SFAS 132 (1998)
Employers' Disclosures about Pensions and Other Postretirement Benefits

In February 1998, the FASB issued SFAS 132, amending the disclosure requirements of SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. SFAS 132 does not change the measurement or recognition requirements of those standards.

The amendments in SFAS 132 recognize the need to provide information that enables users of financial statements to:

1. Evaluate the current and potential future cash flow consequences of an employer's pension and other postretirement benefit plans,
2. Forecast benefit costs, facilitating the estimation of future reported net income, and
3. Assess the effect of accounting choices on reported benefit costs and earnings quality

SFAS 132 requires employers to explicitly report benefits paid and contributions made (by employers and employees). Unlike predecessor standards, it also requires disclosure of the effects on benefit obligations and plan assets of business combinations, divestitures, foreign currency exchange rates, settlement, curtailment, and termination benefits. These disclosures will significantly improve users' ability to analyze the impact of trends in benefit costs and payments on enterprise earnings and cash flows. Comparative analyses over time, both within and across industries, will be facilitated as well.

New and Amended Disclosure Requirements for Defined Benefit Pension and Postretirement Plans
SFAS 132 requires that employers provide the following disclosures:

1. A reconciliation of beginning and ending balances of the benefit obligation, reporting each of the following:
   • Service cost,
   • Interest cost,
   • Contributions by plan participants,
   • Actuarial gains and losses,
   • Effects of foreign currency exchange rate changes,
   • Benefits paid,
   • Plan amendments,
   • Effects of business combinations and divestitures, and
   • Curtailments, settlements, and special termination benefits.

2. A reconciliation of beginning and ending balances of the fair value of plan assets reporting each of the following:
   • Actual return on plan assets,
   • Effects of foreign currency exchange rate changes,
   • Contributions by employer,
   • Contributions by plan participants,
   • Benefits paid,
   • Effects of business combinations and divestitures, and
   • Settlements.

3. SFAS 87 and SFAS 106 both require a reconciliation of the funded status of the plan with the amounts reported in the financial statements. SFAS 132 amends these standards to require reporting of:

• The net pension or other postretirement benefit prepaid asset or accrued liability,
• Any intangible asset and the amount of accumulated other comprehensive income,
• Any unamortized prior service cost,
• Any unrecognized gain or loss, and
• Any remaining unamortized (unrecognized) net obligation or net asset existing at the initial adoption of SFAS 87 or SFAS 106.

4. Net periodic benefit cost, displaying separately amortization of any unrecognized transition obligation (or asset), recognized gains and losses, prior service cost, and gain or loss due to settlement or curtailment.
5. The amount included in other comprehensive income due to a change in the minimum pension liability.

6. The effect of a one-percentage-point increase and the effect of a one-percentage-point decrease in the assumed health care cost trend rates on:

• the sum of service and interest cost components, and
• the accumulated postretirement benefit obligation

7. Significant transactions between the plan and the employer and related parties.

8. Costs of providing termination benefits, and

9. An explanation of changes in benefit obligation or plan assets not evident in other disclosures required by SFAS 132.

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New and Amended Disclosure Requirements for Employers with Two or More Plans

• SFAS 132 permits combined disclosures for plans with assets in excess of the accumulated benefit obligation and those with accumulated benefit obligations in excess of plan assets.

• The standard, however, requires separate disclosure of the benefit obligations and fair value of plan assets for plans with benefit obligations in excess of plan assets.

• Foreign plans may not be combined with U.S. plans if the benefit obligations of foreign plans are significant relative to the total benefit obligation and those plans use significantly different assumptions.

• Prepaid benefit costs and accrued benefit liabilities must be disclosed separately in the balance sheet.

Amended Disclosure Requirements for Defined Contribution Plans
Description of the nature and effect of any significant changes during the period affecting comparability, such as a change in the rate of employer contributions, a business combination, or a divestiture.

Amended Disclosure Requirements for Multi-employer Plans:
Aggregate (pension and other postretirement benefits) contributions to the plans for the period and a description of the nature and effect of any changes affecting comparability, such as a change in the rate of employer contributions, a business combination, or a divestiture.

Retained Disclosures:

1. The weighted-average assumed discount rate, rate of compensation increase, and expected long-term rate of return on plan assets.
2. The amounts and types of securities of the employer and related parties included in plan assets and the amount of benefits covered by insurance contracts.
3. Any alternative amortization methods used to amortize prior service costs or unrecognized net gains or losses.
4. Past practice or history of regular benefit increases.
5. Employers are permitted to aggregate or disaggregate disclosures for all U.S. and foreign defined benefit pension and other postretirement benefit plans to maximize information provided.
6. Cost recognized for defined contribution pension or other postretirement benefit plans during the period must be disclosed separately from the cost recognized for defined benefit plans.
7. The assumed health care cost trend rate for the next year, a description of the direction and pattern of change in the assumed trend rates thereafter, the ultimate trend rate, and when that rate will be realized.
8. The effect of possible withdrawal from multi-employer plans.

Eliminated Disclosures:

1. For Defined Benefit and Other Postretirement Plans including Multi-employer Plans:

• A description of the plan including employee groups covered, type of benefit formula, type of benefits provided, funding policy, types of assets held, significant non-benefit liabilities, and the nature and effect of significant matters affecting comparability of information for all periods presented.
• Any modifications of existing cost sharing provisions, commitments to increase monetary benefits of postretirement plans.

2. Separate Identification of:

• The accumulated and vested benefit obligation components of the PBO.

• Portions of the APBO attributable to retirees, other fully eligible participants, and other active plan participants.

3. For Defined Contribution Plans: A description of the plan including employee groups covered, and the basis for determining contributions.

Disclosure Requirements for Nonpublic Entities:
SFAS 132 reduces disclosure requirements for nonpublic entities to:

1. The benefit obligation, fair value of plan assets, and the funded status of the plan.
2. Employer contributions, participant contributions, and benefits paid.
3. The amounts recognized in the statement of financial position, including the net pension or other postretirement benefit prepaid asset or accrued liability, any intangible asset, and the amount of accumulated other comprehensive income.
4. The net periodic pension cost and the amount of accumulated other comprehensive income due to the change in the minimum pension liability.
5. Items F and H listed in the new and amended disclosure requirements.
6. Items (a) and (b) listed in the retained disclosure requirements.
7. The nature and effects of significant non-routine events, such as amendments, combinations, divestitures, curtailments, and settlements.

Effective Date:
SFAS 132 is effective for fiscal years beginning after December 15, 1997 with earlier application encouraged. Restatement of disclosures for earlier periods must be provided unless the information is not readily available.

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Effect of Changes in Disclosures:
Chapter 12, Pension and Other Employee Benefits, of The Analysis and Use of Financial Statements (Second Edition) shows how SFAS 87 and SFAS 106 can be used to estimate the economic changes in the benefit obligation and plan assets. However discontinuities such as significant acquisitions, divestitures, or plan settlements and curtailments, and (for foreign plans) foreign currency effects, impair the analysis shown. While the changes in SFAS 132 reduce the detail available in some cases, they should permit analysts to separate out these effects.

Exhibit 1 presents disclosures in the SFAS 132 format, based on SFAS 87 and SFAS 106 disclosures provided by DuPont. Exhibit 2 provides SFAS 132 disclosures for General Motors. These exhibits were developed with data from the Annual Reports of these two firms using analytical techniques from Chapter 12.

DuPont reported minimal pension cost in both 1994 and 1996, and pension credits in 1993 and 1995. The projected benefit obligation (PBO) grew 28%, from $11.8 billion at the beginning of 1993 to $15.1 billion at the end of 1996, whereas assets increased by only 21% (from $14.6 to $17.6 billion). Major factors affecting the funded status of duPont's plans include:

• Net actuarial gains,¹ mainly from an increase in the discount rate (from 7.25% to 9.00%) in 1994,
• Increases in prior service costs, and
• High actual returns on plan assets in 1995 and 1996, offsetting increases in service and interest costs.

Pension benefits paid by DuPont increased 35% from $1.16 to $1.57 billion while employer contributions remained low. However, lack of information about acquisitions, divestitures and effects of exchange rate changes may distort the cash flow data. SFAS 132 disclosures will remedy this shortcoming.

DuPont's reported postretirement health care expense declined from $266 million in both 1993 and 1994 to $208 million in 1996. However, benefits paid rose from $255 in 1993 to $397 million in 1996. Both the accrued liability and the benefit obligation declined over the 1993-1996 period. Note the large unrecognized negative prior service cost, reflecting 1992 plan amendments that reduced these benefits (see text page 637). Amortization of this benefit reduced benefit cost.

The assumed health care cost escalation rate declined from 10% (expected to decline to 5% in 10 years) in 1993 to 8% (expected to decline to 5% in 8 years) in 1994. Note the declining impact of a one-percentage point increase in the health care trend rate subsequent to 1993. SFAS 132 also requires disclosure of the impact of one-percentage point decrease in the trend rate. The augmented disclosure will provide useful information about the sensitivity of the APBO and benefit costs to health care inflation that differs from expectations.

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General Motors (GM): Exhibit 3, Exhibit 4
Note: Case 12-1 (starting on text page 644) analyzes GM's pension plan through 1995 and provides background for this discussion.

Pension cost declined 55% from $2,524 million in 1994 to $1,138 million in 1996. Substantial growth (52%) in pension assets combined with a smaller increase in PBO (11%) reduced the pension plan underfunding by 93%, from $18,478 million at December 31, 1993 to $1,206 million three years later. This improvement in funded status was mainly due to:

• Large employer contributions of $18,877,
• High returns on pension plan assets of $21,243,

Note that we used arbitrary assumptions to estimate amortization and hence the amounts of plan amendments and actuarial gains and losses. SFAS 132 requires explicit disclosure of these effects.

GM continues to pay significant other (healthcare) benefits. The reported cost declined over the 1994 to 1996 period but the obligation continued to grow. GM reported a large actuarial gain in 1994 and a smaller one in 1996 due to use of a higher discount rate. In 1995, GM reduced its assumed health care inflation rates, reducing the obligation (offsetting much of the effect of the lower discount rate). These benefits will remain a drain on future cash flows and earnings.  Also note that GM's liability is highly sensitive to the assumed health care trend rate.

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¹ Our computation of actuarial gains and new prior service cost assumes use of the corridor method to determine required amortization of actuarial and investment gains and losses. See Box 12-4, Disaggregation of New Prior Service Costs from Actuarial Gains and Losses, page 619 in The Analysis and Use of Financial Statements.

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