NORWALK, Conn. — The Financial Accounting Standards Board unveiled a proposal to require more detailed breakouts of corporate pension fund allocations.
Hedge funds, private equity, foreign exchange contracts and asset-backed and structured debt as well as negative positions in derivatives or other instruments were among asset classes specified in the proposal.
The proposal also would require more complex disclosure of valuation of assets. It prescribes three levels of valuation, ranging from conventional publicly traded securities, where pricing is readily available and transparent, to non-transparent valuations of investments that typically don’t trade.
The proposal also calls for disclosure of the amount in each asset bought and sold during the corporate fiscal year, as well as the amount still held.
The proposal, issued March 19, seeks to obtain a better assessment of investment risk.
The proposed FASB staff position would amend Financial Accounting Statement 132R and called “Employers’ Disclosures About Postretirement Benefit Plan Assets.” The proposed amendment would apply to post-employment benefit plans, including retiree medical funds, as well as defined benefit funds.
“In each of these asset classes they will have to specify risks,” said Jon Waite, chief actuary of SEI Investments Co. “They may even have to show standard deviation.”
The proposal, however, doesn’t prescribe use of any particular risk measure. “Certain board members advocated enhanced disclosures that commonly are used by investors when they assess a portfolio’s risk and return profile” such as the Sharpe ratio, the proposal stated. But “the board decided not to explicitly require any specific measure, acknowledging that the accounting guidance should focus on providing a principle for disclosing categories of plan assets,” the proposal stated. “An employer should determine the measures and descriptions that would be most useful in providing information about its investment strategies and expected long-term rate of return on plan assets.”
The proposal, if adopted, could cause corporate pension sponsors “to hesitate before moving into certain asset classes because of the public scrutiny,” Mr. Waite said. It also could encourage sponsors to dump risky assets “if they are concerned how they will be perceived,” he added.
“As long as their funds are structured appropriately for the pension environment” — particularly long-term investing and diversification — “they shouldn’t shy away” from riskier assets because of the greater disclosure, Mr. Waite said. “It should not be a deterrent to maintaining strategy,” he said.
Mr. Waite believes plan sponsors will have a mixed reaction to the proposal while analysts will favor it.
The proposal, posted at http://www.fasb.org, is expected to take effect for fiscal years ending after Dec. 15, 2008. FASB, based in Norwalk, Conn., is seeking comments on the proposal; the submission deadline is May 2.
On the allocation detail, the 19-page proposal states: “The following major categories, if significant, should be disclosed, with additional categories included as appropriate: cash and cash equivalents; equity securities; debt securities issued by national, state and local governments; corporate debt securities; asset-backed securities; structured debt; derivatives (segregated by type of contract, for example, interest rate contracts, foreign exchange contracts, equity contracts, commodity contracts, credit contracts and other contracts); hedge funds; private equity funds; venture capital funds; and real estate. Any derivative or other contract whose fair value is negative, that is, in a liability position, should be disclosed separately by type.”
The new allocation breakdown and asset valuation will be disclosed in a note to the financial statements in corporate annual reports, as the pension fund allocation is now.
The proposal explains the rationale for asking for more detailed allocation by noting investors and other accounting-statement users have expressed “concerns about the lack of transparency surrounding the types of assets held in postretirement benefit plans and potential concentrations of risk in plan asset portfolios.”
Contact Barry B. Burr at [email protected]
