AT&T has decided it's better to account for pensions and other retirement benefit offerings under fair value than to smooth over gains and losses as allowed under current accounting rules.

AT&T said it will take a $2.7 billion non-cash charge to earnings in the fourth quarter of 2010 and will flush through the balance sheet some $17 billion in pent-up pension-related losses dating back to early 2008 as a result of the change. AT&T filed a Form 8-K with the Securities and Exchange Commission to explain the change in accounting method.

Accounting rules allow companies to average out their pension gains and losses over time, but AT&T has decided to quit carrying big losses stemming largely from the 2008 market route into the future, instead recasting prior period financial statements to recognize those losses in the periods they actually occurred. “Past net income would have been $17 billion lower had we been using the new method, but the amount of pressure on earnings is the same,” said McCall Butler, a spokesman for AT&T. “The only difference is when it's recognized.”

Honeywell announced a similar move in November, but fell short of a full conversion to fair market value for pension gains and losses. The company adopted a new accounting policy to follow a fair market value approach, but it didn't entirely give up amortization for historical losses. Instead, it lowered the threshold for how it will amortize pent up losses to move them through at a faster pace.

In a webcast to explain the new accounting policy, AT&T CFO Rick Lindner said the company believes the new method is a better way to account for benefit plan costs. “It's easier to understand, it's more transparent to investors, and it aligns with fair value accounting concepts,” he said. “It's a straightforward approach that recognizes plan gains or losses in the year they occur with no more amortization in future periods.” Lindner said it also gives the company's business segments a better view of their actual benefit costs and more control over those costs.

Lindner said he has wrestled with a decision over changing the accounting policy for some time. “We were bothered somewhat by the fact that at any given time there would be large amounts of losses that were not recognized in the income statement that has been deferred,” he said. The company started exploring ideas to accelerate the recognition of those losses, similar to Honeywell's approach, by adjusting the amortization schedule as allowed under existing accounting rules. “But the more we looked at different methods, the more complex the accounting became,” he said.

By giving up the averaging or smoothing methods allowed in Generally Accepted Accounting Methods, AT&T has opened the door to some period-to-period volatility in earnings as a result of pension gains or losses, Lindner acknowledged. On the flip side, because the accounting change only affects timing and not reported amounts for pension-related gains or losses, the company doesn't expect any long-term impact to earnings.