Under past accounting standards, the funded status of an employer's postretirement benefit plan (i.e., the difference between the plan assets and obligations) was not always completely reported in the balance sheet, often hidden in financial statement footnotes. Employers reported an asset or liability that almost always differed from the plan's funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits. Past standards only required an employer to disclose the complete funded status of its plans in the notes to the financial statements.

Specifically, the new standard, Statement No. 158 requires an employer to:

(a) Recognize in its statement of financial position an asset for a plan's overfunded status or a liability for a plan's underfunded status

(b) Measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions)

(c) Recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income of a business entity and in changes in net assets of a not-for-profit organization.

The standard applies to plan sponsors that are public and private companies and nongovernmental not-for-profit organizations. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of the fiscal year ending after Dec. 15, 2006, for entities with publicly traded equity securities, and at the end of the fiscal year ending after June 15, 2007, for all other entities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after Dec. 15, 2008.

The new standard "represents a significant improvement in financial reporting as it provides employees, retirees, investors and other financial statement users with access to more complete information," said FASB member George Batavick. "This information will help users make more informed assessments about a company's financial position and its ability to carry out the benefit promises made through these plans."

The issuance of Statement No. 158 completes the first phase of the board's comprehensive project to improve the accounting and reporting for defined benefit pension and other postretirement plans. A second, broader phase of this project will comprehensively address remaining issues. The board expects to collaborate with the International Accounting Standards Board on that phase.

For more on this story: New Pension Accounting Rules Drops Big Liability on Balance Sheet