With the nation in an uproar over widespread pension fund problems, the Financial Accounting Standards Board has set a standard that will soon require companies to fully recognize on the balance sheet either an asset for a pension plan's overfunded status, or a liability for a plan's underfunded status.Standard 158, Employers' Accounting for Defined-Benefit Pension and Other Post-Retirement Plans, would eliminate companies' ability to only partially report the funded status of a post-retirement benefit plan - that is, the difference between the plan's assets and liabilities.

"This statement puts the obligation that companies have promised in the financial statements, so that they reflect all of the company's obligations and assets, so that an investor or anyone else can see the financial condition of the company and how well the company is able to fulfill those obligations," said FASB project manager Peter Proestakes. "Financial statements will be complete."

Statement 158, which is amending Standards 87, 88 and 132R, also requires employers to measure a plan's assets and obligations that determine its funded status as of the end of the employer's fiscal year. Employers will also need to recognize changes in a plan's funded status in the year in which changes occur. The changes will be reported in the comprehensive income of a business entity or in the net assets of a not-for-profit.

The nation's pension plans may be in the red to a total of $600 billion, according to the Government Accountability Office. The new standard will not resolve the country's retirement benefit woes, but it will help companies, investors, employees, retirees and others understand the financial condition of many public and private companies, as well as not-for-profit organizations.

John Hepp, a senior manager in Grant Thornton's national professional standards group, said that though the change in accounting will affect balance sheets, it is not likely to affect the investment market, because the information has long been required in footnotes to financial statements.

"The market should have known that this standard was coming for quite some time," Hepp said. "If it affects valuation models that analysts were using, then their models were probably wrong before."

FASB took on the project after constituents, including the staff of the Securities and Exchange Commission, called for improvements in the transparency and usefulness of information on post-retirement benefit plans.

The statement is the first part of a broad project to reconsider accounting for post-retirement benefit plans. In the next stage of the project, the board will consider whether to permit the "smoothing devices" that companies use to reduce the effect of short-term volatility on long-term liabilities. Companies have traditionally smoothed out the effect of fund volatility by presenting underfunded plans partially on the balance sheet and partially off.

Corporations were relieved by one major change resulting from comments that the board received on an exposure draft of the statement. Contrary to the initial proposal, companies will not be required to apply the standard retrospectively, which would have involved retrospectively applying deferred taxes, which Grant Thornton's Hepp termed "a very low-yield exercise in terms of additional information for investors."

"We would have had to go back and, for all periods presented, change all the figures as if that standard had been in effect earlier," Hepp said. "That was in response to a lot of people pointing out what a pain in the neck that was going to be. FASB decided - very responsibly, we think - that prospective application would work... . We were very happy that FASB made that change."

The board also deferred the effective date for non-public companies to give them more time to renegotiate loan covenants and similar contracts. For public companies, the requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective as of the end of fiscal years ending after Dec. 15, 2006. The effective date for all other entities is the end of fiscal years ending after June 15, 2007. The requirement to measure plan assets and benefit obligations as of the date of the fiscal year-end statement is effective for fiscal years ending after Dec. 15, 2008.

Proestakes said that over the next few months the board would consider which issues to take on in the second stage of the project. He expected the board to re-affirm its intentions early in 2007. The board will coordinate its efforts with the International Accounting Standards Board to work toward converging U.S. and international standards.

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