As companies and actuaries continue their fight against proposed new accounting rules that would require companies to show pension obligations based on projected future earnings, the Securities and Exchange Commission’s chief accountant has made clear that he favors the rulemakers’ “include everything” approach.
The Financial Accounting Standards Board held six hours’ worth of roundtable discussions last week on its plan to overhaul pension accounting rules. The most contentious discussion focused on the Board’s proposed formula for measuring the pension liability that companies would be required to report on the balance sheet.
The long-standing method of measuring pension liabilities is the “projected benefit obligation,” based not only on what covered employees have earned to date but also what they are expected to earn in the future, taking into consideration projected future salary increases. Companies now are pushing FASB instead to allow the calculation of an “accumulated benefit obligation,” which would focus only on what employees have earned up to the time of reporting.
In its proposed statement, FASB made no change in how it wants companies to measure their pension liabilities, only saying that the figure should be elevated from footnote disclosure to a line-item on the balance sheet. Dozens of comment letters and speakers at the June 27 roundtable argue that although the measurement has been used for calculating the footnote disclosure for some 20 years, it’s not the right way to measure a liability figured into the balance sheet (see related standard, comments and resources in box at right).
William Sohn, speaking on behalf of the American Academy of Actuaries’ Committee on Pension Accounting, said the ABO is the right measure at least until FASB undertakes a second, more comprehensive review of pension accounting rules sometime in the future. (The current project only seeks to clarify pension liabilities in the financial statements.)
“We recognize ABO is probably inadequate because it doesn’t recognize lump sum benefits consistently with other financial instruments, the interest rate for well-funded guaranteed plans is probably too high and should be closer to the risk-free rate, and it ignores embedded options in cash balance plans,” Sohn said. “On the other hand, the PBO includes an allowance for future salary growth that we think is inappropriate for a balance sheet.”
Sohn said he fears that the Board will close the book on any questions about the measurement method when it reaches the second phase of its overhaul, and that putting the PBO on the balance sheet may cause some companies to discontinue otherwise viable plans.
Michael Horton with Buck Consultants said using the PBO figure now, pending FASB’s more comprehensive review of pension accounting rules, would cause confusion. “We’re suggesting there’s lack of consensus,” he said. “People do not fully understand this issue. Adding it to the balance sheet, we may be in this status quo for a long time before phase two can be implemented. After phase one, before phase two, we don’t think we will be improving reporting.”
Schipper
Challenging Horton’s logic, Board member Katherine Schipper shot back: “Are you saying a number which has been reported for 20 years in audited financial statements is not well understood? … I must have misheard you.”
Cautiously, Horton replied, “Showing it on the balance sheet does not improve the understanding of the company’s financial position.”
‘Anything Is An Improvement’
After silently hearing the debate, SEC acting Chief Accountant Scott Taub finally piped up. “I tend to defer to the Board’s discussion 20 years ago” when it adopted the PBO for footnote disclosures, he said. “They thought PBO was the better measure.”
SUMMARY
According to FASB, its proposed statement, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans," would improve existing reporting for defined benefit postretirement plans by requiring an employer that is a business entity to:
Recognize in its statement of financial position the overfunded or underfunded
status of a defined benefit postretirement plan measured as the difference
between the fair value of plan assets and the benefit obligation. For a pension
plan, the benefit obligation would be the projected benefit obligation; for any
other postretirement benefit plan, such as a retiree health care plan, the benefit
obligation would be the accumulated postretirement benefit obligation.
Recognize as a component of other comprehensive income, net of tax, the
actuarial gains and losses and the prior service costs and credits that arise
during the period but pursuant to FASB Statements No. 87, Employers’
Accounting for Pensions, and No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions, are not recognized as
components of net periodic benefit cost. Amounts recognized in accumulated
other comprehensive income would be adjusted as they are subsequently
recognized as components of net periodic benefit cost pursuant to the
recognition and amortization provisions of Statements 87 and 106.
Recognize as an adjustment to the opening balance of retained earnings, net of
tax, any transition asset or transition obligation remaining from the initial
application of Statement 87 or 106. Those amounts would not be subsequently
amortized as a component of net periodic benefit cost.
Measure defined benefit plan assets and defined benefit plan obligations as of
the date of the employer’s statement of financial position.
Disclose additional information in the notes to financial statements about
certain effects on net periodic benefit cost in the upcoming fiscal year that arise
from delayed recognition of the actuarial gains and losses and the prior service
costs and credits.
The proposed statement also "would apply to a not-for-profit organization or an entity that does not report other comprehensive income but would tailor its requirements
to reflect their alternative reporting formats."
Source
Employers’ Accounting For Defined Benefit Pension And Other Postretirement Plans (FASB, March 31, 2006)
Taub
With oversight responsibility for FASB, the SEC tasked the Board to take a look at pension rules when it estimated that the market was as much as $1 trillion short in its ability to meet its collective pension obligation, Taub said. “I’ll tell you that anything is an improvement over what’s on the balance sheet now,” he said. “The number on today’s balance sheet is not a relevant number.”
Taub challenged the logic of ABO proponents. He said the question of booking future liabilities is often discussed at the SEC in a variety of contexts, with companies usually defending the practice.
When questioning companies about such prospective liabilities, he said, the staff often hears, “ ‘We’re not obligated, but we expect it, so it’s appropriate to book it now.’ The answer was always that it doesn’t matter if we’re obligated; we fully expect to do it. I get confused when I hear a large number of issuers going one way on one issue and another way on an issue where it should be similar.”
Taub also disputed the assertion that FASB would decline to review the measurement question during the second phase of its review of pension accounting rules. “That better not be the case, because then the Board would be guilty of deceiving its constituents,” he said. “I don’t believe the Board would do that or is doing that.”
Some attending FASB’s roundtable also raised concerns about timing the new disclosures with the end of a company’s fiscal year. Some claimed the benefit obligation should be measured at the end of the third quarter or some other date before the fiscal-year end, to give more time for the data gathering and calculations necessary to arrive at the obligation figure.
Regulators wondered aloud why companies haven’t raised this concern before now, when the calculation should be not different except that now the number will be displayed more prominently on the balance sheet instead of obscurely in footnotes.
FASB member George Batavick said the Board received 240 comment letters on the proposed pension rules. The Board plans to begin new deliberations of its proposed statement this month, and could have final rules by this fall.
Related resources can be found in the box above, right.
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