FASB 87 Measurement Date

[Guest Marino13]

Are there any requirements for changing the measurement date for FASB 87?

The company's fiscal year end is 6/30 and is what we have been using historically as the FASB measurement date, but I would like to change the measurement date to 3/31 (the earliest measurement date) in order to give the client the results a few months earlier.

Can I simply change the measurement date to 3/31? Are there any special rules regarding this change?

[ishi]

Changing the measurement date would require auditor approval. Typically auditors prefer that the company use an end-of-year measurement date. In my experience, moving from this prefered method has been difficult to get approved, especially in the last few years. The same holds true for using a smoothed MVA for expense (although the change is not as difficult to get approved).

[MGB]

NO! It is not auditor approval, it is SEC approval (assuming the entity is registered with the SEC)!

Changing the measurement date (or asset method, etc.) is a change in accounting method. In order to change an accounting method, you must file a "statement of preferability" with the SEC explaining why you want to change the method and why it is preferable to the old method. The filing must be before the change. The SEC rarely accepts any changes.

If they do allow the change, then you must apply APB 20. This requires you to go back and refigure all numbers since the inception of SFAS 87 as if the new method had always been in place. The aggregate change to date is then recorded on the books (which will include an adjustment to income and an adjustment to the accrued/prepaid and possible minimum liability/intangible asset) and prominently reported in the annual report (not in the pension footnote) as a change in accounting method.

[MGB]

The following is from Jack Abraham, an actuary and director of Deloitte and Touche at the time (now with PwC). This was released by D&T publicly and posted on the discussion forum on the SOA site. The same issues apply to changes in the measurement date:

Purpose:

This note alerts you to a recent SEC staff view on the preferability of a change in accounting method for determining the market-related value of assets of defined benefit pension plans. On November 29, 2001, the SEC staff provided its views on this matter to the AICPA SEC Regulations Committee. Please share this information with others in your firm, as appropriate.

Background:

FASB Statement No. 87, Employers' Accounting for Pensions, permits an employer to measure the market-related value of plan assets at either fair value or a calculated value that recognizes changes in fair value in a systematic and rational manner over not more than five years. Employers may choose to measure the market-related value in different ways for different asset classes, for example, fair value for debt securities and five-year moving average for equity securities. The choice of market-related value of pension plan assets affects net periodic pension cost in two ways: (a) the computation of expected return on plan assets for determining net periodic pension cost and (b) the computation of the amount of gains and losses subject to amortization.

A change in the method used to measure the market-related value of plan assets is considered a change in accounting principle under APB Opinion No. 20, Accounting Changes. Accordingly, the cumulative impact of the change since the employer's adoption of Statement 87 would need to be calculated and reported. Further, the company would need to justify the change as a change to a preferable method. When the company is an SEC registrant, a preferability letter would be required under Rule 601 of Regulation S-K (see Rule 601 (B)(18)).

Question:

Is a change from the market-related value of plan assets at fair value to a calculated value method a change to a preferable method if the basis for the change is to avoid the impact on earnings resulting from volatility in the financial markets?

SEC Staff View:

The SEC staff has concluded that increased market volatility does not provide a sufficient basis to support that a change from the market-related value of plan assets at fair value to a calculated value method is preferable when the sole or primary basis for that conclusion is that the fair value method resulted in greater earnings volatility than the calculated method. The staff observes that the financial markets have a long and demonstrated history of volatility, and since SFAS No. 87 was issued in 1985 the markets have gone through many cycles, and the financial markets can be expected to continue to demonstrate volatility in the future. Accordingly, all other things being equal, a registrant may not support a change in accounting policy solely on the fact that financial markets have been volatile.

The staff’s position should not be construed to infer that the fair value method of determining the market-related value of plan assets is always preferable to the calculated method. Rather, because a decision on preferability of one method over another is based on each registrant’s unique facts and circumstances, there may be factors, other than just market volatility, that led a registrant to conclude that a change in method is appropriate. Registrants with other fact patterns are encouraged to discuss their circumstances with the SEC Staff before making the change.

[Guest Marino13]

MGB,

The client is not registered with the SEC. So now what?

[MGB]

Then it is probably just an auditor approval. But, APB 20 still applies and is difficult to do the calculations required (must historically change the discount and other rates for every valuation going back to inception, not to mention getting the data).

[Guest Marino13]

MGB,

Thanks for your help!

Any idea where I can find a copy of APB 20?

[MGB]

All pronouncements by the FASB (and its predecessor, the Accounting Principles Board) are copyrighted (i.e., they are not available electronically or on the web) and are only available by purchase from the FASB's publication department.

[david rigby]

MGB is correct about copyrights.

I am not aware of any electronic copies of APB statments, but look here for more information on FASB statements

http://www.fasb.org/st/#fas100