Ashley Wright, Professional Accounting Fellow, Office of the Chief Accountant
AICPA National Conference on Current SEC and PCAOB Developments
Dec. 9, 2015
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
Good morning. This morning I want to share observations related to two topics. The first relates to certain aspects of a sponsor’s accounting for a single-employer defined benefit pension plan, and the second focuses on implementation of the new revenue recognition standard.
We understand that some companies, their actuaries, and their accountants have recently considered revising their approach to certain pension accounting computations and, after considering their specific facts and circumstances, have viewed these revisions to be enhancements to their computations. Among other considerations, companies have considered different approaches to developing key assumptions – the discount rates – used to compute the interest cost component of a sponsor’s net benefit cost for a single-employer defined benefit pension plan. OCA staff has recently consulted with companies and accounting firms on two approaches to developing the key discount rate assumptions – a single weighted-average approach and a disaggregated approach, referred to as the “spot rate” approach.
The single weighted-average approach that is based on developing a single discount rate is permitted in the accounting guidance and is commonly applied in practice for pension plans under ASC 715. Under this approach, a single weighted-average rate is determined at the pension plan measurement date based on the projected future benefit payments used in developing the pension benefit obligation (PBO). The single discount rate represents the constant annual rate that would be required to discount all future benefit payments related to past service from the date of expected future payment to the measurement date, such that the aggregate present value equals the benefit obligation.
The spot rate approach uses individual, duration-specific spot (discount) rates from the yield curve that was used in the most recent measurement of the PBO for purposes of computing the interest cost component of net periodic benefit cost. The use of individual (disaggregated) discount rates results in a different amount of interest cost as compared to the use of a single weighted-average discount rate because of the different weightings given to each subset of cash flows. However, in both approaches, the source data about market interest yields used in estimating a discount rate was the same - it was taken from the measurement of the pension benefit obligation.
In a recent consultation, OCA did not object to a registrant changing from the use of the single-weighted average approach to the spot rate approach. In addition, OCA did not object to the registrant accounting for the change as either a change in estimate or as a change in estimate inseparable from a change in accounting principle.
The approaches to estimating appropriate discount rates described above use the same yield curve data embedded in the measurement of the pension benefit obligation.
Some registrants, however, may use a different method of measuring the obligation – a hypothetical bond matching methodology, which is based on identifying a portfolio of bonds expected to generate cash flows similar to the estimated benefit payments of the pension plan. I understand some registrants have asked whether it would be permissible to change their methodology for measuring the pension obligation from using a hypothetical bond matching methodology to a yield curve methodology, since a spot rate approach for computing interest cost can be generated directly from the yield curve model. While we have not consulted with individual registrants on this question, I wanted to share some observations for companies that might be considering the question.
First, under the accounting guidance, the measurement of the pension obligation and the determination of interest cost are integrated concepts. That said, the measurement of the pension obligation is the relevant starting point in applying the pension accounting model. As a result, a company should evaluate the basis for its current selection of the market information, and it should change its methodology only if, and to the extent that, the alternative market information results in better information to be used in measuring the pension obligation.
That is, a company’s decision to select, or to change the selection of, a particular methodology should align with the requirement to select the best rate(s) for which the obligation could be effectively settled. The selection of a “best estimate” is generally not made on the basis of materiality. Further, changes in methodology used to determine that best estimate should be made when facts or circumstances change. As part of the analysis, the registrant may need to consider its prior arguments for changing from a yield curve to a bond matching approach. A change in the approach to developing discount rates for interest cost would not seem persuasive to changing the basis for selecting a different source of market information for measuring pension benefit obligations.
Both Jim Schnurr and Wes Bricker have previously shared some insight into OCA staff’s active monitoring of the transition period activity relating to the new revenue recognition standard. I wanted to spend a few moments providing additional detail about OCA staff efforts in this regard.
OCA has engaged a number of stakeholders, including investor groups, industry groups, individual registrants and audit firms, in discussions about the implementation process, issue identification and planned resolution. I would like to highlight two observations.
First, because the measurement and recognition of revenue will be governed by a principles-based standard that replaces nearly all existing guidance, including industry-specific guidance, all companies will experience some degree of change. That change may include the creation of new business processes, systems and controls; the need to make additional estimates and judgments; and a requirement to provide expanded disclosures. As a result, a change management project plan should be a high priority for management and their Audit Committee to make progress during this transition period. Of course, successful implementation of the plan will require the allocation of sufficient resources with the appropriate skill sets across the relevant areas of the business.
Second, some companies are taking a bottoms-up approach when assessing the effect of Topic 606, with good results. This approach typically involves: (i) identifying each of the different revenue arrangements and contracts, (ii) taking a fresh look at historical accounting policies and practices, and (iii) identifying any differences that may result from applying the requirements of the new standard to those arrangements. Upon taking a “fresh look”, management may discover that its accounting policies result in different accounting conclusions from that of other companies, despite the existence of similar facts and circumstances. One of the objectives of Topic 606 was to enhance revenue standards by establishing broad principles and concepts that should result in improved comparability in the accounting for similar fact patterns. Though similar diversity may exist under application of Topic 605, we are focused on achieving more consistent interpretation and application of the principals as part of the transition to Topic 606.
As differences regarding the implementation of Topic 606 are identified, it is important for management to raise those viewpoints – whether that is through the joint Transition Resource Group (TRG), AICPA industry task forces, or to OCA – so that diversity among companies may be resolved during the implementation phase. Resolution of differences sooner rather than later is preferable from a comparability standpoint, and it could save companies from incurring additional costs associated with changing after the initial implementation date, for example, as a result of interpretative standard setting by the EITF or other settings.
Thank you for your kind attention and please enjoy the remainder of the conference.
 ASC 715-30-35-45 permits the use of a properly weighted average rate for aggregate computations such as the interest component of net pension cost for the period.
 ASC 715-30-35-43
 ASC 715-30-35-68
 ASC 715-30-55-27
 ASC 715-30-55-28
 Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606)