Financial Reporting Alert 07-2: Error Made by Companies in Adopting Statement 158’s Recognition Provisions
June 7, 2007
Entities with publicly traded equity securities were required to adopt the recognition provisions of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans , as of the close of the fiscal year ending after December 15, 2006. Therefore, calendar-year-end public companies adopted the provisions in their December 31, 2006, financial statements. We have become aware of an error made by several companies adopting Statement 158’s recognition provisions.
The recognition provisions of Statement 158 require companies to record any previously unrecognized gains or losses, prior service costs or credits and transition assets or obligations (the “Statement 158 transition adjustment”) as a direct adjustment to the ending balance of accumulated other comprehensive income (AOCI) and not as a component of comprehensive income for the year of adoption. This requirement was discussed in Deloitte & Touche LLP’s Accounting Alert 07-3, Entities Must Measure and Record Changes in Their Additional Minimum Liability to Comprehensive Income Before Adopting Statement 158 , issued on February 8, 2007.
In reviewing the financial statements of many companies that adopted Statement 158 in 2006, we have found that several have included the transition adjustment as part of comprehensive income for 2006 rather than as a direct adjustment to AOCI as of the end of 2006. Any Statement 158 transition adjustment that was recorded as a component of comprehensive income should be considered an error. The materiality of the error should be evaluated according to SEC Staff Accounting Bulletin Topics 1.M, “Materiality” (SAB 99), and 1.N, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (SAB 108).
The evaluation of this error was discussed with the staffs of the SEC’s Office of the Chief Accountant and the Division of Corporation Finance. The SEC staff indicated that it would not object to a registrant, its audit committee and its auditor making a judgment that the error is not material, even if the error is determined to be quantitatively significant, as long as there is sufficient transparency in the financial statements regarding the components of comprehensive income and the Statement 158 transition adjustment. Therefore, amending a prior filing may not be required as long as the company has concluded that (1) the error does not result in a material misstatement of the financial statements and (2) the original presentation is detailed enough that a user of the financial statements could determine (a) the amount, if any, that should have been recorded in comprehensive income for the change in the additional minimum liability for the period and (b) the Statement 158 transition adjustment amount that should have been recorded directly to AOCI.
However, the SEC staff stated that in such a situation the correction of the error should be made the next time the registrant files the prior-year financial statements. If the error is quantitatively significant, the fact that there was an error in the previously reported comprehensive income for the prior year, as well as the corrected amount of comprehensive income, should be clearly disclosed in the registrant’s next interim filing (e.g., second quarter 10-Q for calendar-year-end companies). The SEC staff stated that its decision to not object to such judgments about the materiality of this particular error is not intended to set a precedent for other types of errors that may affect comprehensive income or AOCI.
Note that Deloitte & Touche LLP professionals encountering this situation should consult with a Professional Practice Director and National Office.
Note that for entities using the approach in paragraph 18 of Statement 158 when adopting the Statement’s measurement date provisions, the changes in the unrecognized components of the benefit plan (e.g., gains or losses) resulting from remeasuring the benefit obligation and plan assets as of the beginning of the fiscal year the measurement date provisions are adopted must also be recognized as a direct adjustment of the opening balance of AOCI. These amounts should be excluded from comprehensive income.