The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Application of Topic 715 to Market-Return Cash Balance Plans, intended to improve accounting guidance for certain market-return cash balance plans.
A cash balance plan provides employees with a pension benefit that includes a hypothetical account balance that comprises principal credits and interest credits. Principal credits are defined by the terms of the cash balance plan and determined on the basis of various factors such as the participant’s age or years of service. Interest credits are accrued at fixed or variable interest crediting rates on those principal credits. Market-return cash balance plans are a type of cash balance plan with variable interest crediting rates based on investable market returns. In a market-return cash balance plan, the promised benefit to the participant at retirement (or termination) is equal to the principal credits and the actual investment returns on the principal credits (subject to certain governmental requirements and provisions).
Paragraph 715-30-35-43 of Topic 715 indicates that assumed discount rates to be used in measuring the benefit obligation of a defined benefit plan should reflect the rates at which the pension benefits could be effectively settled. That paragraph further states that, in making those estimates, it is appropriate to look to available information about rates implicit in current prices of annuity contracts that could be used to effect settlement of the obligation. An entity also may look to rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of pension benefits. As a result, entities may measure the benefit obligation using a discount rate that produces an amount inconsistent with the plan’s hypothetical account balance. Stakeholders expressed concern that application of current guidance may result in accounting that does not fully reflect the economics of these plans.
To address stakeholders’ concerns, the amendments in this proposed ASU would require that an entity use the assumed interest crediting rate as the discount rate to measure the benefit obligation for market-return cash balance plans that meet both of the following conditions:
- Pension benefits are communicated to employees in the form of an account balance that comprises principal credits and interest credits based on an investable market return in any of the following forms:
- The return on plan assets
-The return on a subset of plan assets that approximates the associated cash balance liabilities
-The return on a regulated investment company
- Participants have the option to elect lump-sum payments.
As a result of using the assumed interest crediting rate as the discount rate, the benefit obligation of those plans generally would be equal to their hypothetical account balance. The proposed amendments would not otherwise change how market-return cash balance plans should be accounted for under current guidance in Subtopic 715-30.
The FASB will determine the effective date for the proposed ASU after considering feedback from stakeholders. However, early adoption would be permitted. An entity would apply the amendments in the proposed ASU on a prospective basis at its next pension measurement date as determined under Subtopic 715-30.
Stakeholders are encouraged to review and provide comments on the proposed ASU by August 10, 2026.
