The Securities and Exchange Commission has released a report recommending that the Financial Accounting Standards Board reform accounting standards for such front-burner issues as pension and lease accounting.
The report, prepared by the Offices of the Chief Accountant, Economic Analysis and Corporation Finance, was released to the House, the Senate and President Bush.
In the past few years, lease and pension accounting have emerged as two of the accounting profession's most troublesome areas, as an increasing number of SEC filers have kept payment obligations off their balance sheets.
As an example, the SEC examined 200 companies in the preparation of the report, and found that over three quarters had such off-balance-sheet operating leases and $500 billion in pension obligations off their balance sheets.
FASB Chairman Robert Herz said that the board provided input to and has discussed the content of the report with the SEC staff.
"I generally agree with the thrust of the SEC staff's findings and principal recommendations, which are very consistent with FASB's current activities, agenda plans, and overall commitment to improvement, simplification and international convergence of accounting standards and financial reporting," said Herz.
Among the report's recommendations for changes in accounting and reporting requirements was accounting guidance for defined-benefit pension plans and other post-retirement benefit plans. The SEC said that the trusts that administer such plans are currently exempt from consolidation by the sponsoring issuers, resulting in the netting of assets and liabilities in the balance sheet. Additionally, issuers have the option to delay recognition of certain gains and losses related to the retirement obligations and the assets used to fund these obligations.
The report also included a recommendation that guidance for leases be overhauled, claiming that current lease accounting takes an "all or nothing" approach to recognizing leases on the balance sheet, which results in a "clustering" of lease arrangements that don't always require liabilities to be recognized. As a result, similarly structured leases can be accounted for differently.
The SEC also issued a recommendation to continue examining the feasibility of reporting all financial instruments at fair value.
