ASC 715
Active
Compensation–Retirement Benefits
Governs defined benefit and defined contribution pension plans, other postretirement benefits, and pension expense measurement.
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Conceptual Framework Linkage
Compensation deferred to retirement
ASC 715 addresses the accounting for retirement benefits – compensation that employees earn through current service but will not receive until retirement. This creates a classic present obligation: employees have provided service today in exchange for benefits tomorrow, generating a liability that must be recognised even though cash payment is deferred for many years.
Broadly converged with IAS 19, with meaningful classification differences
ASC 715 and IAS 19 both govern defined benefit and defined contribution pension plans and other postretirement benefits, using similar economic logic. However, the US GAAP classification model for plan assets and the expense presentation differ materially from IAS 19's approach, particularly around the corridor method and net interest approach.
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Scope & Applicability
Pension and other postretirement benefits
ASC 715 applies to all retirement benefit arrangements, including defined BENEFIT pension plans, defined CONTRIBUTION pension plans, and OTHER POSTRETIREMENT benefits (primarily postretirement health care). It addresses both the balance sheet recognition of the net pension asset or liability and the periodic pension expense recognised in the income statement.
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Defined Contribution vs Defined Benefit Plans
The fundamental distinction
DEFINED CONTRIBUTION plans require the employer to contribute a SPECIFIED amount to the plan each period (e.g., 5% of salary) – the employer's obligation is limited to the contribution and any remaining obligation is satisfied when the contribution is made. DEFINED BENEFIT plans promise a SPECIFIED future benefit amount (e.g., $3,000/month at retirement) – the employer bears the investment and longevity risk and must fund the plan to meet that promise.
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Plan Assets – Fair Value Measurement
Measured at fair value, reducing the net obligation
Plan assets are measured at FAIR VALUE, which reduces the NET pension obligation or increases the net pension asset recognised on the balance sheet. The fair value of plan assets is the market price if quoted, or fair value determined using valuation techniques if not quoted. Actual returns on plan assets are recognised in other comprehensive income under ASC 715, not in pension expense – a key distinction from the pre-2017 model.
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The Projected Benefit Obligation (PBO)
Present value of expected future benefit payments
The PROJECTED BENEFIT OBLIGATION (PBO) is the actuarial present value, as of the balance sheet date, of BENEFITS expected to be paid to employees based on their service to date – using FUTURE salary increases in the projection (as opposed to the accumulated benefit obligation, which uses current salaries). The PBO represents the employer's best estimate of the total obligation to employees based on their service rendered to date.
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Pension Expense – the Five-Component Model
Service cost plus net interest minus expected return
Pension expense under ASC 715 consists of five components: (1) SERVICE COST – the present value of benefits earned by employee service during the period; (2) INTEREST COST – the accretion of the PBO due to the passage of time; (3) EXPECTED RETURN ON PLAN ASSETS – reducing expense; (4) PRIOR SERVICE COST – amortisation of retroactive plan amendments; and (5) ACTUARIAL GAINS/LOSSES – now recognised through the NET INTEREST approach rather than the corridor method.
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Corridor Amortisation – eliminated by ASU 2017-07
A significant 2017 simplification
Before ASU 2017-07, actuarial gains and losses were only recognised in net periodic pension cost when they exceeded the "corridor" (10% of the greater of the PBO or plan assets), with excess amounts amortised over time. ASU 2017-07 ELIMINATED this corridor approach for EMPLOYERS that are NOT PUBLIC BUSINESS ENTITIES, simplifying the model significantly – though public companies continue to use the net interest approach, which effectively recognises all actuarial gains/losses through OCI immediately.
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Settlement or Curtailment
When plan obligations are settled early
A SETTLEMENT occurs when the employer eliminates its obligation by paying plan participants or purchasing annuities. A CURTAILMENT occurs when the employer significantly reduces the benefits expected to be paid under a plan, such as by closing a facility or terminating a plan for new hires. Both events require immediate recognition of any resulting gain or loss.
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Worked Example – Calculating Pension Expense
Pension expense components
Example: Five-component pension expense calculation
Service cost = $450,000. Interest cost on PBO = $380,000. Expected return on plan assets = $(320,000). Prior service cost amortisation = $45,000. Net actuarial loss amortisation = $25,000.
Pension expense = $450,000 + $380,000 − $320,000 + $45,000 + $25,000 = $580,000. The net interest on the net defined benefit liability ($380,000 amortisation − $320,000 expected return = $60,000) is the largest component after service cost.
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Worked Example – Funding vs Expense Divergence
Cash contributions diverge from accounting expense
Example: Actual contributions differ from expense
Pension expense is $580,000. Actual employer contributions to the plan during the year are $750,000 – higher than expense due to catching up on underfunding.
Accounting: Pension expense of $580,000 recognised in income. Cash: $750,000 contributed to the plan. The $170,000 excess contribution reduces the unfunded pension liability on the Balance Sheet. Cash funding and accounting expense are independently determined and routinely diverge.
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Disclosure Requirements
What ASC 715 requires
Components of net periodic benefit costAmounts in other comprehensive income and reclassification adjustmentsFunded status of the plan and amounts recognised in the balance sheetKey assumptions: discount rate, expected return on plan assets, rate of compensation increaseExpected employer contributions in the next fiscal year
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Selection of the high-quality corporate bond discount rateDetermination of expected return on plan assetsClassification as defined benefit vs defined contribution
SIGNIFICANT ESTIMATES
Rate of compensation increase for PBO projectionExpected long-term rate of return on plan assetsMortality and turnover assumptions
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ASC 715 vs IAS 19 – Comprehensive Comparison
Comparison – ASC 715 vs IAS 19
FeatureUS GAAP (ASC 715)IFRS (IAS 19)
Plan asset classificationUsual classification, but must exclude own-issued instrumentsSame restriction on own-issued instruments
Actuarial gains/lossesRecognised through OCI immediately under net interest approachRecognised immediately in OCI with no reclassification to P&L
Expected return on plan assetsReduces pension expense in P&LCalculated using same principle but not shown separately
The MOST PRACTICALLY SIGNIFICANT difference relates to presentation: IAS 19 uses a NET INTEREST approach that presents service cost and net interest separately, while ASC 715 traditionally presented the full expense in one line – though ASU 2017-07 moved US GAAP closer to the IAS 19 model for service cost classification.
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Statement Mapping
Where every ASC 715 event lands
EventStatement(s) affectedNotes
Service costISRecognised as compensation expense
Net interest on net defined benefit liabilityISInterest cost minus expected return on plan assets
Actuarial gains/lossesOCIRecognised immediately in OCI, no reclassification
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Related Topics
Cross-reference map
TopicConnection
ASC 712Nonretirement Postemployment Benefits – governs benefits before retirement
ASC 710Compensation–General – governs compensated absences
IAS 19Employee Benefits – IFRS counterpart
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows