Despite objections by retirement-plan sponsors and actuaries, the Financial Accounting Standards Board has decided to require companies account for projected future salary costs when stating their pension liabilities.
The Board voted last week to stick with its original plan, as part of a larger effort to clarify pension costs and move those liabilities from financial statement footnotes onto the balance sheet. Corporations had argued that those figures should be based on past and current salary costs, not raises that might come in the future.
Urging the Board to press on, FASB project manager Peter Proestakes pointed out that the existing method for measuring pension obligations, dating back to 1987, is a cost-projection model similar to those used in other areas of accounting to measure and report other types of liabilities.
“The accounting for defined-benefit obligations is for the most part an exercise in estimating the future,” he said. The projected benefit obligation is not, he said, “inconsistent with the definition of a liability.”
Seidman
Citing a “clear mandate from investors” to get existing measurement information onto the face of the balance sheet, board member Leslie Seidman favored setting aside preparers’ and actuaries’ arguments that the projection model is not an appropriate balance sheet metric. Board members generally agreed measurement issues can be reconsidered as necessary in the second, more comprehensive phase of FASB’s effort to overhaul pension accounting.
Seidman looked to retirement plan terminology as a basis for her reasoning. If a defined-benefit plan’s terms are based in some way on future salary expectations, then those terms should be reflected in the reported liability, she said.
Crooch
Board member Michael Crooch said FASB should remain focused on the primary objective, which is to make quick improvements in pension liability reporting. “The goal here is we need to be sure we get this number on the financial statements, and if we hang any other things on this project, it seems to me it would cause us to not meet that goal,” he said.
FASB wants the first phase of its overhaul, bringing liability costs onto the balance sheet, to be complete by the time companies prepare their financial statements for next year.
Separately, FASB bowed to constituents’ call for relief from applying the new rule for prior periods. The Board instructed the staff to do additional research into investors’ need for information from prior years, and how to balance that against the burden such a requirement would place on companies by the intended effective date.
FASB took up the pension project at the urging of the Securities and Exchange Commission, which identified pension accounting as a priority in a 2005 report on off-balance sheet accounting problems. SEC acting Chief Accountant Scott Taub voiced his support for FASB’s approach at a June roundtable.
FASB, IASB Offer Views On Conceptual Framework
U.S. and international accounting standards-setters are writing a new rule book for how they will draft new accounting rules, and they’re giving the public a sneak preview of the first few chapters.
In their quest for accounting rules that are more similar across international borders, FASB and the International Accounting Standards Board are creating a new, common conceptual framework, which essentially governs how they approach the rulemaking process. The two boards issued a “preliminary views” document to give the public some insight into their intended direction.
The document outlines what ultimately will be only the first few chapters of a far more comprehensive piece, FASB project manager Ron Bossio says. The long-term objective is to blend IASB’s existing conceptual framework with FASB’s series of concept statements, to create a new, unified rulemaking philosophy for both boards.
“We want to take what we each have, build on them and improve them, and in effect get to something that’s the same for both boards,” Bossio says.
The initial chapters of the conceptual framework define the objective of financial reporting as focused on the needs of investors and creditors, addressing such concepts as relevance, faithful representation, comparability and understandability. The boards make a point to carve out “transparency” as a term they will not use.
“The boards concluded that ‘transparency’ should not be added as a qualitative characteristic of decision-useful financial reporting information because to do so would be redundant,” the draft document reads. “Rather, transparent information results from applying several qualitative characteristics that the framework already incorporates, including faithful representation and its components of neutrality and completeness. Enhancing understandability also improves transparency.”
Beresford
Dennis Beresford, accounting professor at the University of Georgia and a former FASB chairman, says he doesn’t see any significant differences in FASB’s existing framework and its new one, nor does he see importance in the “transparency” distinction.
For the most part, the preliminary views is “apple pie and motherhood,” he says. “On the surface, very little has changed from the FASB's present objectives of financial reporting and qualitative characteristics … With respect to transparency, I don’t think this is a big deal one way or the other. The Board, together with the IASB, simply was trying to deal with a number of terms that have been tossed around and transparency is one of them.”
The boards' "preliminary view" of its conceptual framework can be downloaded from the box above, right.
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