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recent study says companies probably need to increase assumed year-end discount rates as they establish pension-related assumptions that will help calculate pension liabilities—which are making their debut on corporate balance sheets this spring.
Waite
SEI, an asset-management firm, recently published its 2007 update of annual research that examines key barometers affecting pension-related assumptions. Jon Waite, chief actuary for SEI’s Institutional Solutions Group, says those findings and other recent research would suggest that companies need to increase their discount-rate assumptions by as much as 25 basis points at the end of 2006 compared with 2005.
That, the SEI report says, will alter the calculation of a company’s 2007 pension expense, but it can’t be independently pinned to an increase or a decrease in expense; other factors would come into play as well.
Waite says companies are paying more attention than ever to their pension-related assumptions because of new FASB accounting rules. Financial Accounting Statement No. 158, Defined-Benefit Pension and Other Postretirement Plans, and amendments to other standards, especially FAS 87, Employers’ Accounting for Pensions, are putting the actual funded status of pension liabilities on the face of the balance sheet, making the liability more prominent.
“The funded status of the liability is on the balance sheet so it’s much more accessible to the readers of the financial statements,” he says. “Financial executives need to know what these numbers are and how they’re changing from year to year.”
Given the spotlight that will shine on pension liabilities as companies close the books on 2006, financial executives are paying closer attention to the inputs. “We have found that plan sponsors are operating and selecting their assumptions within relatively tight bands,” he says.
FASB Proposes Limits On Foreign Exchange Hedging For Debt
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he Financial Accounting Standards Board is proposing new limits for how companies can hedge against the effect of exchange rates when issuing foreign debt.
Just before the end of 2006, the Board issued a third proposed Statement No. 133 implementation issue, this one numbered H17. The proposal says any gain or loss resulting from changing exchange rates as a company issues debt in a foreign currency is not eligible for hedge-accounting treatment.
Hamlen
“The question is whether the gain or loss on the forward contract qualifies for hedge accounting, and therefore is recognized in income on a smoothed basis, or does not qualify for hedge accounting and appears immediately as a gain or loss in income with no offset,” says Susan Hamlen, accounting professor at the University at Buffalo. “The proposal says the forward contract does not qualify for hedge accounting, and therefore the loss must be reported in income immediately.”
Hamlen and James Largay, an accounting professor at Lehigh University, are authors of a textbook on financial derivatives and have published on hedge accounting implementation issues. They say Statement 133, Accounting for Derivatives and related standards and implementation guidance employ special hedge accounting to match gains and losses on hedges with losses and gains on hedged items on the same income statement; consequently, reflecting hedging relationships more accurately.
Largay
In the case of hedges of planned issuance of debt denominated in another currency, “the current reporting rules do not allow recognition of any gain or loss on the change in the value of the debt prior to issuance,” Largay says. That means no offsetting loss or gain exists for the hedge to match against. “Companies who have buried their gains and losses on these hedges on the balance sheet will now be required to report them in income,” he continues.
Hamlen and Largay say there are several instances where financial transactions that are clearly economic hedges do not qualify for special hedge accounting. “This proposal exacerbates this problem by denying hedge accounting for hedges of planned issuance of debt in another currency,” Largay says. Hamlen’s take: “The result is volatility in income that does not reflect the economics of the transaction.”
FASB is accepting comments on the proposal through Feb. 2.
SEC Publishes Reference Guide For 2006 Rules
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he accounting staff of the Securities and Exchange Commission’s Division of Corporation Finance has published a summary of the current accounting and disclosure issues that are foremost on regulators’ minds as they head into 2007.
The summary does not provide any new rules or new guidance, but boils down all of the SEC’s recent statements into a single document for easy reference, in case the finance staff of public companies may have missed certain releases throughout the course of 2006.
The summary includes new rules and the staff’s views on such issues as executive compensation, stock options and backdating, cash-flow classifications, correcting misstatements, first-time adoption of International Financial Reporting Standards, accelerated filer deadlines, various enforcement actions, off-balance-sheet disclosures, and numerous other issues.
FASB Assembles Investors Technical Advisory Committee
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ASB has assembled a dozen users of financial reports with strong technical accounting knowledge to sit on a newly created Investors Technical Advisory Committee. The committee is intended to help FASB identify urgent accounting and financial reporting issues, propose new standards-setting or staff-guidance projects for the Board to consider, and offer insight on the implementation of new standards.
In a statement, FASB said ITAC is intended to assure that investor views and interests are represented as accounting rules are written. The committee will meet publicly with FASB at least twice annually and with the FASB staff quarterly.
FASB has formed other groups with similar objectives. The User Advisory Council, established in 2003, airs the views of individual and institutional investors, equity and debt analysts, lenders, and credit-rating agencies. The goal was to increase analyst participation in the accounting rule-making process. The Investor Task Force, formed in 2005, gives a voice to large institutional asset managers.
The new ITAC consists of representatives of Standard & Poor’s, Moody’s, the Council of Institutional Investors, the CFA Centre for Financial Market Integrity, Goldman Sachs, Bear Stearns, Glass Lewis & Co., and others.
PCAOB Plans More Small Business Forums In 2007
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he Public Company Accounting Oversight Board said last week it will continue its small business roadshow into 2007, with eight stops planned coast to coast to help companies understand the wide world of auditing.
The Board began hosting its Forums on Auditing in the Small Business Environment to give regulators, small public accounting firms, and small public companies face time to discuss audit concerns and the audit-regulatory regime as it applies to smaller companies. The program launched in November 2004 and continued into 2005 and 2006. The PCAOB says it has met with representatives of 1,600 entities as a result of the forums.
For 2007, the Board plans to revise the program to reflect emerging issues. Stops are planned in Atlanta; Chicago; Fort Lauderdale, Fla.; Houston; New York; San Francisco; Santa Monica, Calif.; and Washington, D.C.
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