The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update No. 2011-09 (the Update), requiring significant additional financial-statement disclosure by employers contributing to multiemployer plans. The FASB, subject to oversight by the Securities and Exchange Commission, sets standards for Generally Accepted Accounting Principles (GAAP) applicable to companies whose securities are publicly traded in the United States and to other companies obligated to follow GAAP.
Although requiring more information than existing FASB guidance, the Update retreats from FASB’s original proposal last year, which would have required disclosure of an employer’s estimated withdrawal liability if it stopped contributing, if such an estimate were obtainable. The original proposal also would have required detailed information about cash-flow implications arising from an employer’s participation in a multiemployer plan, such as the expected contributions for the next reporting period and known trends in contributions, including the extent to which a surplus or deficit in the plan may affect future contributions. The FASB did not include these requirements in the final version of the Update because the original proposal met with significant resistance on account of the compliance costs that would be involved.
The disclosures required by the Update are effective for public entities for annual periods for fiscal years ending after December 15, 2011. For non-public entities, the Update is effective for annual periods for fiscal years ending after December 15, 2012.
The Update is available on the FASB website.
Multiemployer Plans in General
A multiemployer plan is a benefit plan maintained pursuant to one or more collective bargaining agreements (CBAs) between a union or unions and employers and to which more than one employer is obligated to contribute. Multiemployer pension plans are defined benefit plans providing periodic pension benefits. Other multiemployer plans provide defined contribution retirement benefits (such as 401(k) salary deferrals) or health or other welfare benefits.
New Required Disclosures Relating to Multiemployer Pension Plans
Congressional concerns over the financial viability of multiemployer pension plans resulted in stricter funding requirements for these plans under the Pension Protection Act of 2006 (PPA). The FASB adopted the Update in response to requests by users of financial statements for additional disclosure to increase awareness of the commitments and risk involved with contributing to multiemployer plans.
Chief among these risks is the withdrawal liability that an underfunded multiemployer pension plan may assess under ERISA against an employer that stops making contributions. Such liability represents the employer’s proportionate share of the plan’s unfunded vested benefits. In some cases involving poorly-funded plans, withdrawal liability can dwarf the employer’s regular periodic contributions.
Before the Update, required GAAP disclosures by an employer contributing to a multiemployer plan were limited primarily to the historical contributions made to the plan. The Update requires that an employer disclose the following information in its financial statements for each individually-significant multiemployer pension plan to which it contributes:
- The legal name of the plan.
- The plan’s employer identification number and, if available, its three-digit plan number.
- For each statement of financial position presented, the most recently available certified “zone” status provided by the plan, as currently defined by the PPA. Among other factors, plans in what is commonly referred to as the “red zone” are generally less than 65% funded (“critical” status under the PPA); plans in the “yellow zone” are less than 80% funded (“endangered” status under the PPA); and plans in the “green zone” are at least 80% funded. If the zone status is not available, the employer must disclose information about the funded status of the plan as of the most recent date available, on the basis of the financial statements provided by the plan, the total plan assets and accumulated benefit obligations.
- The expiration dates of each CBA, if any, requiring contributions to the plan. If more than one CBA applies to the plan, the employer must provide a range of the expiration dates of those CBAs, supplemented with a qualitative description that identifies the significant CBAs within that range as well as other information to help investors understand the significance of the CBAs and when they expire (such as the portion of employees covered by each CBA or the portion of contributions required by each CBA).
- For each period that a statement of income or statement of activities is presented, (i) the employer’s contributions made to the plan and (ii) whether those contributions represent more than 5% of total contributions to the plan as indicated in the plan’s most recently available annual report (Form 5500 for U.S. plans).
- As of the end of the most recent annual period presented, (i) whether a “funding improvement plan” or “rehabilitation plan,” as defined in ERISA, had been implemented or was pending; (ii) whether the employer paid a surcharge to the plan; (iii) a description of any minimum contribution required for future periods by each CBA as well as by statutory obligations or other contractual obligations, if applicable.
The above information must be provided in tabular format where feasible; information requiring greater narrative description may be provided outside the table.
Additionally, the employer must provide a description of the nature and effect of any significant changes that affect comparability of total employer contributions to multiemployer plans from accounting period-to-period, such as a business combination or a divestiture, a change in the contractual employer contribution rate or a change in the number of employees of the employer covered by the plan during each year.
For significant multiemployer pension plans that do not file Form 5500s (foreign plans), the Update requires additional disclosures.
The Update provides that if certain quantitative information (such as a plan’s zone status and whether the employer’s contributions represent more than 5% of total contributions) cannot be obtained without undue cost and effort, such information may be omitted, but the employer must describe what information has been omitted and why, and must also provide any qualitative information as of the most recent date available that would help users understand the financial information that otherwise is required to be disclosed about the plan.
The employer must also disclose, in a tabular format for each annual period for which a statement of income or statement of activities is presented, (i) its total contributions made to all multiemployer pension plans that are not individually significant and (ii) its total contributions to all multiemployer pension plans.
New Required Disclosures Relating to Multiemployer Plans not Providing Pension Benefits
The Update requires that employers contributing to multiemployer plans providing post-retirement benefits other than pensions disclose the amount of contributions to such plans for each annual period for which a statement of income or statement of activities is presented. An employer may disclose total contributions to multiemployer plans without disaggregating the amounts attributable to pension plans and other post-retirement benefit plans.
The disclosures must include a description of the nature and effect of any changes that affect comparability of total employer contributions from period-to-period.
Also required is a description of the nature of the benefits and the types of employees covered by these benefits, such as medical benefits, provided to active employees and retirees.
FASB Guidance on Recognition and Measurement of Liability
The current FASB recognition and measurement guidance for an employer’s participation in a multiemployer plan requires that an employer recognize its required contributions to the plan as pension or other post-retirement benefit cost for the period and recognize a liability for any contributions due at the reporting date. The Update does not change this guidance.
Also unchanged by the Update is the FASB requirement that an employer apply the recognition, measurement and disclosure provisions for contingencies in prior guidance in the event an obligation due to withdrawal from a multiemployer plan is either probable (requiring the accrual of a liability and disclosure of the contingency) or reasonably possible (requiring disclosure of the contingency).
Observations
Although the Update greatly increases the information about multiemployer plans that must be disclosed in the financial statements of contributing employers, it relies to a significant extent on third-party information as to multiemployer pension plans, principally Form 5500s. All Form 5500s must now be filed electronically with the Department of Labor (DOL) and are easily accessible from the DOL website.
Potential withdrawal liability, if any, is certainly among the most important information that could be provided in the financial statements of an employer contributing to a multiemployer pension plan. Nevertheless, the combination of (i) the information required to be disclosed by the Update and (ii) the plan’s Form 5500 and its attachments (including the plan’s financial statements and an actuarial report) will not be sufficient to enable anyone to estimate such liability.
Two members of the FASB dissented from the issuance of the Update out of a belief that the required disclosures do not provide, in a cost-effective manner, decision-useful information to financial-statement users.