FASB Ponders Pension, Hedge Rules; More

The Financial Accounting Standards Board has issued an exposure draft of a new statement that would require employers to recognize the overfunded or underfunded positions of defined benefit pensions and other post-retirement plans in their balance sheets.

The proposal would require employers to measure plan assets and obligations as of the date of their financial statements, and report them as such in the body of the financial statements. That differs significantly from current rules, which allow employers to delay recognition of certain changes in plan assets and obligations affecting the cost of providing the promised benefits, reporting the actual funding status in footnotes.

The new statement revises rules found in FAS No. 87, Employers’ Accounting for Pensions, and FAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. It also changes some aspects of FAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and FAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits—which itself is an amendment of Statements No. 87, 88, and 106.

The proposed new rule is the first stage of a comprehensive project to review those earlier statements. The second phase will tackle a wider range of issues and, in the interest of converging U.S. rules with international rules, will proceed in tandem with the International Accounting Standards Board.

Batavick

“Many constituents, including our advisory councils, investors, creditors and the SEC staff, believe that the current incomplete accounting makes it difficult to assess an employer’s financial position and its ability to carry out the obligations of its plans,” FASB member George Batavick said in a statement. “We agree. (This) proposal, by requiring sponsoring employers to reflect the current overfunded or underfunded positions of post-retirement benefit plans in the balance sheet, makes the basic financial statements more complete, useful and transparent.”

For public companies, the proposed changes take effect for fiscal years beginning after Dec. 15, 2006. Nonpublic companies, including not-for-profit organizations, would be required to meet the new standard by the same date, but they’ll get an additional year to meet the requirement to measure plan assets and obligations as of the balance sheet date.

The Board is open to written comments on the proposal through May 31, 2006. The Board also plans to hold one or more public roundtable meetings on the proposal in June.

FASB Releases Road Map For Hedge Accounting Rules

Seeking to untangle the thicket of provisions that surround hedge accounting, FASB has issued a report offering a roadmap of implications for its latest statement, FAS No. 156, Accounting for Servicing of Financial Assets.

FASB finished FAS No. 156 in mid-March to amend FAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—which itself was a replacement of FAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

To alleviate all that complexity, FASB issued the 112-page roadmap to show where the new rules affect existing accounting literature. It is a cumulative update of earlier reports relating to the same body of rules, showing 28 Q&As that are impacted, 11 issues addressed by the Emerging Issues Task Force, and six issues addressed in FAS No. 133, Accounting for Derivative Instruments and Hedging Activities.

Statement No. 156 is intended to simplify the accounting for servicing assets and liabilities, such as those commonly associated with mortgage securitization activities. It sets up the conditions for simpler hedge accounting, and advances fair value as the measurement attribute of choice for derivative instruments.

Trott

“The standard is the latest step in a series of projects aimed at reducing complexity, while providing an approach that allows hedge-like accounting without having to deal with the complexities of Statement 133,” FASB member Ed Trott said in a statement. FAS No. 133 is widely regarded as the most complex area of Generally Accepted Accounting Principles.

FASB issued the guidance to answer questions regarding implementation of the various hedge accounting standards. “The issues were complex and FASB is taking an extra step to help guide constituents,” FASB spokesman Gerard Carney said. “You can expect to see more of this in the future.”

PCAOB Awaits SEC Approval For Independence Rules

The Public Company Accounting Oversight Board is delaying the effective dates for new rules of engagement for auditors while the Securities and Exchange Commission continues to push the rules through its approval channels.

In July 2005, the PCAOB approved new rules regarding ethics, auditor independence, tax services and contingent fees—all intended to widen the separation between auditors and the public companies whose financial statements they audit. The board amended the rules in November and sent them to the SEC for its review and approval, as required by Sarbanes-Oxley for all PCAOB rules.

The SEC just published the rules in the Federal Register on March 13, and was open to comments through April 3, making the original March 31 effective date for one particular rule regarding tax services impossible to meet. To allow for a reasonable transition, the PCAOB last week said the new effective date will be “one year after SEC approval of the rules.” For a second rule related to tax services, PCAOB says the effective date will be Oct. 31, 2006, or 10 days after SEC approves the rule, whichever is later.

PCAOB spokesman Christi Harlan said the March 31 target date was meant to coincide with when audit committees for calendar-year filers would likely meet with their auditors. The delayed approval process led the Board to postpone the effective date so that companies aren’t left wondering what to do during the current season of audit committee meetings.

SEC spokesman John Heine said the SEC review process calls for PCAOB rules to be published in the Federal Register for a three-week comment period, followed by a two-week window when the Commission must act on the rule. No mandated timeline exists, however, for when a rule must be published, nor does any guideline for how long the commission usually takes to publish the rule for comment, he said.

Frederick Lipman, president of the Association of Audit Committee Members, said he was surprised by how long SEC has taken to act on the rule. He surmised that the departure of Chief Accountant Donald Nicolaisen last fall and the resulting personnel transition played a role.

IAASB Refines Proposal to Revise Group Audit Standard

International audit standard-setters are making progress in their quest to restrict the extent to which the auditor leading a group audit can rely on the work of other external auditors in its attestation of financial statements.

The International Auditing and Assurance Standards Board is seeking comment on a revised proposal to amend International Standard on Auditing 600, which governs the audit of group financial statements for international audits. A group audit would occur when multiple auditors, or even multiple audit firms, are involved in the audit of a single entity, usually one with multiple subsidiaries or doing business in multiple countries.

Crawford

Craig Crawford, a partner with KPMG and a member of the IAASB, said the international standard takes a more narrow view than U.S. rules of how much the group auditor at the top can lean on the work of other external auditors down the hierarchy. “In the United States, it’s seen as important to disclose that there was more than one auditor,” he says. “In the rest of the world, it’s seen as important to say there was one auditor.”

Crawford cites the unraveling of Italian foodmaker Parmalat, along with the “finger pointing at the end of the day,” as what prompted the call for greater accountability of the group auditor. IAASB is seeking comments on its revised proposal through July 31.