Many funded retirement benefit plans have experienced significant losses on the investments held by the plan. At the same time, historic low discount rates have resulted in substantial increases in benefit obligations. These events have resulted in sizable losses that can be deferred in accumulated other comprehensive income (AOCI), but are then required to be amortized into income over future periods. Some employers may be considering changing their accounting policies for recognizing gains and losses that arise in their retirement benefit plans to reduce or eliminate the impact on future periods' reported net income of recognizing previously deferred losses.
A change in accounting policy is considered a change in accounting principle and the employer would be required to justify that the new policy is preferable to the existing policy. Also, a preferability letter from the company's independent accountant is required if the company is an SEC registrant. When presenting the accounting change in the financial statements, the new method is applied retrospectively to all prior periods presented, which can be quite challenging and often impacts other areas of the financial statements.
This Dataline explores the implications and considerations associated with an employer changing its accounting principles for pension and OPEB plans.