Earnings from companies' normal business operations should typically drive the value of their stocks.
But when corporations include in those earnings pension income produced by gains in defined benefit plan assets, the force driving the stock price is less certain or steady.
Because the pension income typically is revealed only in footnotes, the earnings figures can be misleading to unsophisticated investors, especially when the pension income amounts to a significant percentage of a company's overall earnings.
That is why the Securities and Exchange Commission is right to require companies to report significant pension income upfront by making it part of management's discussion to shareholders.
The deficiency in disclosure is one weakness of Financial Accounting Statement 87, which provides footnote disclosure for pension income that is included in a corporation's earnings. The Financial Accounting Standards Board should have addressed this issue earlier, especially after many years of great stock market performance that has allowed some companies to enhance their corporate income with pension income.
In addition to the SEC's requirement that companies acknowledge the pension earnings in management's discussion, the FASB could make the footnote itself clearer by having the companies explicitly mention pension income as gains from pension investments rather than as subtractions from pension expenses.
Because the object of accounting is to make the financial statements of companies more understandable, the FASB should do more to put its terms in unambiguous wording.
In the meantime, thanks to the SEC, the accounting for pension fund income will at least be more noticeable, if not clearer.
