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August/September 2007

SFAS 158 and why it matters to your pension plans

If your organization offers a defined benefit pension plan or other postretirement plans, such as medical and prescription drug coverage, get ready: You must adhere to the provisions of Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

The statement in a nutshell

SFAS 158 amends a slew of previously issued statements that had governed the accounting for defined benefit and postretirement plans. In the past, employers didn’t have to recognize in their financial statements the funded status of these plans. Instead, this information was often buried in the footnotes, which often made financial statements look better because most plans are underfunded.

Now, SFAS 158 requires you to recognize in your organization’s financial statements the difference between the fair value of the plans’ assets and the plans’ anticipated future benefit obligation. The statement also requires you to recognize this difference at the end of the reporting period. A reporting period would be either a fiscal year end or another period of time such as a short year end, which would be a reporting period of six months.

Compliance is easy

Nonprofits must adopt SFAS 158 and apply its provisions starting with the fiscal year ending after June 15, 2007. In the year of adoption, if your defined benefit pension plan is underfunded, your nonprofit is likely to show a significant decline in its unrestricted net assets and a corresponding decrease in its change in unrestricted net assets compared to the prior year.

The reason for these changes should be apparent because the SFAS 158–required adjustment will be a separate line item on the statement of activities. However, to nonaccountants, such as some board members and donors, this may require a one-time detailed explanation of the change in accounting principle. (See “Explaining SFAS 158 to your constituents” below.)

Smooth sailing going forward

The good news is that, in future years, though your organization will continue to recognize the change in the funded status of its defined benefit pension and other postretirement plans, the biggest impact will occur in the year of implementation. The change in future years shouldn’t have as much of an impact. This should be covered in your donor explanation in the year you adopt SFAS 158 to calm fears that a large adjustment will be necessary each year. •

Explaining SFAS 158 to your constituents

Consider using the following wording when explaining the SFAS 158 change in accounting principle to your constituents:

“For the year ended Month XX, 200X, Your Nonprofit’s Name adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS 158 requires organizations to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position.

“As a result of this change in accounting treatment, Your Nonprofit’s Name has recorded this pension liability on the statement of financial position in the amount of $XXXX. In implementing SFAS 158, Your Nonprofit’s Name also recorded $XXXX as a change in unrestricted net assets.”