ASU 2017-07’s Impact on Pension and Benefit Cost Reporting

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-07 to change how companies report costs for defined benefit pension and other postretirement plans. The standard targets the income statement, separating costs related to employee service from the other financial and investment-related elements of benefit expenses. This provides a clearer view of a company’s operating performance versus its financing decisions.

Redefining Net Benefit Cost Components

ASU 2017-07 requires companies to break down their net periodic benefit cost into distinct components. The primary component is service cost, representing the value of benefits employees earned during the current reporting period. This is considered a form of employee compensation, similar to salaries and wages.

Beyond the service cost, the standard groups all other elements of net benefit cost together. This group of “other components” includes several items that are more financial in nature:

• Interest cost, the expense accruing on the total benefit obligation.
• The actual return on plan assets, reflecting investment earnings or losses.
• Amortization of prior service cost, arising from plan amendments.
• Recognition of actuarial gains or losses from changes in assumptions or experience.

New Income Statement Presentation

The primary change from ASU 2017-07 is the location of these cost components on the income statement. Only the service cost component is reported within income from operations and must be presented alongside other employee compensation costs. For a manufacturing company, this might mean including service cost within cost of sales or in selling, general, and administrative expenses.

All other components of net benefit cost are excluded from operating income. These items must be presented separately in the non-operating section of the income statement, often grouped into a single line item like “Other non-operating income (expense).” This reclassification prevents volatility from investment returns and interest rate changes from obscuring the performance of a company’s core business.

Changes to Asset Capitalization

The update also changed the rules for capitalizing costs into an asset’s value. Previously, companies could capitalize the entire net periodic benefit cost for employees involved in constructing or manufacturing an asset. This meant the full cost, including financial components, could be added to the asset’s book value and expensed over time.

ASU 2017-07 restricts this practice by stipulating that only the service cost component of net benefit cost is eligible for capitalization. The other components can no longer be included in the cost of an asset, aligning the capitalization rules with the new income statement presentation.

Adoption and Disclosure Requirements

Companies adopted the standard using a dual approach. The income statement presentation rules were applied retrospectively, meaning a company had to recast the income statement for any prior periods presented for comparison. The FASB provided a practical expedient allowing companies to use component amounts from benefit plan footnotes for these adjustments.

The change limiting capitalization to the service cost component was adopted on a prospective basis, applying only from the date of adoption forward. Companies did not change capitalized amounts from previous periods. The standard also requires disclosure of the income statement line item where non-service cost components are presented if they are not listed separately.