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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.
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:
Due to the fact this ASU will be applied retrospectively, it will be effective for all periods presented in a comparative financial statement presentation.
Commonly referred to as SIRAGE, the components of net periodic benefit costs include:
The below image demonstrates how components of the net periodic benefit cost may be grouped in a financial statement presentation under the new guidance:
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.
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