The implementation of Financial Accounting Standard 158 on shareholders equity made for some big winners and big losers, based on Standard & Poors Compustat data.
Denver-based Qwest Communications International Inc. reported the largest gain in stockholders equity of S&P 500 companies $1.08 billion as a result of the rule, which moves the reporting of post-employment benefit plans funded status to the corporate balance sheet.
On the other end of the spectrum, General Motors Corp. stockholders equity, or book value, plunged $16.9 billion after FAS 158 was adopted in September by the Financial Accounting Standards Board wiping out the Detroit-based companys stockholder equity and moving it into negative numbers.
The Compustat data is based on the financial statements of 297 companies in the S&P 500 stock index that have defined benefit plans, other post-employment plans or both for the fiscal year ended Dec. 31, said Charles Kessler, Compustat analyst in Denver.
The results show the transitional effect of adopting 158, Mr. Kessler said.
Eric S. Friedman, consulting actuary at Watson Wyatt Worldwide Inc., Chicago, said the impact of reporting pension funding status on the balance sheet is reflected in stockholders equity.
For the 297 companies, the aggregate change in shareholders equity was $142.5 billion $136.8 billion in reductions and $5.7 billion in gains, Compustat found. The median impact was a loss of $80.9 million.
In all, 258 of the companies, including GM, had declines in stockholders equity caused by the new rule, while Qwest and 32 other companies had gains, according to Compustat. Six companies saw no impact.
$5.4 billion deficit
For General Motors, its stockholders equity fell to a deficit of $5.4 billion as of Dec. 31 from $14.9 billion in stockholders equity a year earlier. The new accounting rule caused a 75.7% reduction in the stockholders equity, the rest coming from unrelated financial factors, Mr. Kessler said.
Under previous accounting rules, which placed funded status in corporate financial statements notes alone, General Motors stockholders equity would have been $16.9 billion greater than it reported, or $11.5 billion, Mr. Kessler said.
At Qwest, the accounting rule change gave its stockholders equity a 42.8% gain, although the company still wound up at year end with a negative book value, or a stockholders deficit, of $1.4 billion, improved from a $3.2 billion deficit a year earlier, Compustat shows.
After GM, companies that took the largest hits to stockholders equity according to Compustat were:
•International Business Machines Corp., Armonk, N.Y., with a $9.5 billion reduction, or 25%, ending the year at $28.5 billion, down from $33 billion a year earlier;
•Ford Motor Co., Dearborn, Mich., with a $8.7 billion reduction to stockholders equity, or 71.8%, ending the year with a $3.4 billion deficit, down from a positive $13.4 billion the year earlier;
•Boeing Co., Chicago, with an $8.2 billion reduction, or 63.5%, to a year-end $4.7 billion; and
•Exxon Mobil Corp., Irving, Texas, with a $4.9 billion reduction, or 4.2%, for a total of $113.8 billion as of Dec. 31, still up from $111.1 billion the year earlier.
Companies reporting the largest gain after Qwest were:
•Sprint Nextel Corp., Reston, Va., with a $662 million gain, or 1.2%, to put stockholders equity at $53 billion as of Dec. 31 from $51.9 billion a year earlier;
•Questar Corp., Salt Lake City, with a $198 million increase, or 8.3%, ending the year with $2.2 billion in stockholders equity, up from $1.5 billion a year earlier;
•NiSource Inc., Merrillville, Ind., with a $139 million gain, or 2.7%, ending the year with $5 billion, up from $4.9 billion a year earlier; and
•Verizon Communications Inc., New York, up $113 million, or 0.2%, ending the year at $48 billion, up from $39.6 billion a year earlier.
Embarq Corp., Overland Park, Kan., had a $124 million increase, or 20.9%, in shareholders equity because of FAS 158. The new rule lessened the overall decline; as of Dec. 31, Embarq reported a stockholders deficit of $468 million, down from a $4.8 billion stockholders equity a year earlier.
The Compustat data dont distinguish between pension plan and health-care or other non-pension retiree benefit plans, Mr. Kessler said.
I would say the majority of the value is related to other post-retirement benefits, Mr. Kessler said. They are greatly underfunded. Most (of these plans) have few assets backing the liabilities.
In subsequent financial reporting, there will be smaller adjustments, reflecting year-to-year changes or volatility in funding level, Mr. Kessler said.
Roman L. Weil, V. Duane Rath professor of accounting at the University of Chicago Graduate School of Business, said, The information we now have in the balance sheet in not new.
Prior to this change, the information was in the footnotes to financial statements. So its not a surprise to sophisticated analysts what the accounting of the pension funding was, Mr. Weil said. I think it will be a shoulder shrug in terms of its impact in the market. The stock market is not surprised by this information, he added.
The new rule has a large accounting significance and small market significance, Mr. Weil said.
Mr. Weil thinks the new accounting treatment wont affect investment models that use book value, unless you naively used book value without including information from the notes to financial statements, he said.