Through the economic crisis, analysts got a stark reminder of how the effect of pension plans and other post-retirement benefit obligations on equity and net income isn’t entirely clear under existing financial reporting requirements, especially in the banking sector.

Moody’s recently published a detailed report on how it planned to adjust financial institution reports for the under-reported effects of pensions and other post-retirement benefit plans to get a better sense of their true economic impact. The agency says the adjustment wouldn’t have an immediate impact on ratings, but it would make the impact on capital and financial results more transparent, the firm said.

Donald Robertson, vice president and senior accounting analyst for Moody’s, said the accounting problems for pension and other post-retirement benefit obligations have been around for a long time. The Financial Accounting Standards Board and the International Accounting Standards Board have been on a long-term journey to revise the accounting to eliminate many of the smoothing mechanisms that have been in place to allow companies to protect their periodic reports from volatility.

International standards generally still allow for more smoothing than U.S. Generally Accepted Accounting Principles, said Robertson. Income statement smoothing mechanisms exist under both IFRS and GAAP, but GAAP requires companies to reflect the funded status of their plans on the balance sheet while that’s optional under IFRS. As a result, Moody’s wanted to develop a methodology for making financial statements more comparable across international borders. The firm has been adjusting corporate financial statements in a standardized way for differences in pension accounting for some time, he said.

Moody’s took a deep dive into the financial statements of 14 major global banks to determine how it would adjust for their differences in reporting. It found significant differences between what banks reported under their relevant accounting rules and what effect the plans were actually having on equity and income.

"The financial crisis has really highlighted the impact that these plans can have on a bank's equity and net income, after we peel back some of the accounting distortions," said Robertson. The report, titled

"Peering Behind the Curtain of Banks' Employee Benefit Plan Obligations" is for sale by Moody’s.