasons for changes in the net asset and benefit information reported in successive financial statements. Therefore, the Board concluded that plan financial statements should include (a) information regarding the year-to-year change in the net assets available for benefits and (b) disclosure of the effects, if significant, of certain factors affecting the year-to-year change in the benefit information.
If the benefit information date is the beginning of the year, the required disclosure regarding the year-to-year change in the benefit information will relate to the preceding year. Presenting information regarding changes in both the net asset and benefit information for the same period is necessary to present the changes in the plan's financial status for that period. Therefore, if the benefit information date is the beginning of the year, information regarding the changes in net assets during the preceding year is also required.
Determination of the net asset and benefit information may be affected by estimates and judgment. The Board believes users can better evaluate that information if the underlying assumptions and methods are disclosed. In addition, certain explanations may be needed for users to understand the information provided by a plan's financial statements. Therefore, this Statement requires certain disclosures regarding the plan, the effects of certain transactions and events, and other factors necessary for users to understand the information provided.