Pensions on Balance Sheets
Plans' Deficits, Surpluses Are Taken Out of Footnotes In First
of Coming Changes
By David Reilly
The Wall Street Journal
Friday, September 29, 2006
Forget the fine print. Accounting standard setters plan today
to issue a final rule requiring companies to include on their
balance sheets the overall deficit or surplus for their
retirement plans, lifting the figure from often overlooked and
Bringing deficits for pension and other retiree benefit plans
onto the books could cause some companies' net worth -- or
shareholders equity -- to fall or even turn negative. That in
turn could force some companies to renegotiate covenants in debt
agreements, or in some cases hamper companies' ability to pay
dividends. Lenders and ratings firms typically factor the
deficits into their calculations, so the change isn't expected
to cause upheaval at many companies even if it takes some
investors by surprise.
But it is the first step in what could be a contentious and
widely watched battle in the world of pension accounting rules.
The Financial Accounting Standards Board next plans to rework
all the accounting rules related to pension and other retiree
benefit plans. The course the board eventually charts will have
broad implications for companies, investors and employees who
participate in defined-benefit pension plans.
That is because FASB is likely to consider changes that could
curtail, in part or altogether, companies' ability to smooth out
over a period of years the impact on profits from changes in the
surplus or deficit of a pension plan. By smoothing results,
companies don't immediately recognize gains or losses related to
plans in the period in which they occur. Rather they take them
over time. At the moment, smoothing means pension-related
figures appearing in corporate financial statements bear little
resemblance to the reality of what is happening in pension and
other retiree benefit plans.
A move to eliminate smoothing could add volatility to corporate
earnings as changes in the value of pension plans are reflected
in profit. That isn't likely to sit well with executives and
some investors who believe pension movements aren't core to a
company's operations and will obscure what is actually happening
in a company's underlying business. Employees could also suffer
if, as some observers worry, such changes hasten moves by
companies to close or eliminate defined-benefit pension plans.
"The battle on this will be for mom and pop losing their pension
plan because the company can't deal with the volatility or
doesn't think investors can deal with it," said Janet Pegg, an
accounting analyst at Bear Stearns Cos. But she believes
problems facing defined-benefit pensions don't lie with any rule
changes brought about by FASB. Rather, the board is bringing
more transparency to the issue.
Bear Stearns has predicted that the fight over pension
accounting will be even more bruising than the political
slugfest that erupted when FASB moved to require expensing of
So what is up for grabs as FASB reconsiders pension accounting?
Everything, it seems. For a start, the board will have to
consider how to measure the pension obligation companies have to
employees. Under the rule being issued today, companies will
base this obligation on a measure that includes expected future
salary increases for employees. FASB stuck with this measure
despite opposition from many companies that wanted pension
deficits to be based on benefits that employees had already
Now, FASB is likely to return to this debate and will extend it
to determining the retiree health-care obligation companies
face. Besides considering the merits of projected or
accumulated benefits, the board could also consider basing a
company's obligation on the termination value of a plan or could
even look to a measure of a plan's market value.
Jack Ciesielski, editor of the Analyst's Accounting Observer,
added that the board will also have to grapple with another
big-picture issue: whether a pension plan should be treated as
part of a company's assets and liabilities. "A company doesn't
have unilateral control over a pension trust, it can put assets
in but would have a hard time getting them out," he said.
Still, Mr. Ciesielski doesn't think the board will ultimately
de-consolidate pension plans from the books of companies that
FASB will also have to consider the thorny question of "smoothed
versus volatility" as it applies to the way pension costs flow
through to a company's income statement, Bear Stearns's Ms. Pegg
said. Underlining the complexity of these issues, FASB expects
that it could take two to three years before new
pension-accounting rules emerge.
Write to David Reilly at