ASC 715 pension and OPEB accounting valuations

Employers that report under US GAAP and sponsor a defined benefit pension plan, a retiree medical plan or another benefit accounted for under Topic 715 need a valuation every reporting year. ASU 2017-07 states that it applies to all employers, including not-for-profit entities, that offer those plans.

That covers audited private companies, public registrants, not-for-profits and private-equity portfolio companies that inherited a legacy plan. A 401(k) or other defined contribution plan sits outside this work.

Typical triggers:

• An audit request list that asks for the PBO, plan assets and net periodic benefit cost
• An acquisition that brings in a frozen or closed plan
• A plan amendment, freeze or settlement that changes the cost mid-year
• A lender or buyer asking for the funded status and expected contributions

The discount rate reflects high-quality fixed-income debt matched to the plan's expected benefit payments, and the plan is measured at the fiscal year-end or, under ASU 2015-04, the nearest month-end. Pre-Codification Statement 87 (paragraph 44A, pensions) and Statement 106 (paragraph 31A, retiree benefits) say the objective is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the benefits when due. The Codification text is behind a login, so the signing actuary confirms the current ASC 715 wording.

Our discount rate memo records the curve or bond portfolio used, the plan's expected payment timing, the rate selected last year and the reason for any movement, so the signing actuary can select the rate and the auditor can retrace it.

On timing, FASB Statement 158 required an employer to measure plan assets and obligations as of the date of its fiscal year-end statement of financial position, with limited exceptions. When the year-end is not a month-end, ASU 2015-04 allows the month-end closest to it, applied consistently, with an adjustment for contributions or significant events in between.

The PBO is the obligation that sits in a pension plan's funded status, and the ABO counts the same service at current and past pay with no assumption about future pay, so for a pay-related formula the PBO is the larger number. The table sets them side by side; the definitions are paraphrased from FASB documents because the Codification glossary is behind a login.

ASU 2018-14 clarified the disclosure in paragraph 715-20-50-3: the PBO and plan asset fair value for plans with a PBO above assets, and the ABO and plan asset fair value for plans with an ABO above assets. Both measures come out of the same census and assumption set, so we run them in one model.

Net periodic benefit cost has up to seven components, and after ASU 2017-07 only the service cost lands inside operating results. ASU 2017-07 lists the components in paragraph 715-20-50-1(h) and sets the presentation in paragraph 715-20-45-3A. The last column uses the illustrative plan described in the roll-forward section.

The standard also lists a transition asset or obligation component, which is zero in our example. Gains or losses from settlements or curtailments, and the cost of certain termination benefits, are reported in the same place as the non-service components. Illustrative figures only: 300 + 250 - 266 + 40 + 20 = 344.

The year-end PBO equals the prior-year PBO plus service cost, interest cost and any actuarial loss, less benefits paid. The diagram shows that chain from left to right, ending at the signing actuary's review, and the figures are made up so that every line can be checked. Funded status is plan assets at fair value less the benefit obligation (FASB Statement 158).

Illustrative pension plan, $000:

Check: 5,000 + 300 + 250 - 260 + 190 = 5,480, and 3,800 + 380 + 400 - 260 = 4,320. Funded status moves from (1,200) at the start of the year to (1,160) at the end, a 40 improvement. In practice the actuary also applies the plan's benefit formula, mortality and timing of payments, which this simplified example ignores.

Gains, losses and prior service cost that are not yet in net periodic benefit cost sit in accumulated other comprehensive income (AOCI), and a schedule releases them into cost over time. FASB Statement 158 required those amounts to be recognized in other comprehensive income as they arise and adjusted as they are later recognized in cost. For retiree benefits, Statement 106 paragraph 59 set the corridor: amortization is required when the net gain or loss at the start of the year exceeds 10 percent of the greater of the obligation or the market-related value of plan assets, and the minimum amortization is that excess divided by the average remaining service period of active participants. Paragraph 60 allows any systematic method that amortizes at least that much.

Continuing the illustrative plan: the liability loss of 190 less the asset gain of 114 (actual return 380 against 266 expected) leaves a net loss of 76 added to AOCI. Releasing 40 of net loss and 20 of prior service cost reduces AOCI by 60, so the net OCI charge for the year is 16.

Reconciliation: employer contribution 400, less net periodic benefit cost 344, less the OCI charge 16, gives the 40 improvement in funded status. That tie-out is the one auditors ask to see first.

The disclosure file is built from the same figures. ASU 2018-14 removed some disclosures and added others, and it took effect for fiscal years ending after December 15, 2020 for public business entities and after December 15, 2021 for all other entities.

The auditor evaluates the actuary's competence, capabilities and objectivity, understands their work and judges whether it is appropriate audit evidence. That is the requirement in AU-C 501, paragraph .27 for a management's specialist, and application paragraph .A70 adds that failing to use needed expertise, such as actuarial calculations, may be a significant deficiency or material weakness.

If the audit firm engages its own actuary instead, AU-C 620 applies: the auditor evaluates that specialist's competence and objectivity (paragraph .09), understands the field of expertise (.10) and agrees the work in writing where appropriate (.11), and keeps sole responsibility for the opinion (.03).

We organize the file for those tests:

• Census tie-out to payroll and retiree records, with an exceptions list
• The discount rate memo and the support for each assumption
• The PBO, asset and cost roll-forwards with the reconciliation to funded status
• Disclosure tables tied to the general ledger and the journal entries
• A one-page answer sheet for the auditor's standard pension request list

Finbryn does not describe the work as audit-ready. When Finbryn's signing actuary signs the valuation report, the auditor evaluates him as management's specialist under AU-C 501 paragraph .27 and decides whether the evidence is enough.