by Glenn Cheney

Norwalk, Conn. -- In response to requests from analysts and investors, the Financial Accounting Standards Board has issued a proposal for better disclosures for pension and other post-employment benefit plans. Some of those users of financial information, however, are objecting to the elimination of several disclosures that are currently required.

The proposal does not affect the recognition and measurement requirements of FASB Statement 87, Employers’ Accounting for Pensions, or Statement 132, Employers’ Disclosures about Pensions and Other Post-Retirement Benefits, but, if adopted, it would replace the accounting guidance in those statements.

“The most important area of these new disclosures is in information about plan assets and cash flows, so there is much more information to help financial statement users assess investment risk and have more information about cash flows associated with these plans - both payments made to retirees and money that the company sponsors are contributing to prefund the plans,” said FASB project manager Peter Proestakes.

Global economic stress has left the country’s pension plans an estimated $350 billion below their obligations. While the proposed standard would in no way close that gap, it would help investors understand the health of corporate pension plans.

Janet Pegg, an accounting analyst at Bear, Stearns, had general praise for the proposal, albeit with certain reservations.

“This definitely improves information on the assets and future cash flows of pension plans,” Pegg said. “We would have liked a little more information about smoothing mechanisms that companies use to calculate under Statement 87, but it’s definitely a step forward.”

The proposed statement would have public company employers provide more detail about plan assets, benefit costs and obligations, cash flows (including projections of future benefits and contributions), and other information. Companies would be required to categorize plan assets in such groups as equity, debt and real estate. Financial statements would also have to show expected rates of return and target allocation percentages for each asset category.

To help investors and analysts compare current and past information, the proposal would have companies apply the new rules retrospectively to previously issued information. This would apply only in statements that include information that had been issued before the new rules applied. If such re-statement is impracticable, companies would not need to do so. To keep information current, the proposal requires companies to provide information in quarterly financial statements.

Proestakes said that the proposal aims in the same direction as a project at the International Accounting Standards Board. That project will address recognition and measurement as well as disclosures. An existing international standard is similar to FASB’s Statement 87, but a proposal for changes is expected to be issued by the end of the year. That proposal may diverge significantly from Statement 87, so FASB is discussing the possibility of soliciting comments on the IASB draft and asking constituents whether a subsequent FASB document would be desirable.

“When we took on this pension disclosure project, we made the conscious decision to limit it to disclosure, partly because the users of financial information told us that better disclosures would go a long way toward solving their concerns,” Proestakes said. “The other part of the decision was that if we took on a broader-scope project then, we’d be doing it while the IASB was in the middle of their project. We decided to let them finish so we could capitalize on their learning and use that as a springboard for our next step.”

Unnecessary confusion

The proposal eliminates the current requirement for reconciliation of beginning and ending balances of plan assets and benefit obligations, which some financial analysts see as a move away from transparency. The Equity Research bulletin of Bear, Stearns & Co., of which Pegg is one of three authors, said that the omission could lead to confusion.

“We believe that eliminating the reconciliation is a step in the wrong direction,” the bulletin stated. “When attempting to understand pensions and other post-retirement plans, most users look to the reconciliation as a starting point. Given that most users of financial statements are not experts in retirement benefits, we believe that eliminating the reconciliation will add a good deal of unnecessary confusion and uncertainty to the analytical process.”

The bulletin also objected to the elimination of several disclosures that are currently required, among them income statement classifications of net benefit cost, market-related value of plan assets used to calculate expected return, plan measurement dates, sensitivity information showing the impact of changes in assumptions, the weighted-average duration of the benefit obligation, and the number of pension plan participants who are active, terminated and retired.

The Association for Investment and Management Research has not yet formulated a comment on the proposal, but Rebecca McEnally, CFA, AIMR vice president of advocacy, doubts that better disclosures will resolve the problems inherent in Statement 87.

“AIMR has made clear in the recent past that the real problem is Statement No. 87 and its use of ‘smoothing’ mechanisms as a means to obscure the inherent volatility of fair value reporting of pension plans,” McEnally said. “Our view is and has been for a very long time that if the volatility is there, it should be reported fully and clearly, not covered up. We have also made clear that the infirmities of Statement No. 87 cannot be cured by footnote disclosure, any more than a failure to expense stock options can be solved with footnote disclosure. The basic financial statements themselves must be repaired.”

So far, the IASB project includes tentative decisions that would require some, but not all, of FASB’s proposed requirements, and FASB’s proposal includes requirements that are not included in the IASB decisions. Much of the divergence is attributable to the IASB’s attempt to accommodate the rules in many different countries.

Proestakes said that, fortunately, the two boards are in general agreement on such key issues as the categories of pension plan assets.

Comments are requested by Oct. 27, 2003. If adopted soon, the standard will be effective for fiscal years ending after Dec. 15, 2003. Calendar year-end companies would be required to make the new disclosures in their 2003 annual reports, with abbreviated quarterly disclosure of information beginning in the first fiscal quarter in the fiscal year beginning after Dec. 15, 2003.

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