by Glenn Cheney
Norwalk, Conn. -- September’s Financial Accounting Standards Board exposure draft on public company pension plan disclosures greatly expanded the information that such companies must provide as indicators of the health of their plans. The proposed requirements met corporate criticism, however, due to a perceived increase in the burden of the accounting behind the disclosures.
In response, the standard-setting board has tentatively decided to eliminate a few of the proposed disclosures and require, instead, a narrative report on pension plan investment strategy — a looser venue of information that, while open to abuse, makes it easier for companies to proffer information that is relevant to the company’s situation.
“When the board took on this project, it clearly wanted plan sponsors to provide more information about their portfolios of plan assets so that investors could get a better idea of understanding of market risks, potential volatility and expected rates of return that were being assumed,” said FASB project manager Peter Proestakes. “Meanwhile, the board was trying to balance the perceived need for that information with the burden it would put on plan sponsors to provide it and have it audited.”
The effort to balance the burden of new disclosures resulted in a few proposed disclosures being dropped, while similar disclosure is expected in a narrative of the plan’s investment strategy. Proestakes said that the board recognized the limitations of narratives, which, he said, “can only be as good as a company wants them to be.”
The board decided to drop the proposed disclosure of the estimated rate of return for each major asset category because many companies do not normally use an actuarial method that would produce that kind of information. The board also dropped a requirement to disclose the maturities of debt securities, information that was, on second thought, considered of little use.
The board also sought to simplify financial statement preparation by requiring the disclosure of the measurement date in all cases, not just cases when the preparer determines that a significant event took place after that date.
FASB also dropped the disclosure of target allocations of each asset category. That information will be expected, however, in the investment strategy narrative.
Jack T. Ciesielski, president of R.G. Associates Inc., an investment research and management firm in Baltimore, was among the users of financial information who called for more disclosure of asset mix and investment strategy.
“This is an incremental good move,” Ciesielski said. “It’s better than just having a number there with nothing to explain why performance was out of line with what you might expect. Under current requirements, nobody knows what’s in the asset mix, so you’re left in the dark to speculate, and a lot of the time, people speculate the worst. This is incremental information that might clear up a lot of mysteries.”
Corporations were less enthusiastic about the disclosure of investment strategy. The Institute of Management Accountants had objected to the details about plan assets, calling them “onerous,” especially in the case of multinational investments, and said that disclosures about investment strategies would not add meaningful information.
Auditors also tended to discount the value of the additional disclosures. Stephen McEachern, chairman of the American Institute of CPAs’ Technical Issues Committee and managing shareholder of Houston-based Fitts, Roberts & Co. PC, saw it as nothing more than an added burden — at least for smaller companies.
“It’s going to be very difficult for smaller companies to dig down and get that information,” McEachern said. “In a bigger company, that information might be internal and they can easily determine it, but for a smaller company that has to go to external sources that are managing the pension fund, it’s going to be difficult to get that information, and I question how much value it’s going to add to financial statements.”
The project deals only with disclosure. It does not change the accounting for pension plans or other post-employment benefits, or amend FASB Statements 87, 88 or 106, but it does replace Statement 132, Employers’ Disclosures about Pensions and Other Post-Retirement Benefits, by requiring disclosures about major categories of plan assets, including equity securities, debt securities and real estate. The project does not cover defined-contribution and multi-employer plans.
FASB took on the project following complaints by users of financial information, who said that financial statements lacked transparency and information about pension plan assets, obligations, cash flow and net benefit cost. The board opted for a faster, leaner project that dealt only with disclosures because it would more quickly address investor concerns, and because the International Accounting Standards Board is working on a project that includes accounting principles.
FASB planned to issue a final statement before the end of the year, with many of the new disclosure requirements effective for 2003.
