The Financial Accounting Standards Board is making inroads on more accounting change around compensation with new requirements for how companies must account for retirement benefits and a proposal around stock compensation.
In Accounting Standards Update No. 2017-07, the FASB is looking to improve the presentation of net periodic costs associated with pensions and other post-retirement benefits. Historically, GAAP has not specified where a company should display the amount of net benefit cost in a given period in an employer’s income statement, nor has it required entities to disclose by line item the amount of net benefit cost that is included in the income statement or capitalized in assets.
The FASB says it heard from those who use financial statements that presentations were not adequately transparent for those who analyze service cost components separately, so the board issued the new guidance to address the concern. The new accounting standard requires companies to separate the service cost component from the other components of the net benefit costs. It also explains how to present those items in the income statement, and it explains that only the service cost component of net benefit cost is eligible for capitalization.
According to an alert from PwC, companies that have elected to immediately recognize actuarial gains and losses are likely to view the new accounting requirements favorably. “Presenting only the service cost component within operations and limiting the amount eligible for capitalization will likely reduce volatility within the operating section of the income statement,” PwC says.
Still open for consideration, the FASB is looking for feedback on another accounting change to compensation, this one focused on non-employee share-based payments. FASB issued a proposed update to accounting standards that is meant to make the accounting easier and less costly for companies.
The proposal would expand the scope of stock compensation accounting to include payments for goods and services to non-employees. That would make the accounting for both employees and non-employees similar, the board says, replacing separate guidance companies currently must follow for equity-based payments to non-employees.
The FASB says it heard from multiple directions that the accounting for non-employee equity compensation could use some improvement, most notably via a post-implementation review of its 2004 requirement for companies to begin reflecting stock compensation for employees in the income statement. Through that review, the board says, it learned users of financial statements wanted to see improvements in non-employee share-based payments as well.
The new accounting takes effect for public companies with annual periods beginning after Dec. 15, 2017, including interim periods. The FASB is accepting comments on the proposal through June 5, 2017.