No. 2015-63
30 September 2015
To the Point
Potential alternative to develop
discount rates used to measure
defined benefit plan costs
Companies may
be able to use
an alternative
approach for
measuring interest
and service costs.
What you need to know
•
The SEC staff said recently that it would not object to a company that uses a yield
curve approach for developing discount rates changing to using a spot rate approach
to calculate the interest cost and service cost components of net periodic benefit
costs for defined-benefit retirement plans.
•
Companies that make this change would have to provide robust disclosures about the
discount rates they use and the effects of the change on the financial statements,
earnings trends and any non-GAAP measures.
•
The SEC staff said the effects would be accounted for prospectively as either a
change in estimate or a change in estimate that is inseparable from a change in
accounting principle.
•
A company that makes this change should not later change back to a weighted
average discount rate.
•
Companies that do not use a yield curve approach for determining discount rates
(e.g., use a bond matching approach) should discuss any changes in approach with
their auditors and the SEC staff before making a change.
Overview
Many companies use a weighted average discount rate to calculate the interest cost and
service cost components of net periodic benefit cost for defined-benefit pension plans and
other defined-benefit post-retirement plans. Questions have arisen about whether a company
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can use another, more refined approach to determine discount rates for purposes of
calculating interest and service cost.
Key considerations
The Securities and Exchange Commission (SEC) staff recently evaluated the acceptability of a
company that calculates a weighted-average discount rate from a yield-curve changing to a
spot rate approach,1 under which it would use disaggregated interest rates to calculate
interest and service costs for its defined benefit plans. The SEC staff indicated that when a
yield curve is used to determine discount rates, it would not object to a company changing
from using a weighted average discount rate to the spot rate approach for measuring interest
and service cost provided there is robust disclosure of the change and its effects.
A company that changes to the spot rate approach should not change back to the weighted
average discount rate in future periods. The SEC staff also indicated that it would not object
if an entity accounts for this change as a change in estimate or as a change in estimate that
is inseparable from a change in accounting principle pursuant to Accounting Standards
Codification (ASC) 250, Accounting Changes and Error Corrections.
Companies that change from the weighted average discount rate to the spot rate approach
would have to provide robust disclosures, including ASC 250’s required disclosures about the
nature of the change, the discount rates used and the effects of the change on the financial
statements and cost and earnings trends discussed in Management’s Discussion and Analysis
(MD&A) for both GAAP and non-GAAP measures.
Companies may continue to use the weighted average discount rate to calculate interest and
service cost because ASC 715, 2 Compensation — Retirement Benefits, permits this method as
a practical expedient.
A company considering a change other than the change described above should discuss its plans
with the SEC staff. Other possible changes that should be discussed with the SEC staff include:
•
A company that uses a yield curve for determining its discount rate wants to use a
disaggregated approach that is different from the spot rate approach described above
•
A company that determines its discount rate under another approach (e.g., bond matching
approach) wants to change to a disaggregated approach
•
A company that determines its discount rate under another approach (e.g., bond matching
approach) wants to change to a yield curve as an intermediate step before adopting the
spot rate approach
How we see it
• Companies should carefully consider their specific facts and circumstance before
determining the appropriateness of a change. This will include an assessment of their
current method of setting discount rates and consideration of the fact that they couldn’t
change back to the prior method.
• Any change should be applied consistently to all defined benefit plans and to the
measurement of both interest and service costs.
• The disclosures associated with such a change are intended to provide financial
statement users with a robust understanding of both the change and its effects on
GAAP as well as non-GAAP information.
2 | To the Point Potential alternative to develop discount rates used to measure defined benefit plan costs 30 September 2015
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Endnotes:
1
2
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Under a spot rate approach, a company that determines its discount rate from a yield curve would use the
individual spot rates along the yield curve that correspond with the timing of each future cash outflow for benefit
payments to calculate interest cost and service cost.
ASC 715-30-35-45.
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
3 | To the Point Potential alternative to develop discount rates used to measure defined benefit plan costs 30 September 2015