Chapter 4 — Non-GAAP Measures That May Be Misleading or Prohibited and Other Considerations Related to Common Non-GAAP Measures

4.15 Treatment of Pension and Other Postemployment Benefits Expense in Non-GAAP Measures

Some registrants present non-GAAP measures that adjust for defined-benefit pension-related items. For example, a registrant may adjust to remove (1) all non-service-related pension expense, (2) all pension expense in excess of cash contributions, or (3) the amortization of actuarial gains and losses. Some registrants that immediately recognize all actuarial gains and losses in earnings present non-GAAP measures that remove the actuarial gain or loss attributable to the change in the fair value of plan assets from a performance measure and include an expected return.

The SEC staff has observed that these pension-related adjustments can be confusing without the appropriate context about the nature of the adjustment. For example, the staff has noted that pension adjustment disclosures often:

Do not clearly describe what the adjustment represents (e.g., the adjustment removes the amount of actuarial gain/loss immediately recognized in earnings or removes all non-service-related pension costs).
Refer to “noncash” pension expense even though the pension liability is expected ultimately to be settled in cash.
Do not provide context about adjustments related to actuarial gains and losses.
Inconsistently reflect adjustments related to actuarial gains and losses.

At the 2013 AICPA Conference, the SEC staff provided an example of a registrant that immediately recognized its actuarial gains and losses. The adjustment in the non-GAAP measure included the impact of changes in pension plan assumptions (e.g., changes in discount rate) as well as the difference between the actual return on plan assets and the expected return on plan assets. The staff indicated that this presentation might be confusing because the adjusted non-GAAP measure reflected only the expected return, which is always positive no matter how the market actually performs. The staff noted that a registrant should disclose that the non-GAAP measure reflects:

An expected return on plan assets of X percent or $XX.
An actual return of Y percent or $YY.
Pension expense of $ZZ.

Registrants that amortize actuarial gains and losses (rather than immediately recognize their actuarial gains and losses) should disclose similar information. That is, they should (1) quantify the expected return on plan assets reflected in the non-GAAP measure and (2) disclose the amount of pension expense reflected in the non-GAAP measure.

At the 2015 AICPA Conference, the SEC staff expressed some observations regarding a registrant’s change in approach when measuring its service cost and interest cost. The SEC staff has also highlighted that it expects registrants to disclose any significant impact of a change in the approach used to measure net periodic benefit cost on any non-GAAP measures. Specifically, registrants should explain how the change in approach affected components of net periodic benefit cost and actuarial gains and losses in the current period and on a prospective basis to the extent that those items are reflected in non-GAAP measures.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.