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Thorny Issue for Board:
How to Value Pension Plans
By
Mary William Walsh, New York Times
November 11, 2005
The board that writes the professional accounting rules for American businesses voted unanimously Thursday to start a far-reaching revision of the rules for reporting pensions and other retirement plans, a project that is sure to be contentious, especially among companies with big retirement plans.
To keep the project from bogging down from the start, the Financial Accounting Standards Board agreed to focus on a single issue at first: how to express the true economic value of a company's retirement plans on its balance sheet.
At the moment that information is tucked away in the footnotes, making it hard for anyone but a sophisticated analyst to understand how much a company owes its future retirees, and how those promises might affect the business.
The accounting board agreed that until that task was completed, it would not start working on the potentially touchier issue of how companies should report the way their retirement plans affect their earnings. The current method has come under intense fire because it distorts earnings and can sometimes make a company look more profitable than it really is.
"The broader the scope, the longer it takes," said Jules M. Cassel, the board's senior technical adviser, explaining why the board had decided to start with just one part of the project. He said that in any case, balance sheet changes would have a powerful effect on some companies' reported financial strength.
"In terms of the immediate effect on balance sheets, it's huge," Mr. Cassel said. "There are companies which have positive equity now which could have negative equity when this changes."
Having negative shareholders' equity is not an immediate catastrophe, although it can have certain consequences, like putting a company out of compliance with its loan covenants. But in general, having negative equity means that over time the company has built up liabilities that are greater than its assets, and that is not an image any company is eager to project to its investors or creditors.
"We're talking about hundreds of billions of dollars" in coming aggregate changes in corporate financial reports, added Peter Proestakes, who will manage the pension project. Mr. Proestakes said the biggest change would probably be in sectors like heavy manufacturing, where adding current pension values to the balance sheet is likely to increase the company's overall indebtedness.
At the moment, the board is planning to use the pension values as they are currently calculated. Board members said they were aware that those values had also come under fire, because they can be based on questionable actuarial assumptions.
But in the board's public meeting Thursday, members said they feared muddying the waters too much if they tried to revise the calculations at the same time as they were making the balance-sheet change.
"It's clear to me that we're going to be criticized for not doing enough in this particular part," said G. Michael Crooch, a member of the board, adding that he believed that the board would be criticized no matter what approach it took.
The board set a one-year deadline for completing the first phase. It hopes to issue a so-called exposure draft of the new requirements for public comment next spring, and then issue a final standard by the end of 2006. But the one-year schedule met with some skepticism.
"It's very aggressive," said Timothy S. Lucas, a former research director of the accounting board and a veteran of the bitter battle over the writing of an accounting rule for stock options, which lasted 10 years. "It could easily be two years."
Robert H. Herz, chairman of the accounting board, said that he had told the professional staff that once the balance sheet changes were done, he hoped to complete the remaining pension accounting revisions in three years. But he said the staff would say only "maybe."
There are many more questions to be resolved about the accounting for retirement benefits, and any one of the issues could keep the accounting board busy for a long time. The board also agreed that when it took on the second phase, it would work jointly with the International Accounting Standards Board, in hopes of creating a uniform international standard.
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