Credit unions and community banks that sponsor either a defined benefit pension and/or other post-retirement benefit plan (“DBP” or “PRBP”) may be impacted by Accounting Standards Update (ASU) Topic 715, Compensation – Retirement Benefits. This ASU improves consistency among entities, as well as transparency of the financial statements by eliminating the netting of net periodic benefit costs in income and expense line items of the income statement. Effective in 2019, it clarifies how DBP or PRBP activity (i.e., net periodic benefit cost components) is to be shown in the income statement.

What’s Changing?

Under current generally accepted accounting principles (GAAP), there is a lack of consistency in how DBP or PRBP activity is presented in the income statement. Specifically, certain entities include net periodic benefit costs as a component of compensation and employee benefit expense, while other entities include certain components of the net periodic benefit costs within other income and expense line items. Under the new guidance, there will be a set approach of presenting the net periodic benefit cost, which will include:

  • Only the service cost component of the net periodic benefit cost will be included in the compensation and benefits expense line item on the income statement. This is because the service cost is the present value of benefits earned by employees in the current year.
  • Components other than the service cost will be presented in separate line item(s) outside of operating income, if presented. Additionally, if these other components are not presented separately in the income statement, the classification of the line(s) used should be disclosed.
  • When calculating deferred origination costs under ASC 310-20 (i.e. FAS-91), the service cost component is the only item that may be capitalized.

Due to the fact this ASU will be applied retrospectively, it will be effective for all periods presented in a comparative financial statement presentation.

Components of Net Periodic Benefit Costs

Commonly referred to as SIRAGE, the components of net periodic benefit costs include:

  • Service Cost – The present value of all pension benefits earned by company employees in the current year.
  • Interest Cost – The increase in the projected benefit obligation due to the passage of time (like an interest expense).
  • Expected Return on Plan Assets – Actual return adjusted for the difference between actual and expected return – in other words, expected return on assets held by the pension plan.
  • Amortization of Unrecognized Prior Service Cost – The cost of retroactive benefits is amortized.
  • Gains or Losses – Difference between expected and actual return on plan assets, as well as changes in actuarial assumptions.
  • Amortization of Existing Net Obligation – This transition adjustment is the difference between the projected benefit obligation and the fair value of plan assets when the sponsor company adopted ASC 715 (SFAS 87).

A Look at the Financial Statement Presentation

The below image demonstrates how components of the net periodic benefit cost may be grouped in a financial statement presentation under the new guidance:

Preparing for Impact

Topic 715 will impact some credit unions and community banks, but will likely not be considered to have a significant impact on the financial institution industry as a whole. Specifically, the components of net periodic benefit cost, other than service cost, will no longer be included in operating income, if presented. If your credit union or community bank is impacted by this update, special attention should be given to the components of net periodic benefit cost provided by your actuary to ensure entries are recorded correctly to reflect these changes.

For more information on how to implement these accounting changes, contact Doeren Mayhew’s CPAs and advisors today.