In four months flat, the Financial Accounting Standards Board has cranked out a proposal for a new standard on accounting for post-retirement benefit plans, including pensions.Not only has the board been quick to write the proposal, but it may be quick to implement it as well. If approved soon, it will be effective for fiscal years ending after Dec. 15, 2006.
"The board wanted to focus on a balance sheet that is complete, and to measure the pension-related assets and obligations at the same date as all other assets and obligations," said FASB project manager Peter Proestakes. "The board thinks that if we include the pension and other post-retirement benefit status, then the investor has a much better ability to see and assess how well the employer was able to carry out that obligation."
The proposal, which has been issued as an exposure draft for public comment, would require employers to recognize overfunded and underfunded positions of their defined-benefit post-retirement plans, including pension plans, in their balance sheets. They would have to measure plan assets and obligations as of the date of their financial statements.
John Hepp, senior manager of Grant Thornton's National Professional Standards Group, said that this is a good thing. His firm recently conducted a survey of chief financial officers, and an overwhelming majority supported FASB's proposed approach.
"An astute reader could always tell what the real status was, but it wasn't on the balance sheet," Hepp said. "Now we're going to put it on the balance sheet, and that can't do anything but help accounting. The better the numbers on the balance sheet, the less you have to go digging around among the notes to find out what's really going on. It's better for all concerned."
The proposal is the first stage of a comprehensive project to reconsider guidance on Statement 87, Employers' Accounting for Pensions, and Statement 106, Employers' Accounting for Post-Retirement Benefits Other Than Pensions. Both of those statements leave in financial statement footnotes much of the information that the proposed standard would require in the balance sheet. The proposal also makes minor amendments to Statement 88, on settlements of pension plans, and Statement 132R, on disclosures.
Proestakes said that the board was able to make swift progress on the proposal because it is of limited scope, essentially just moving information from financial statement footnotes to the balance sheet. The second stage of the project, however, is likely to take years.
"One of the main reasons we took on this first stage was because we wanted to make some immediate and meaningful improvements without wasting years to do so," said Proestakes. "We saw this obvious incompleteness that we could address."
Weighing the burden
According to the Government Accountability Office, the country's pension plans may be a total of $600 billion in the red. New accounting will not resolve the country's retirement benefit problems, but FASB says that a better standard would help companies, investors, employees, retirees and others understand the financial weight of funded and unfunded defined-benefit and post-retirement plans.
FASB holds that current accounting standards allow an employer to recognize in its balance sheet an asset or liability that is generally different from its actual overfunded or underfunded position. As a result, recognition of changes in plan assets and obligations that affect the cost of providing benefits is delayed.
FASB member George Batavick said that a broad array of constituents, including investors and creditors, had complained that current standards make it difficult to assess employers' financial positions and their ability to carry out the obligations of their benefit plans.
The Benefits Finance Committee of Financial Executives International has just begun to assess the exposure draft from a corporate accountant's point of view. Though they are reluctant to express an opinion, a spokesman said that at first glance, the standard looked a little onerous. Calculating projected benefits pay-outs would be very difficult, and restatements could prove complicated for companies that would need to restate their summaries of five or 10 years. They were also concerned about additional disclosures regarding the 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 proposal inches closer to the international standards promulgated by the International Accounting Standards Board by requiring the balance sheet reporting that the international standard merely permits.
FASB and the IASB plan to work together on the second stage of the project. Proestakes said that the boards had not yet decided exactly how they will cooperate or what kind of final documents they will aim for, but convergence will be a goal.
The second stage of the comprehensive project on post-employment benefits will deal with related issues, such as the recognition and display in earnings and other comprehensive income of the various elements that affect the cost of providing benefits; the best measurement of the obligation under plans with lump-sum settlement options; whether more guidance is needed regarding measurement assumptions; and whether post-retirement benefit trusts should be consolidated by the plan sponsor.
In that second stage, the board will consider whether "smoothing devices" that companies employ to reduce the effect of short-term volatility on long-term liabilities should be permitted. Companies accomplish this by presenting underfunded plans partially on the balance sheet and partially off.
Though the board did not consider smoothing in the current proposal, Proestakes said that it might have a certain smoothing effect anyway.
"The way I like to look at it, we have eliminated smoothing as it relates to the balance sheet," he said. "We do that through other comprehensive income. It's a way we can recognize changes in plan assets and benefit obligations without affecting earnings."
The proposed changes, other than the requirement to measure plan assets and obligations as of the balance sheet date, would be effective for fiscal years ending after Dec. 15, 2006. Public companies would be required to apply the proposed changes to the measurement date for fiscal years beginning after that date, and nonpublic entities, including nonprofits, would become subject to that requirement in years beginning after Dec. 15, 2007.
The board requested comments by May 31. It will hold a public roundtable discussion on the issue at its headquarters in Norwalk, Conn., on June 27.
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