The Financial Accounting Standards Board will propose changes in pension accounting and reporting rules early next year.
The changes would make it easier for financial analysts to identify and track pension fund cash flows.
They are an effort to streamline and improve financial disclosure, and to provide additional information about pension assets and how mergers and acquisitions would affect pension plans of affected companies.
FASB's proposed modifications to Financial Accounting Standards 87 and 106 are being billed as improving the completeness and relevance of information regarding pension and retiree medical accounting.
Actuaries, accountants and plan sponsors generally expect the proposed changes to improve the nature of accounting disclosures. But they are not enthusiastic in their support - some see the changes as extraneous and incomplete, while others believe FASB should go further and streamline burdensome portions of the pension accounting rules.
The FASB staff recommended the modifications to provide additional disclosure information without changing the substance of the two accounting standards. In general, the proposed changes would add information on changes in the value of plan assets and plan obligations, and of amounts recognized in the financial statements.
The modifications could include the elimination of certain current disclosure information the FASB staff views as less relevant, such as employee groups covered, funding policy and types of assets held by a pension plan. These items, according to the board staff, tend to be too general in nature. Another item that could be eliminated is the net amortization and deferral line of pension expense, which includes net periodic costs, service costs and interest costs. These items would be disclosed in a separate schedule showing changes in the overall benefit obligation.
Specific disclosure issues under consideration by the board include showing actuarial gains and losses of pension plans, plan amendments during the accounting period, and the effect on pension plans of corporate mergers, acquisitions and restructurings.
In addition, the FASB is considering requiring the disclosure of total benefit payments and contributions to the plan during the period.
Under current rules, companies must only show the market value of their plans' assets at the beginning and end of the year and disclose the assumptions they make for life expectancies, salaries and interest rates.
John Hepp, FASB project manager, said the new disclosure proposal could be issued as an exposure draft available for comment in the first quarter of 1997.
Mr. Hepp said the additional pension and retiree medical disclosure would be part of an effort by the FASB to make the standards "more useful and easier to read and understand."
He said current footnote disclosure is frequently a puzzle. For example, he said, current requirements call for information on service cost and interest costs "but doesn't provide information regarding plan amendments and actuarial gains and losses during the period. .*.*. We would like to see more explanation of the obligation and the assets from one year to the next."
Diana Scott, former FASB project manager who now is a consultant with Towers Perrin, Chicago, said the proposed additional pension disclosure could benefit financial analysts and should not require additional analytics or computation by plan sponsors. She said most of the information already is being generated by actuaries.
"Analysts want to see the outflows; they could find the cash flow amounts, but pension amounts were not being broken out separately," she said. "They also want to see if a company is making contributions. .*.*. Analysts will take anything you can give them. If the board accepts the staff proposal, there will be a lot more information available," she said.
Gary Leventhal, principal and consulting actuary at Kwasha Lipton, Fort Lee, N.J., said the information being discussed by FASB is being generated by actuaries on behalf of their clients. "They (FASB) are asking now for more disclosure than in the past, not necessarily more analysis."
"I get the information from company auditors and company financials that would answer most of these questions," said Mr. Leventhal. "But for a company with a lot of plans and which has gone through a merger or a spin-off, it could get a little complicated."
Bill Miner, a consultant with Watson Wyatt Worldwide, Chicago, said additional disclosures could be of interest to some analysts.
"If there is a retiree medical program, you would want to see the liabilities compared with the benefit payments. There may be some retiree medical plans with annual expenses which are less than the liabilities," Mr. Miner said.
"Also, some analysts value some companies they look at by looking at cash flow rather than reported earnings. If you look at cash flow, you don't have some of the key elements now, and this (disclosure) would be a big help in that respect," he said.
Some industry sources who follow or are directly affected by FASB's pension accounting rules would like to see the organization making more substantive changes.
Richard Manka, senior investment officer at the Kroger Co., Cincinnati, with $1.7 billion in pension assets, said the proposed modifications would provide additional information, but he believes "the entire framework" of statements 87 and 106 is unwieldy.
Mr. Manka said the FAS 87 method used to calculate pension liabilities is on a termination basis "even though you have no intention of terminating. "For a company which intends to terminate it may be appropriate, but it introduces an element of volatility for those companies who have no intention of terminating. It's not the way ERISA intended these obligations to be calculated," Mr. Manka said.
Dick Joss, consultant with Watson Wyatt in Washington, agreed. He has petitioned the FASB to modify its discount rate requirements under FAS 87, which now must be modified annually based on prevailing interest rates.
The volatility is apparent if the discount rate is increased in one year and lowered the next year. If the rate increases, the pension liability decreases; if the rate is lowered the following year, the pension liability increases.
"Discount rates go up and down like a yo-yo," said Mr. Joss. "We need an averaging mechanism or a range of reasonableness and get off this picking of a rate based on a single day."
William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, who oversees nearly $8 billion in employee benefit assets at American Airlines, said he has no disagreement with the potential FASB disclosures.
"Disclosure is always reasonably good," Mr. Quinn said, "as long as it is not burdensome and costly. A lot of this information is included in the 5500 form."
Mr. Quinn said the disclosure requirement possibly could accelerate the timing of some pension calculations that might not now be done until after the annual report is nearly completed.
He, too, agreed the annual FASB discount rate requirement injects an element of "unnecessary" volatility into the pension calculation. He said the FASB discount rate mechanism "is contrary to what is happening everywhere else" and added several regulatory and industry organizations such as the Internal Revenue Service and the Pension Benefit Guaranty Corp. each require different interest rate calculations.
Harold Dankner, principal at Coopers & Lybrand, Washington, who conducted the FASB field test for both FAS 87 and 106, said the proposed additional disclosures might not be totally appropriate.
"I think the information will be of some use, but are the financial statements of the company the right vehicle? With these types of plans, all you need to say is what is your promise, who is it to, how do you calculate the benefit liability and has it changed.
"To fully understand FAS 106, you need to know what drives it. The financial statements, unfortunately, are not the appropriate vehicle to get those types of details," said Mr. Dankner. "I would think a separate inquiry to the company for these details would be a more realistic way of dealing with it."
Besides, he said, "you can make these numbers dance if you know how to do it."
The additional information will be useful, he said, "but is this the right way to provide it? There are a lot of things you need to know and to understand about these two issues. For the health plan you need to know the medical history, the HMO participation rate and per capital medical costs, for example. There is a lot to know, and the numbers in a basic footnote may not be the best place to go and find that." n