Now that many companies have been reporting pension income, it's time for some change in FAS 87 to improve understanding of financial statements.
Wall Street and buyside analysts may discount pension income in corporate earnings reports. They are trained to look behind earnings numbers. They know where to look to see if there are accounting tricks taking place behind the scenes.
But how many stockbrokers are that savvy? How many would point out the contribution of pension income to earnings if they knew? And how many clients could figure it out for themselves?
Individual investors can easily be misled by the sources of corporate income; it is for them that improved accounting standards usually are adopted.
Financial Accounting Statement 87 governs how companies account for their pension plans in their corporate financial statements. It was designed to link pension plan finances with the corporations' operations by requiring, for instance, unfunded pension liabilities to be included in corporate reports to shareholders. While this disclosure, adopted in the mid-1980s, improved clarity in financial statements, the liability information was relegated to a footnote and was not comprehensive in detail.
Improvement to FAS 87 would not have to require a radical revamping of the accounting rule that would take years of debate to complete, still with no certainty of adoption.
One idea for improvement: the Financial Accounting Standards Board could create another footnote in corporate financial statements that would report how much in corporate earnings specifically was generated by surplus assets in the pension plan. The footnote also could say how much earnings per share would have been without the pension income. This would not be difficult for companies to calculate and report.
FAS 87 was a great improvement on previous accounting for corporate pension plans, but now it needs updating. The FASB can't let its rules be static when their limitations inhibit understanding of financial statements. Now it's time to improve FAS 87 to further improve the transparency of the earnings reported by corporations.